A trust fund is a tool that is used in estate planning. It creates a legal entity to hold property or assets on behalf of a person or organization. A trust fund is managed by a third party trustee that is neutral, meaning they have no gain or benefit from the trust fund.
The types of assets held within a trust fund can include money, real estate, stocks, bonds, and businesses. Trust funds can hold a mix of asset types and can be formed under a variety of stipulations.
How a trust fund works
A trust fund consists of three key parties, a grantor, a beneficiary and a trustee. The grantor is the person who sets up the fund and populates it with their assets. The beneficiary is the person chosen to receive the trust fund assets and the trustee is the neutral third party instructed to manage the assets in the trust fund.
For example, A father (the grantor) sets up a trust fund and places assets he wants his daughter (the beneficiary) to receive when the grantor passes away. A trusted third party (the trustee) is appointed to manage the assets and ensure the beneficiary receives the assets held in the trust fund as per the stipulations when it was set up.
The trustee has a fiduciary responsibility and must act in the best interests of the grantor and not for their own gain.
Types of trust fund
There are several different types of trust fund available, including:
Revocable Trust: Also known as a living trust, this type of trust gives the grantor the ability to better control assets during the grantor’s lifetime. Commonly used to transfer assets to children or grandchildren.
Irrevocable Trust: Are types of trust funds that are difficult to change or revoke and most often avoid probate.
Asset Protection Trust (APT): This type of trust can be used to protect a person’s assets from claims of future creditors.
Blind Trust: A blind trust is created without the beneficiary knowing who holds power of attorney for the trust, i.e. who the trustee is.
Charitable Trust: A trust that is created to benefit a chosen charity or charities.
Individual Retirement Amount Trust: Also known as an IRA, this type of trust can help to minimize taxes on qualified assets held in the trust.
Marital Trust: A marital trust is funded at one spouse’s death and would be eligible for the unlimited marital deduction.
Advantages of a trust fund
The advantages of a trust fund include:
Ensures beneficiaries are taken care of
An individual may want to protect the future wealth of their children and ensure their estate goes to them. An example would be if someone had remarried and wanted to make sure their assets were passed to their children and not their spouses children.
Controls when a beneficiary should receive the assets
A grantor can put stipulations in place as to when the beneficiary receives the assets. This is usually based on age, i.e. access is granted at 21 when they are deemed responsible. A trust fund can also stipulate how the assets should be used, i.e. money must be used for education or to purchase property.
What else do you need to know?
Can be cost prohibitive
Trust funds can be costly to set up and manage which may not make them a viable option for some individuals.
Can be complex to manage
Depending on how the trust fund is set up and the type of trust fund that is used can make it more complex to manage. For example, a trustee may need to make regular distributions at identified milestones.