A trust fund can help shelter your assets and determine how they are managed now or in the future. Generally a part of estate planning, trust funds can help minimize estate taxes, provide financial support to your loved ones, or even donate money to your favorite charitable cause.
There are numerous types of trust funds out there, and there likely isn’t a one-size-fits-all option. The trust you select will depend on your goals and unique circumstances, so it’s important to know the ins and outs of trust funds before deciding which option is right for you.
Trust Fund Definition
A trust fund is a legal tool or arrangement in which individuals can choose to place assets of various types into a special account. They’re often used to hold those assets, like stocks or real estate, for a beneficiary, like a family member, or even a company.
The purpose of a trust is to hold assets for the beneficiary without giving them direct control over the funds or property — the control remains with a third party designated by the individual creating the trust.
As an example, say a high-net-worth philanthropist desires to leave a legacy to his favorite cause when he dies. He creates a charitable trust that will add the charity as a beneficiary when he passes away. At that time, the predetermined assets move into the trust. A third party, otherwise known as the trustee, will manage the money or assets in the trust and make distributions to the charity following the trust’s terms.
How Do Trust Funds Work?
There are a few key parties involved in a trust fund agreement. They include:
• Grantor. This person is the creator of the trust. The grantor outlines the trust guidelines, designating the funds or other assets that will go into a trust as well as the rules that govern it.
• Trustee. The grantor will name a third party the trustee. This person is responsible for managing trust assets, completing any trust obligations such as distributions, and upholding the fiduciary standard (employed by fiduciary advisors), or, always acting in the best interest of all beneficiaries. A trustee is anyone the grantor deems appropriate for handling the terms of the trust.
• Beneficiary. The beneficiary is the one who will reap the benefits of the assets or property in the trust.
The grantor determines the terms of the trust, choosing how and when the resources are given to the beneficiary.
Say, for example, a grantor wants to establish a trust fund for their grandchild with the stipulation that the funds can only go toward college expenses. In this case, the grantor can write the trust’s terms to reflect these wishes rather than let the beneficiary spend a financial windfall however they please.
Through use of the “spendthrift clause,” a grantor can also prevent a beneficiary from spending the trust’s assets in a particular manner, such as to pay off credit card debt.
Additionally, when the grantor passes away, trust assets are often guarded against creditors, and can bypass the extensive and sometimes costly probate process. Of course, whether that happens depends on the type of trust the grantor sets up.
Different Types of Trust Funds
The needs of the grantor will determine which trust is suitable for their situation. A financial professional or attorney can help outline the features of each trust and help find a suitable solution for the grantor’s trust needs. Some of the most common types of trust funds include:
• Irrevocable trust: Once established, this trust cannot be changed or revoked in any way — not even by the grantor.
• Revocable trusts: Also known as living trusts, revocable trusts permit the grantor to make modifications at will or cancel the trust altogether.
• Charitable trust: Grantors can establish a trust with a charitable organization as the beneficiary. Typically, charitable trusts can help minimize the grantor’s tax obligation, such as reducing estate taxes.
• Constructive trust: This type of trust is an indirect trust that the court creates, believing that there was intention on the part of a property owner to disperse it in a precise manner.
• Special needs trust: Those who have children with special needs may use this type of trust to create support for their child well after their passing. Any asset transferred to the trust will not prohibit the beneficiary from any government funding or benefits they would receive otherwise.
How to Establish a Trust Fund
When creating a trust, it’s important to seek knowledgeable and responsible people or professionals to help create and manage it. For starters, even though it’s not technically necessary to hire a trust attorney, it’s probably a good idea to do so to ensure all legal requirements are upheld and the terms of the trust are solidified.
A trust attorney should be able to identify different trusts that can meet the unique needs of the grantor. From lowering a tax bill to securing assets, trust attorneys understand the intricacies of each type of trust’s advantages, which can help the grantor meet their trust fund objectives.
Depending on the grantor’s circumstances and state of residence, attorney fees can amount to several thousand dollars. To find a trusted attorney, you can start by asking friends and family members for referrals. You can also browse the internet for reviews and cost estimates.
It’s also essential to select a responsible trustee to manage the funds. Since it’s the trustee’s responsibility to manage and distribute the assets, they must be trustworthy and understand the magnitude of the role. After all, the grantor is putting their hard-earned money into the hands of someone else. Using a third-party trustee may help the family avoid scuffles about how assets are divided up.
Why Set Up a Trust Fund?
With the benefits trust funds provide, there are many reasons why a trust fund may make sense for your estate-planning efforts. When asking “Is a trust fund right me?“, consider a few topics:
• Tax reduction. Depending on the size of an estate, some states may levy an estate or inheritance tax. For 2023, an estate tax return is required for estates that exceed $12,920,000. To avoid taxation, a trust may make sense.
• Control over asset distribution. A trust gives a grantor greater power over their wealth, since they can set the terms for how the trustee manages the assets.
• Bypassing probate. When someone passes away, by law, their will must complete the probate process. The creation of a trust can help the estate owner bypass this often costly and extensive process.
• Safeguarding assets. Depending on the trust, assets can be guarded against creditors and/or asset misuse by the beneficiaries. A trust can also protect a beneficiary with special needs so that they can continue to receive both the financial support from the trust and any other government benefits after their caretaker passes away.
• Philanthropic efforts. Trusts give individuals who are passionate about a cause a way to support the mission long after they are gone.
Trusts are worth considering for those concerned with how their assets, property, or life insurance benefits will be managed after their passing. Although everyone has a unique situation that may require an array of estate planning tools, a trust fund can be a valuable addition to the mix if the creator can capitalize on trust benefits.
The Takeaway
A trust fund is a special legal arrangement that allows for the protection of certain assets for beneficiaries. Creating a trust may be advantageous for people who have built some wealth and want to control what happens to it once they are gone. There are a number of different types of trusts, each tailored to the needs of the grantor, and sometimes the beneficiary as well.
About the author
Ashley Kilroy
Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.
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