What is a Trust Fund? Everything You Should Know

A trust fund can be an effective financial tool for nearly any person’s circumstances. They’re designed to provide financial support and protection for your loved ones. If you have funds you’d like to distribute to loved ones before or following your death, you may want to consider setting up a trust fund now.  

Before we dive into the details of setting up a trust fund, it will be helpful to understand these three common terms associated with trusts:

• Grantor: The individual who puts the assets in the trust fund
• Beneficiary: Those who will receive the assets from the trust
• Trustee: The individual or corporation that manages the assets
  

What is a trust fund?

A trust fund is an estate planning tool that allows a person to put aside money and/or other assets that will later be distributed to the beneficiaries named on the trust. They’re created to house assets on another person’s behalf under the supervision of a licensed estate planning attorney.

Trust funds are legal entities that hold a number of asset types for the named grantor, including money, real property, investment accounts, a business, or any combination of these options.

How does a trust fund work?

The main reason people open trust funds is to ensure their assets are distributed in the manner they choose, either while they’re still alive (more on this later) or after their death. Trust funds are set up by the grantor and managed by the trustee until the time comes for the beneficiary to receive the payout or other assets. 

At that time, the contents of the trust will be distributed in the manner outlined in the fund. For example, assets can be distributed as a lump sum, installments, real estate property deeds, physical item transfers, and more.

How to set up a trust fund

Trust funds are one aspect of a person’s estate plan, and they determine how certain assets will be allocated. Remember, a trust fund should only be prepared by a qualified estate attorney. If you work for a company that offers legal insurance as a benefit, you may be able to find one through that network.

The trust should include the following details:

• Who the trustee and beneficiaries are
• How the assets in the trust will be handled and distributed
• When the trust will end
• Which assets will be distributed
• The terms of the trust (per the grantor) 

There are 4 basic steps in creating a trust fund:

1. Designate your trustee
2. Choose your beneficiary(ies)
3. Create and notarize the trust document
4. Open a trust account and transfer the assets in

What about living trusts?

A living trust is one that’s meant to be utilized during the grantor’s lifetime. Most trusts are living trusts, meaning the assets will be available to the beneficiary at a pre-planned time, regardless of the status of the grantor—unless they change the terms during the life of the fund before it’s time for it to be distributed. Once you put assets into a trust fund, it’s considered a living trust.

Most living trusts are what are called living revocable trusts. This is when the trust can be revoked (i.e., ended) during the grantor’s lifetime.

What are the types of trust funds?

There are a number of different types of trust funds, all of which have slightly different payout methods and tax implications. In order to determine which type is best for you, you’ll need to assess your situation’s specifics and choose which option best fits your needs. 

Spendthrift 

Spendthrift trusts are one of the most common types of trust funds. Instead of doing a lump sum distribution money is given to the beneficiary in smaller amounts over time and often under the supervision of an independent trustee. For example, if the beneficiary has poor spending habits, this type of trust can protect the assets from the beneficiary’s potential creditors.

Testamentary

Testamentary trusts or “after-death trusts” are made through a will and funded after the grantor dies. These have become less common in recent years, as living trusts can be set up in the same way, while also avoiding the need for probate (when a will is proved valid and its terms are enforced by a court).

Bypass

Bypass trusts are mostly used by spouses and are designed for estate tax purposes. When the first spouse passes away, some assets may be passed to the bypass trust and held for the benefit of the surviving spouse without having to pay federal estate tax. When the surviving spouse passes, these assets may go to beneficiaries without the need to pay this tax.

Charitable

Charitable trusts are a method for making donations to a charity in a tax-efficient manner that may also let the donor continue to receive some benefit (e.g., income) from the gifted property.

Trusts and wills

The primary difference between assets in a will and in a living trust is that assets in a living trust typically avoid the need for probate court. Because the assets are already in the trust fund, they can be transferred to your beneficiaries without waiting for a will to be carried out. Also, the terms of a funded living trust tend to be more private than a will.

Wills and funded living trusts allow the grantor to iron out these details:

• What conditions beneficiaries need to meet before receiving the funds (like graduating college, coming of age, etc.)
• When and how to distribute assets
• How conservatively or aggressively to invest assets

Trust funds: What’s the bottom line?

Trust funds can be a complicated concept to wrap your head around, but now that you understand the ins and outs, you can feel prepared to take on this task when the time comes. For now, remember that a trust fund allows you to ensure your assets will be shared with your loved ones in the way you choose, and that a trust should be created with the help of a licensed estate planning attorney.