A trust fund is a legal entity that holds assets or property for a person or organization and is a tool for estate planning. Money, real estate, stocks, bonds, a business, or a combination of many different kinds of properties or assets can all be held in trust funds.
A trust fund can only be established by three parties: the beneficiary, the trustee, and the grantor. The trustee is responsible for managing the trust funds on behalf of the grantor and beneficiary.
It is possible to establish trust funds in a variety of ways and under a variety of conditions. They provide those involved with financial security, support, and certain tax benefits.
How Trust Funds Work
Estate planning is the process of figuring out how a person’s assets, other financial affairs, and any property they have will be distributed when they die. Bank accounts, investments, personal property, real estate, life insurance, artwork, and debt are all included in this. While trust funds are also popular legal entities, wills are the most common estate planning tool.
The establishment of a trust fund involves the following three parties:
- The grantor, who sets it up and populates it with their assets
- The beneficiary(s) or the person (people) for whom the assets are managed
- The trustee, who is a neutral third party (an individual, a trust bank, or another professional fiduciary) charged with managing the assets involved
Usually, the grantor makes a deal that is carried out when they are dead or no longer mentally competent for a variety of reasons. The trustee, as the appointed fiduciary, is accountable for safeguarding the grantor’s interests. Typically, this entails paying for their living expenses or even their education, such as private school or college tuition, while they are still alive. Alternately, they can make a one-time payment to the beneficiary.
Both the people who set up trust funds and the people who will benefit from them receive certain benefits and protections. For example:
- In the event that creditors decide to sue the grantor for unpaid debts, some types have the ability to hide assets.
- They avoid having to go through probate, which is the process of analyzing and distributing an individual’s assets following their death without leaving any instructions.
- After the grantor dies, the assets are distributed to the beneficiary(s) and some trust funds can reduce the amount of estate and inheritance taxes owed.
When millions (or even billions) of dollars are at stake for multiple generations of a family or other entity, wealth and family arrangements can become quite complicated. As a result, a grantor’s needs can be met by a trust fund with a surprising number of options and requirements.
But trust funds aren’t just for the super-rich, contrary to popular belief. In point of fact, they can be beneficial to virtually everyone, regardless of their financial circumstances. Find out which kind of fund is best suited to your needs by talking to a financial professional about them.
Irrevocable versus Revocable Trust Funds
Revocable Trust Fund
A grantor with a revocable trust fund has better control over their assets throughout their lifetime. After the grantor’s death, assets can be transferred to any number of designated beneficiaries once they have been placed in it. It can be used to transfer assets to children or grandchildren and is also known as a living trust fund.
The main advantage is that the assets don’t go through probate, so they can be given to the people on the list quickly. Because living trust funds are kept private, an estate is divided in a very private manner.
It is possible to make changes while the grantor is still alive, or it can be completely revoked before the grantor dies.
Irrevocable Trust Fund
Changing or withdrawing from an irrevocable trust fund is extremely challenging. The grantor may receive significant tax benefits as a result of this arrangement, which effectively transfers control of the assets to the trust fund. Most of the time, irrevocable trust funds avoid probate.
Different Kinds of Trust Funds
There are a number of different kinds of trust funds that can be used for both revocable and irrevocable trust arrangements. Depending on the assets involved and, more importantly, the beneficiary, these types frequently have distinct rules and conditions. If you want to learn more about the intricacies of these vehicles, you might be best served by consulting a tax or trust attorney. Remember that this is not an all-inclusive list.
- Security of Assets: A person’s assets are shielded from future claims by creditors by this fund.
- Blind: The goal of this fund is to avoid any potential conflicts of interest. As a result, neither the grantor nor the beneficiary of the trust fund are aware of the holdings or how they are managed. However, it does grant the trustee control.
- Charitable: A charity or the general public gain from a charitable trust fund. This includes a Charitable Remainder Annuity Trust (CRAT), which makes annual payments of a predetermined amount. A Charitable Remainder Unitrust gives assets to a specific charity when the fund runs out. During the trust fund’s lifetime, the donor receives a charitable deduction and the beneficiary receives a fixed percentage of income.1
- Generation-Skipping: When the beneficiary is one of the grantor’s grandchildren or someone who is at least 37.5 years younger than the grantor, this one provides tax benefits.
- Grantor Retained Annuity: The grantor can transfer any assets that have appreciated in value to any beneficiaries in order to reduce estate taxes by establishing this kind of fund.
- Individual Retirement Account: Instead of beneficiaries, IRA distributions are controlled by trustees
- Land: This makes it possible to manage real estate like land, a house, or another kind.
- Marital This is eligible for the unlimited marital deduction and is paid for at the death of one spouse.
- Medicaid: This allows the grantor to be eligible for Medicaid long-term care and allows individuals to set aside assets as gifts for their beneficiaries.
- Qualified Personal Residence: To save money on gift taxes, a person can move their personal residence out of their estate and into this fund.
- Qualified Terminable Interest Property: A surviving spouse will gain from this one, but the grantor will still be able to make decisions after the surviving spouse passes away.
- Special Needs: In order not to disqualify the beneficiary from such government benefits, beneficiaries are those who receive them.
- Spendthrift: Since beneficiaries don’t have direct access to the named assets, they can’t sell, spend, or give them away unless certain conditions are met.
- Testamentary: After the grantor passes away, the assets of this fund are distributed to a beneficiary who is given specific instructions.
How Do Trust Funds Work?
Individuals receive financial, tax, and legal protections from trust funds, which are legal entities. They require a grantor, who establishes the trust, one or more beneficiaries, who receive the assets upon the grantor’s death, and a trustee, who oversees the trust and distributes the assets later.
The purpose of trust funds is to carry out the grantor’s wishes. This indicates that the trustee is responsible for managing the assets while the deceased person is alive. The trustee has the option of transferring the assets to the beneficiary(s) in accordance with the grantor’s instructions, either in the form of a recurring income stream or a one-time payment.