1. Define beneficiaries and distribution rules
Trust beneficiaries are the individuals or entities that will receive property from the trust. Distribution rules are the instructions for that property transfer. As a simple example, a settlor might want the property in trust to be divvied up equally among three siblings upon her death.
Beneficiaries and distribution rules are established when the revocable trust is created, but they can be modified. If the settlor has a falling out with one sibling, for example, the trust could be amended to divide the property equally between the other two.
2. Manage assets
Settlors of revocable trusts often appoint themselves as trustees. Trustees are the legal managers of the trust property.
Serving as trustee allows the settlor to use and manage the assets in trust, much in the way a property owner would. An example would be selling a home that's held in trust and using the proceeds to cover medical expenses. A third-party trustee would need to sign off on that transaction, but the settlor trustee could proceed without anyone else's approval.
3. Choose a successor trustee
A successor trustee is the individual who steps in to run the trust after the settlor dies. The settlor can appoint a trust company, family member, or close friend to serve as successor trustee.
The successor cannot change the terms of the trust. He or she can only make decisions that fulfill the trust instructions. Those decisions usually involve selling property, paying taxes, and distributing assets to beneficiaries.
4. Retitle property
After the trust is established, it is the settlor's job to retitle any applicable property in the trust's name. The trust distribution rules can only apply to property the trust owns.
5. Modify trust rules as needed
Trust rules can become outdated due to life changes such as divorce, remarriage, or childbirth. Settlors should review the trust periodically and work with a lawyer as needed to modify the trust to suit their current circumstances.
6. Pay taxes on trust income
Revocable trusts are usually structured to pass taxable income to the settlor. The settlor then reports the income on a personal tax return and pays any resulting income taxes.
Revocable trust settlors vs. irrevocable trust settlors
The responsibilities outlined above are specific to revocable trusts. Settlers engage differently with irrevocable trusts, which are very difficult to modify or dissolve.
On a revocable trust, for example, the settlor who is still living can also be the trustee and the beneficiary. The successor trustee and estate beneficiaries step in only when the settlor dies. On an irrevocable trust, the settlor cannot be a sole trustee and should not be a beneficiary at any time.
Therefore, the settlor of an irrevocable trust has minimal duties once the trust is funded. The settlor may pay taxes when transferring assets into the trust. After that, the irrevocable trust files its own tax return. Any beneficiaries who receive income from the trust are responsible for the taxes going forward.
