What Is a Trust Fund?
While many people consider trust funds as a way for wealthy individuals to protect their assets, they’re actually a widely used estate planning tool.
Usually set up by attorneys, trust funds are implemented for a wide range of financial reasons, including the legally determined distribution of assets and even the preservation of money for charities or other third-party beneficiaries after an individual’s death.
Creating a trust fund is therefore a sensible and straightforward way to avoid family disputes and ensure that affairs such as business commitments and schooling of children or grandchildren are taken care of.
This can be a huge reassurance for those concerned about the handling of their affairs toward the end of their lives.
In this article, we’ll help you to decide whether or not a trust fund could help you in your specific situation by tackling these common questions: “What is a trust fund?”, “What form can it take?”, and “How exactly do you put one in place?”
Trust Fund Basics
As discussed in the introduction, a trust fund is an estate planning tool that places the care of assets, including property, stocks and bonds, and money in the care of a nominated and neutral third-party trustee.
Trusts are considered independent legal entities and are typically set up by an attorney at the request of the individual during their lifetime.
It’s possible to establish a trust fund under a variety of forms (as we’ll discuss later) and stipulations depending on unique circumstances, but they fundamentally rely on the coming together of three parties:
- Grantor: The person creating the trust fund
- Beneficiary: The group or person that stands to benefit from the trust
- Trustee: The person responsible for managing the trust, typically a bank or law firm
How Trust Funds Work
Once established, a trust fund sets clear rules surrounding the distribution and handling of any assets outlined by the grantor of that trust fund, typically after that individual’s passing.
To achieve this, the grantor must transfer their assets into the trust’s name, often with specific trust fund stipulations such as age restrictions on access for younger beneficiaries and even restrictions such as a spendthrift clause that prevents beneficiaries from using the trust to clear debts or secure credit.
Types of Trust Funds
While they fundamentally aim to achieve the same goal, there are a surprising array of types of trust funds, each of which meets specific expectations of a grantor.
The sheer scope of trust funds available means that many people are best off seeking the assistance of a trained professional who can recommend the best option based on the assessment of the grantor’s assets and overall goals.
To begin narrowing things down, however, it’s worth considering a few popular types of trust funds. These are:
Also known as a living trust, a revocable trust enables a grantor to better control assets and their distribution during their lifetime by transferring relevant money, property, and so on into their trust straight away.
As well as enabling the grantor to add or remove items, change priorities, and so forth, revocable trusts are popular because their predetermined nature means that they make it possible to avoid probate in the event of the grantor’s death. This leads to the much quicker distribution of assets.
Also called a “pour-over-will” trust, an irrevocable trust is one that can’t be controlled as easily because assets aren’t transferred until after the grantor’s death. This can bring significant tax benefits for a grantor as it effectively involves giving away control of their trust fund to a third party.
Unfortunately, there’s no guarantee that assets in an irrevocable trust will avoid probate, meaning that beneficiaries may experience delays and face fees or even lost inheritance as a result.
While the majority of trust funds focus on the distribution of assets to individuals of a grantor’s choosing, a charitable trust is created with the purpose of benefiting either a particular charity or the general public.
This is most commonly achieved through either a charitable remainder annuity trust (CRAT) that pays a fixed amount to chosen charities each year or a charitable remainder unitrust (CRUT) that provides charitable deductions on eligible assets and pays a fixed income to beneficiaries during the life of that trust.
Special Needs Trust
Special needs trusts allow a grantor to provide for a beneficiary who is disabled without compromising on government assistance that the individual might otherwise receive, such as Medicaid and Supplemental Security Income (SSI).
Other common types of trust funds include marital trusts, generation-skipping trusts, and testamentary trusts.
Advantages of a Trust Fund
As long as a prospective grantor takes the time to choose the right type of trust fund for their needs, many advantages make this a worthwhile option for the distribution of trust fund assets across grantors from all walks of life.
- Ensured intentions. Generally speaking, without a trust fund, individuals have limited options when it comes to ensuring the handling of their assets once those are passed down to their beneficiaries. The ability to place specific stipulations on a trust fund makes it far easier to ensure the correct usage of your inheritance, including setting clear funds aside for things like college payments, property usage, and more.
- More extensive inheritance options. Trusts cover assets that a will can’t, making it possible to include things like life insurance policies and retirement plans in your inheritance.
- Tax benefits and reducing costs. Trusts can help to ensure tax benefits that increase the overall inheritance amounts; living trusts are especially helpful if you want to avoid sometimes high probate costs.
- Ongoing transfers. While not the case with irrevocable trusts, the flexibility of revocable trusts provides the power to easily add to or remove assets at any moment in case of, for example, the addition of new family members.
Disadvantages of a Trust Fund
Unfortunately, trust funds come with certain disadvantages that are also worth noting:
- Upfront fees. While trust funds are not complex in themselves, the importance of choosing the right fund and completing all paperwork properly means that, in the vast majority of cases, individuals require the help of estate planning attorneys to ensure everything is done right. This translates to high fees, including annual management fees, that can, in many cases, quickly outstrip any tax benefits or savings from a trust fund.
- Potentially inflexible. With irrevocable trust funds, limitations with regards to making changes during your lifetime can also prove problematic, preventing you from easily adding beneficiaries or changing your requirements once the stipulations for a trust fund have been put in place.
- Record keeping. Detailed records must be kept of any property or assets you transfer into a living trust during your lifetime, which can prove especially problematic if you’re frequently trading assets or generally struggle with organization.
Is a Trust Fund Right for You?
Despite some setbacks, the popularity of trust funds is a testament to their effectiveness in managing people’s assets. A step away from societal misunderstandings about “trust fund babies” has led many to consider this option for the first time.
If you’re among them, it’s vital to remember that getting estate planning right using this method is really about taking your time to understand what a trust fund is and which type of trust fund will best serve your needs and those of your beneficiaries.
Is a trust fund a good idea?
Whether or not a trust fund is a good idea for you depends on the assets in question and also your overall intentions for them, including whether you wish to include stipulations for your beneficiaries or wish for an inheritance to be used in a certain way.
How much money do you need for a trust fund?
You don’t need to be wealthy to set up a trust fund. In fact, setting up a trust fund in itself needn’t cost much more than $100, though working with an attorney can increase that amount to $1,000 or more.
What are the benefits of a trust fund?
Control over your assets is perhaps the main benefit of a trust fund, while tax benefits and the ability to set inheritance stipulations also prove tempting for many.
How do trust funds pay out?
Specific pay-out options for your trust fund depend entirely on your trust agreement and could include lump-sum payments, yearly allowances, or amounts that are kept in a trust until beneficiaries reach a certain age.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.