What Is A Trust Fund?

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

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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.

This makes it so you have an estate planning tool that establishes a legal entity for a beneficiary to inherit assets. This can be in the form of money, properties, stocks, bonds, and even businesses. 

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.

To dive a little deeper, there are three main parties that need to work together in order to create a trust fund. First, there is the grantor, this is the person who sets up the trust and provides the assets within that trust. In addition to that, there is a beneficiary who very simply put, will receive the assets upon the death of the grantor. Finally, there is the trustee, who is set to be in charge of managing the assets that are presented within the trust fund. 

The primary reason why someone would want to set up a trust is to build this vehicle that sets the rules for how their assets will be held, gathered, or distributed in the future. This aspect of the trust fund is the exact thing that sets it apart from other estate planning methods. 

There is a relationship that is established when it comes to the creation of the trust fund. That would be the relationship in which the trustee, who is typically a fiduciary, manages the assets in a way that is in the best interest of the grantor. 

The basis of a trust fund is to enable your family to live comfortably after you have passed away. Building up a massive trust fund is one of the most selfless things that you can do because it will allow your family to not have to worry about their financial life while they are coping with the loss of you. 

Difference Between a Will and a Trust Fund

There are several differences between a will and a trust fund. 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 fund.

Instead, your trust starts once it’s created. After establishing your trust, you can start transferring your property, even if you’re still alive.

One of the most notable differences between a will and a trust fund is the fact that a will has to go through a probate court. This means that there are going to be attorney fees and a long process.

A will can be great depending on your current situation, but a trust fund is made to be set up a little easier. 

As mentioned above, a trust fund is developed with the help of a fiduciary. This makes it so you are not dealing with the things that take place in court. Instead, you will experience an easier process that automatically hands everything down upon the passing of the grantor. 

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 the property to someone else. This person forms a trust fund. There are several types of trust funds, each with its 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 trustee. 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. Alternatively, 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.

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Why Use a Trust Fund? 

The main reason for you to open a trust fund is to ensure that your money is being put to good use after you have passed away. This means that you are enabling your family to see a financial stimulant in their lives after you are no longer around. This is something that many people do not think about when they are getting older but making sure that your family is covered is a very important aspect of leaving a legacy. 

Overall, a trust fund will provide peace of mind. The last thing you want is for you to pass away and leave your loved ones wondering how they are going to pay their bills. This is certainly not an easy thing to think about at first, but at the end of the day, you want to make sure that your family will be able to stay afloat while coping with your passing away. 

Different Kinds of Trust Funds

It has been mentioned above that there are many different kinds of trust funds. These are going to cover different kinds of assets, but these funds are all primarily created with the common goal of handing down assets. Although, to give you more of an inside look, check out the different kinds of trust funds described below. 

Revocable Trust

A revocable trust, also known as a living trust, is a kind of trust fund that allows for the grantor to have more control over the assets during their lifetime. This form of trust fund in which a grantor puts some assets into the bin which can then be dispersed among any number of beneficiaries at the time of the grantor’s death. In this case, the beneficiaries are typically children and grandchildren. 

One of the things that make this stand out among many other kinds of trust funds is the fact that this is a trust fund that can be changed or revoked. This means that while the grantor is still living and mentally capable, anything in the trust can be changed. 

Irrevocable Trust

With the revocable trust fund comes the irrevocable trust fund. To put it in the simplest terms, this is a trust fund that is very difficult to change or revoke. There is still a way to change it, but it is going to be a long and potentially expensive process. The reason that some people like to opt for an irrevocable trust fund is the fact that there are some tax benefits that can come while transferring over the assets. 

Asset Protection Trust

This is an interesting kind of trust fund because it makes it so the assets are protected at all costs. This means that if a debt collector was to come in to try to use the assets to pay off the debt, they would be turned down because these assets have the protection plan in place. 

Blind Trust

When you open up a blind trust fund, you as the grantor do not know who the fiduciary or trustee is. So, the person who is managing the money is a complete stranger to you. A reason for going into a trust fund like this is to give you peace of mind knowing that you do not have to stress about any component of the assets under management. 

Charitable Trust

This is an interesting kind of trust fund in the sense that you are not going to be giving your assets to your family. Instead, you will pass your assets on to a charity of your choice. This is a great option if you feel that your family doesn’t need your assets. Perhaps they have already built up substantial financial lives of their own. 

The great thing about this is that you are using your assets to better the lives of others, even if you don’t know them. This is another very selfless thing that you can do with your assets as you are entering the latter half of your lifetime. 

Generation-Skipping Trusts

This is another form of trust that poses some extra tax benefits. The only difference between this kind of trust and a traditional trust is the fact that the grantor’s grandchildren are included in the beneficiary list, ultimately stating that there is a generation that is skipped in the making of the trust fund. 

Many Others

These are six of the most common trusts that people put their assets into, but there are many more that you can choose from. Just to give a basic overview, here is a list of the other trust funds you can buy into. 

  • Grantor retained annuity
  • IRA trust
  • Marital trust
  • Land trust
  • Medicaid trust
  • Qualified personal resistance trust
  • Special needs trust 
  • Spendthrift trust
  • Testamentary trust

All of these trusts in the list are going to be more or less the same in structure. The difference is the asset that you are putting into the trust.

For example, a land trust fund is meant to conserve the land owned by the grantor to be passed down to the beneficiaries.

The passing down of an asset is what makes these a trust fund, it is just important to understand which assets you would like to be passed down so you can understand which kind of trust fund to get into. 

Frequently Asked Questions (Faq)

What is a special needs trust fund?

A special needs trust fund is set up for a person with either a disability, chronic illness, or mental illness. It is generally set up by either friends, family, or third parties to supplement any benefits the disabled person may be receiving from Social Security without affecting their eligibility to access services such as the Supplemental Security Income, Medicaid, or Medicare.

What is a trust fund baby?

What are trust fund babies? A trust fund baby is someone whose parents have set up a trust account so that are taken care of financially. The term generally has a stereotypical negative connotation and implies that the trust fund baby is spoilt, does not have to work for a living, and that everything is taken care of for them. This is often not true, however, as many trust fund babies have jobs.

How is a trust fund set up?

There are few steps involved with setting up a trust fund:

  1. Find yourself an attorney you trust
  2. Choose the type of trust you want
  3. Decide on the details of the trust
  4. Register your trust with the IRS
  5. Keep detailed records of all dealings

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. There are many different kinds of trust funds and as a grantor, you need to know which ones are going to allow you to achieve your goals.

If that means helping people in need then you can go for a charitable trust. Perhaps you are looking to provide for your grandchildren. In that case, you would opt for a generation-skipping trust. 

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 have any kind of assets like land, stocks, or businesses then you are able to set up a trust fund for your family. 

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.

There is going to be a bit of a process that you are going to need to go through, but the attorney and fiduciary will be an excellent help in getting everything under control.

Overall, setting up a trust fund is an excellent way to make sure that your family is protected even when you are not around to protect them.

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