- 1). Determine the initial trust assets. Cash, real estate and personal property can be contributed. In most cases a family trust is established with only nominal assets (for example, $100) and assets are gradually added as the settlor approaches retirement age. This arrangement is particularly likely if the main purpose of creating the trust is to avoid estate taxes upon the settlor's death.
- 2). Determine the identities of the trustees. The trustees are the parties who determine how the trust's assets are to be distributed. Although the settlor can serve as one of the trustees in most jurisdictions, an independent trustee (not a family member) needs to be appointed as well. Otherwise the trust runs the risk of being declared invalid by a court at some point.
- 3). Determine the identities of the beneficiaries. In the case of a family trust, the beneficiaries must all be members of the settlor's immediate or extended family. No beneficiary has the legal right to demand any of the trust assets at any time. The trustees have near total discretion in distributing the trust assets to beneficiaries, as long as they act prudently and in the interests of the beneficiaries. In most family trusts, distributions can only be made by unanimous consent of the trustees.
- 4). Draft the trust deed. The trust deed is like a constitution. It should specify the initial trust assets. Identify the settlor, the trustees and the beneficiaries. List the duties and authority of the trustees. Set the rules for the operation of the trust bank account. Specify how the trustees are to make decisions, and clarify the authority of the trustees to invest the trust assets. Once the trust deed has been signed and notarized, the trust is created. The use of an experienced attorney is essential at this stage.
- 5). Gradually sell your assets to the trust, and then forgive the trust's debts to you. All of these transactions should be in writing.
- 6). Have the trust lease its assets to you, in exchange for which you pay the trust a leasing fee. In this way you can retain the use of your property (real estate, for example) while funding the trust assets.
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