Can I Set Up a Trust Fund for Myself?

A trust fund is a legal arrangement designed to manage and distribute assets according to specific instructions. It involves a grantor, who creates and funds the trust, a trustee, who manages the assets, and beneficiaries, who receive benefits from the trust. Many individuals wonder if they can establish a trust where they are also a beneficiary. This arrangement is possible through a specific legal structure known as a self-settled trust.

Understanding Self-Settled Trusts

A self-settled trust is a legal instrument where the individual who establishes the trust, known as the grantor or settlor, also retains an interest as a beneficiary. In this arrangement, the grantor contributes assets to the trust and also has the potential to receive distributions from it. This differs from traditional trusts where the grantor names other individuals or entities as beneficiaries.

In a self-settled trust, the grantor often initially takes on the roles of both grantor and beneficiary. It is common for the grantor to initially serve as the trustee, managing the assets themselves, though a successor trustee is typically named to take over under certain conditions. While the grantor is a beneficiary, the trust document outlines the specific conditions under which they can receive distributions. This structure is distinct from trusts created solely for the benefit of other parties, providing the grantor with continued access or control over the trust’s assets.

Types of Self-Settled Trusts

Self-settled trusts primarily fall into two categories: revocable and irrevocable. The distinction between these types lies in the level of control the grantor maintains over the trust and its assets once established. This control significantly impacts how assets within the trust are treated for tax purposes and creditor claims.

A revocable self-settled trust allows the grantor to modify, amend, or terminate the trust at any time. Assets placed into a revocable trust remain part of the grantor’s taxable estate for federal estate tax calculations. Because the grantor retains significant control, assets in a revocable self-settled trust are not protected from the grantor’s creditors.

Conversely, an irrevocable self-settled trust means the grantor gives up the right to change or revoke the trust once it is created. Assets transferred to an irrevocable trust are removed from the grantor’s personal estate for certain tax purposes. While the grantor can be a beneficiary, the terms governing distributions are fixed, and the grantor relinquishes direct control over the assets and the trust itself.

Deciding on a Self-Settled Trust

Individuals often consider establishing a self-settled trust for various purposes, including planning for potential future incapacity or pursuing certain estate planning objectives. These trusts can provide a framework for managing assets if the grantor becomes unable to do so themselves. For instance, a revocable living trust can appoint a successor trustee to manage assets seamlessly without court intervention if the grantor becomes incapacitated.

A common misconception is that self-settled trusts offer robust protection from all creditors. This is not the case for the grantor’s existing creditors, such as those with current debts or claims. The long-standing rule in most jurisdictions is that if you create a trust for your own benefit, your creditors can reach the assets in that trust. This principle applies even if the trust contains a “spendthrift” provision, which aims to protect assets from creditors.

However, certain states have enacted specific legislation allowing for Domestic Asset Protection Trusts (DAPTs), which are a type of irrevocable self-settled trust designed to offer protection from future creditors. These trusts are available in a limited number of states, with about 20 states permitting them. For a DAPT to be effective, assets must be transferred into it before any creditor claims arise, as fraudulent transfer laws prohibit transfers made to avoid existing debts.

Even in states that recognize DAPTs, there are exceptions to creditor protection, such as claims for child support, alimony, or certain tort claims. For bankruptcy purposes, transfers to a self-settled trust can be scrutinized for up to 10 years. While these trusts can be considered for long-term care planning, they require relinquishing control over the principal for Medicaid eligibility. Asset protection from long-term care costs also requires the trust to be irrevocable.

Creating Your Self-Settled Trust

Establishing a self-settled trust involves preparatory steps and formal procedures. Before drafting the trust document, information and decisions are necessary to accurately reflect your intentions. This includes identifying yourself as the grantor and determining who will serve as the trustee. While you can initially name yourself as the trustee, it is important to designate successor trustees who will manage the trust if you become unable to.

You will need to:
Define the beneficiaries, including yourself and potentially others.
List assets to be placed into the trust (e.g., real estate, bank accounts, investments).
Outline specific terms, conditions, and distribution rules.
Consider which state law will govern the trust.

Once the necessary information and decisions are gathered, the procedural steps for establishing the trust can begin. The first step involves drafting the trust document, prepared by an attorney, incorporating all determined terms. After the document is drafted, it must be properly signed, which requires notarization in most states, and sometimes witnesses, depending on state law.

A crucial step in establishing any trust is funding it, which means formally transferring ownership of assets into the trust’s name. This involves retitling bank accounts, real estate deeds, and investment accounts to reflect the trust as the new owner. The trust is not fully effective until its assets are properly transferred. If another trustee is named, formal appointment and acceptance processes may be necessary.