What’s a Trust Fund and How Does It Work?

Unarguably, having a solid plan for the future is indispensable to ensure your assets remain preserved and safely go down to your loved ones. And the most straightforward and manageable way to keep your assets protected is by setting up a trust fund.

More often than not, most people link trust funds with uber-wealthy families who possess profusion of property. Sure, setting up a trust fund is a good option for millionaires to park their money. However, trust funds aren’t just for rich people. Besides, you don’t necessarily need to own an abundance of cash and property to benefit from it.

Even if you possess a small amount of property, a trust fund can help you practice more authority over your assets. It can also protect your family’s future finance and leave a legacy. It’s principally a fiduciary arrangement, a crucial estate planning instrument that stipulates the asset distribution without the need of a probate court.

Unlike Wills that only take effect after death and involve plenty of costs and time, trusts can come into effect even before death or incapacitated. You can structure trusts to attain various goals such as to help reduce estate taxes, benefit charities, or save assets for minors until they grow up.

What is a trust fund?

To help better understand the whole process, let’s begin with the trust fund definition and the roles of each individual. A trust fund can be described as an independent legal entity that primarily holds assets on behalf of a person or an organization until the intended person receives them.

For instance, it may happen when the previous owner of the assets dies or when the intended recipient reaches a specific age. A trust fund can hold many assets such as real estate, stocks, bonds, money, heirlooms, companies, or other properties.

Who’s involved in a trust?

The following three parties are a must to set up a trust fund:

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  • Grantor:This individual establishes a trust and decides what assets a trust will contain. Also known as a settlor or trustor, this person defines the rules and conditions behind it.
  • Beneficiary:This person/organization ultimately benefits from a trust. A beneficiary in no way owns the property. Still, it possesses the ultimate right to receive benefits of the assets mentioned in the trust.
  • Trustee:The trustee shoulders the responsibility of fulfilling the trust requirements and monitoring the distribution of assets to its beneficiaries.And the trustee can either be an individual or an entity such as a bank, law firm, or multiple trusted advisors.

How does it work?

Trust funds are exceptionally different from other estate planning tools. It allows the grantor to create trust and pass down the assets to the loved ones in a structured way. It also enables the grantor to specify the conditions and impose rules to disburse the assets in the best possible way.

For instance, as a grantor, you can allocate the trust funds for your children’s educational expenditures. Or you can be specific about how the beneficiary receives it, either annually or as a lump sum. The grantor can even impose restrictions that the beneficiary isn’t eligible to access the trust fund to pay off debt.

Assets such as retirement accounts can’t be a part of the trust funds since they already have a stated beneficiary. However, the grantor must consult an estate attorney or a trusted financial advisor before including car and life insurance assets.

Trust funds offer a lot more specificity and authority than Wills. For instance, a Will becomes a public record when a person dies, and there isn’t any surety that all wishes stated in a Will will be met. However, in the case of a trust fund, only beneficiaries and trustees are aware of the conditions and content. Not to mention how some trust funds also provide financial protection.

Types of trust funds 

  • Revocable Trust

A revocable trust, sometimes known as the Living Trust, is a trust in which a grantor creates and transfers the ownership of the assets during their lifetime.

Nonetheless, as the name suggests, the grantor can revoke or make modifications for any reason, provided that the grantor is living and mentally stable. The primary benefit of this type of trust is it can help avoid probate.

  • Irrevocable Trust

In an irrevocable trust, once the grantor places their assets in the trust, they no longer can modify or revoke it. One major drawback of this type of trust is that the grantor gives the full authority of the assets to the trust funds.So, it might get challenging to get the money back, even if the grantor needs it.

However, since the assets are no longer in the direct possession of the grantor, they can enjoy considerable tax benefits.

  • Special Needs Trust (SSI)

Special Needs Trust ( aka Supplemental Needs Trust) is a legal arrangement in which the person with special needs is eligible to receive government benefits.

The beneficiaries eligible for this trust may include Medicare, Medicaid, or Supplemental Security Income (SSI). The two common types of special needs trusts are third-party special needs trust and self-settled special needs trusts.

  • Charitable Trust

True to its name – this type of trust strives to support and benefit a charitable organization. In this type, an individual can earn income and enjoy tax benefits.

However, since Charitable Trusts are the type of Irrevocable Trust, the person may lose control over their assets once they choose the organization as their trustee. The two most widely common types of Charitable Trusts are Charitable Remainder Trust and Charitable Leads Trust.

  • Testamentary Trust

Testamentary Trust goes into effect only after the death of the grantor. It is more like a last Will in which a grantor leaves assets to the beneficiaries with specific instructions.

Note that in this type of trust, the Trust Under Will needs to pass through the probate court so that the law can examine the Will.

Final Words

While a Will is one of the easiest ways to pass down assets to loved ones, going down this route means relinquishing control over your property. Not only this, but your estate might also need to go through a complex probate process.

Therefore, if you wish to practice more control over the distribution of your assets, a trust fund is a feasible option. It allows the grantor to delineate their terms and conditions. These may primarily encompass the way and the time the contents of the trust fund pass down to the beneficiaries. Besides, irrevocable trust funds provide some relaxation on taxes and protection against legal actions.

All that’s to say is that a trust fund is an excellent opportunity to lay out your wishes in broad strokes. But as with other financial ventures, ensure that it’s the right option for you, your financial state, and your beneficiaries.

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