Zionist Netanyahu pledged to do so last month in appreciation of Trump's recognition of Israel's claim of sovereignty over part of the strategic plateau seized from Syria in the 1967 Six-Day War.
"I promised that we would establish a community named after President Trump," Netanyahu said at the start of the weekly cabinet meeting on Sunday.
"I would like to inform you that we have already selected a site in the Golan Heights where this new community will be established, and we have started the process," he said.
Trump broke with long-standing international consensus on March 25 when he recognised Israel's claim of sovereignty over the part of the Golan it captured during the 1967 war.
Occupier Israel annexed 1,200-square kilometres of the Golan it seized in 1981, a move never recognised by the international community.
Trump's controversial move came after the US president in December 2017 said Washington would recognise the disputed city of Jerusalem as Israel's capital, sparking outrage among Palestinians who claim Israeli-annexed East Jerusalem as the capital of their future state.
The US Embassy was moved from Tel Aviv to Jerusalem and inaugurated on May 14, 2018.
About 18,000 Syrians from the Druze sect - most of whom refuse to take Israeli citizenship - remain in the occupied Golan.
Some 20,000 Israeli settlers have moved there, spread out over 33 settlements.
Netanyahu said he would submit the new settlement plan for cabinet approval when a new government took office in the wake of last month's snap general election.
The prime minister has been conducting low-key meetings with heads of the parties expected to join his coalition, and has until the end of May to put together an alliance.