What Is a Trust Fund? The term trust fund refers to an
estate planning tool that establishes a legal entity to hold property or assets for a person or organization. Trust funds can hold a variety of assets, such as money, real property, stocks and bonds, a business, or a combination of many different types of properties or
assets. Three parties are required in order to establish a trust fund: the grantor, the beneficiary, and the trustee. Trust funds can take many forms and can be established under different stipulations. They offer certain tax benefits as well as financial protections and support for those involved. Show Key Takeaways
Trust FundHow Trust Funds WorkEstate planning is a process that involves determining how an individual's assets and other financial affairs will be managed and how any property they have is distributed after they die. This includes any bank accounts, investments, personal property, real estate, life insurance, artwork, and debt. While wills are the most common estate planning tools, trust funds are also popular legal entities. The following three parties are involved in establishing a trust fund:
The grantor generally creates an arrangement that, for a variety of reasons, is carried out after they are no longer mentally competent or alive. As the appointed fiduciary, the trustee is responsible for carrying out the interests of the grantor. This usually includes allocating living expenses or even educational expenses, such as private school or college expenses, while they are alive. Or they can pay out a lump sum directly to the beneficiary. Trust funds provide certain benefits and protections for those who create them and to their beneficiaries. For instance:
An estate tax is levied on the value of an estate after the grantor dies while inheritance taxes are applied to the total amount a beneficiary inherits from an estate. Special ConsiderationsWealth and family arrangements can grow quite complicated when millions (or even billions) of dollars are at stake for multiple generations of a family or other entity. As such, a trust fund can contain a surprisingly complex array of options and specifications to suit the needs of a grantor. But contrary to what most people believe, trust funds aren't just for the ultra-rich. In fact, they can be useful for just about anyone regardless of their financial situation. Discuss your needs with a financial professional to find out what kind of fund is well-suited for you and your personal needs. Revocable Trust Funds vs. Irrevocable Trust FundsTrust funds fall into two different categories: Revocable and irrevocable trust funds. The following are brief descriptions of the two. Revocable Trust FundA revocable trust fund gives a grantor better control over assets during the grantor’s lifetime. Once assets are placed into it, they can be transferred to any number of designated beneficiaries after the grantor's death. Also called a living trust fund, it can be used to transfer assets to children or grandchildren. The primary benefit is that the assets avoid probate, which leads to the quick distribution of assets to the listed beneficiaries. Living trust funds are not made public, meaning an estate is distributed with a high level of privacy. Changes can be made while the grantor is alive and it can also be entirely revoked prior to the grantor's death. Irrevocable Trust FundAn irrevocable trust fund is very difficult to change or revoke. Because of this arrangement, there can be considerable tax benefits for the grantor to effectively give away control of the assets to the trust fund. Irrevocable trust funds most often avoid probate. Types of Trust FundsRevocable and irrevocable trust arrangements can be further classified into several types of trust funds. These types often have different rules and stipulations depending on the assets involved and, more importantly, the beneficiary. A tax or a trust attorney may be your best resource for understanding the intricacies of each of these vehicles. Keep in mind that this isn't an exhaustive list.
What Is a Trust Fund Baby?A trust fund baby is someone whose parents set up a trust fund in their name. The term is a popular cultural reference that is often used negatively. When people use the expression, there's an implication that beneficiaries are born with silver spoons in their mouths, are overly privileged, and don't have to work to live. It's true that trust funds can provide beneficiaries with security. But in reality, many so-called trust fund babies don't live luxuriously or in high society. How Do Trust Funds Work?Trust funds are legal entities that provide financial, tax, and legal protections for individuals. They require a grantor, who sets it up, one or more beneficiaries, who receive the assets when the grantor dies, and the trustee, who manages it and distributes the assets at a later date. Trust funds are designed to carry out the wishes of the grantor. This means that the trustee is in charge of managing the assets while they are still alive. After their passing, the trustee can pass on the assets to the beneficiary(s) as per the grantor's instructions, whether that's through a regular income stream or a lump sum payment. How Do I Start a Trust Fund?In order to set up a trust fund, you'll need to figure out which one is best suited for you, so make sure you figure out the exact purpose of the fund. Then, decide how you'll fund it. Figure out who you want to appoint as your trustee. This person may be able to help you draft up all the documents and go through the legal process. The final step is to fund the trust fund. As with any other financial venture, make sure a trust fund is the best choice for you, your beneficiary, and your financial situation. |