What Is A Trust Fund And How Does It Work? [2021]

Bucky Wucky Finance > Personal Finance > What Is A Trust Fund And How Does It Work? [2021]
What Is A Trust Fund?

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What Is A Trust Fund?

When you think about property and financial inheritance vehicles, a will is usually the first legal document that comes to mind.

With a will, when someone in your family dies, their property goes to those listed on the will.

However, a last will and testament is not the only way that you can take care of your loved ones after you’ve passed away.

By setting up a trust fund, you can distribute property to your family members and have more control over the allocation of your assets.

What Is A Trust Fund?

With that in mind, it’s important to explain what a trust fund is and how it works.

To make it easier to explain, let’s compare and contrast it to a will. Both legal documents when applied together build a comprehensive estate plan.

This simply means that with these two inheritance tools, you can plan how the property you own is distributed to others.

There are several differences between a will and a trust. One of the most major differences is the fact that a person who creates a will must first die before it goes into effect.

However, this is not the case with a trust. Instead, your trust starts once it’s created. After establishing your trust, you can start transferring your property, even if you’re still alive.

To understand exactly how this works, it’s important to know how trust funds are formed.

How Do Trust Funds Work?

How Do Trust Funds Work?

Trusts start with a person that wants to pass along property to someone else. This person forms a trust fund.

There are several types of trust funds, each with their differences, but generally, all trusts do the same thing.

Essentially, a trust fund is a legal entity that holds property to be dispersed to other people, groups, or companies, once certain conditions are met.

The person who sets up the trust, also known as the trustor, adds assets to the trust fund. This makes the trust fund the legal owner of the cash, investments, and other property that the trustor gives to the legal entity. 

While establishing the trust, a trustor selects a trustee, co-trustees, and successor trustees. Trustees can be individuals, groups, or companies.

Essentially, a trustee’s role is to oversee assets in the trust. Usually, the trustee does not have any ownership of the property in a trust, but they are reimbursed with a management fee.

Next, the trustor establishes a set of rules on how these assets are given to others. The people or companies that receive asset disbursements from a trust are referred to as beneficiaries. But, in most cases, the assets are not only disbursed when the trustor dies. 

Instead, the trustor can ensure that the assets held by a trust fund can only be dispersed once the beneficiary turns 21. Or, they can establish a rule that the beneficiary needs to spend any assets they receive on college tuition.

And it’s the job of a trustee to ensure that any inherited property, money, or assets are used exactly how the trustor wanted.

Those Are Just the Basics

There’s a lot to explain when it comes to trust funds. But now you understand the basic principles of how trusts work and the parties involved.

You might think that only wealthy individuals have trusts. Yet they can be powerful tools of the middle class for building and passing along wealth through generations.

If you want to establish a trust fund, make sure that you speak to your attorney, who can help you understand all the details and legal implications.

Enjoy our article, what is a trust fund?

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