Contrary to popular belief, there’s no need to put a lot of money into a trust right away, for it to be effective and accomplish what you want. In fact, what you put into a trust and when should vary depending on your finances and goals. Below are three ways to fund a trust at different times, and some examples of the benefits of each approach.

#1. Transfer assets outright to a trust during your lifetime. Anything you already own — from stocks and bonds to real estate and even interests in a business — can be transferred to a trust. A common strategy is to transfer certain assets into a “revocable” trust, meaning a trust that can be cancelled or changed at any time. The benefits of this: you still control assets in the trust (and are taxed on any gains or income produced), but the trust holdings remain private and would provide for the trust beneficiaries after you are gone. Assets placed in a trust — no matter what state they are located in —  would avoid having to go through probate court. And if you become incapacitated, the trustee or co-trustee you designate for the trust could continue to manage the assets as you have specified.

Under current tax law, estates valued at up to $11.4 million are exempt from federal estate taxes ($22.8 million for a married couple). These high exemption levels expire at the end of 2025, unless renewed by Congress (the previous federal exemption was half this amount, just over $5 million). Therefore, large estates currently have an opportunity to transfer a significant amount of assets into an irrevocable trust (cannot be changed or cancelled), which takes those assets out of the estate. Such transfers can benefit multiple generations within a family, creating what is known as a Dynasty Trust. Those assets, as they grow in value within the trust, could provide support or a safety net for descendants over many generations. Trusts in WA State, for example, can last as long as 150 years.

#2. Use a life insurance policy to fund the trust. This is a relatively inexpensive way to fund a trust, especially for younger parents who want to provide for their children. Basically, you set up an irrevocable trust and transfer enough money to the trust annually (as gifts) to pay for the annual life insurance premiums. This is known as an Irrevocable Life Insurance Trust, or ILIT. Upon death, the life insurance proceeds go to the trust and can be used by the trustee to support children and grandchildren and/or help pay for estate taxes if any are due.

#3. Use your will or financial account designations to fund the trust after you pass away. In your will, you can designate that the assets you intend for your heirs go straight into an irrevocable trust whose terms you have specified. If you have already created a revocable trust, that can turn into an irrevocable trust for the benefit of your heirs (and charities) after you pass away. Another way to fund a trust at death is to make the trust the beneficiary of a “pay-on-death” financial account.

Trust Taxes
Trusts are taxed at higher rates than individuals and corporations. For trusts, any income over $12,750 annually is taxed at the highest individual tax rates (37% on income and short-term gains and 20% on long-term capital gains). When beneficiaries receive distributions from a trust, part of that payout is taxable to them. Anything not paid to beneficiaries is taxable to the trust. Even though taxes are higher on trusts, they can be minimized by an experienced trustee through tax-aware investing and an optimized distribution strategy within the terms of the trust.

Read more about trusts in general, why they are needed in addition to a will, and also about Special Needs Trusts.