A Basic Guide to Trust Funds
The common perception of a trust fund is a large amount of money or property set aside by the wealthy to someday be passed onto their children. While trust funds may seem more appropriate for the rich, they can be established by individuals of all incomes.
A trust is a legal entity in which property or assets are handled by a managing party, called the trustee, for the benefit of someone else, called the beneficiary. The person funding the trust is called the grantor or settler. The trustee can be any person or legitimate entity (such as a company) that oversees the assets within the trust.
An example of a trust fund in action: A dying parent (grantor) sets aside $100,000 in a trust that is managed by a close relative (trustee) and disbursed to the child (beneficiary) at the age of 25 years.
There are two basic types of trusts: living trusts and after-death trusts.
Living trusts are established while the grantor is still alive and can be either revocable or irrevocable. Revocable trusts allow the grantor to control all the assets in the trust, which includes revoking or changing the terms of the trust at any time.
Irrevocable trusts transfer ownership of assets from the grantor to the beneficiary and typically cannot be changed without the beneficiary’s permission. After-death trusts are set up along with the process of carrying out a will. The assets designated for these trusts will usually go through the probate process of estate disbursement.
Purposes of a Trust
The general public knowledge of trusts encompasses far less than what is stated in complex trust laws. The funds can be used for many various purposes. These are some of the most common reasons for setting up a trust:
Estate planning
Trusts can play an integral role of the estate planning process because it is a legal entity that places conditions on how assets are distributed upon death while offering a tax break on estate taxes.
Spendthrift protection
In the event that the beneficiary is not financially responsible, a trust can be established to control how money is disbursed to prevent the beneficiary from squandering the money.
Charitable donation
A charitable trust appoints a charity or organization as the beneficiary in the form of an irrevocable trust. It allows the grantor to claim gift and estate tax deductions while still being able to enjoy the use of the property.
Pros of a Trust
- The terms of within a trust agreement are private while the terms of a will are public.
- Depending on the type of trust, tax advantages could benefit both the grantor and the beneficiary.
- Assets in trusts can bypass the probate process (which could ordinarily take months to years).
Cons of a Trust
- Trusts can cost up to a few thousand dollars to establish and could also include annual administrative fees.
- Funding a trust can be a major hassle, as it involves a large amount of work to transfer the assets.
- A trust does not replace a will, meaning you will need to document what happens to other assets.
How to Establish a Trust Fund
Before making the decision to establish a trust fund, it is highly recommended you consult an attorney who specializes in estate planning. An estate lawyer will help find a trust that best suits your goals, assets, and beneficiaries and provides assistance with the documentation and procedures.
