What Are Trust Funds?

Trust funds are structured legal entities used to pass on assets from one generation to the next. A trust fund can include multiple types of asset spread across many jurisdictions, with terms and conditions attached to the disbursal of each type of asset

The two main types of trusts are revocable and irrevocable trusts. Besides this, there are many other types of trusts depending on the nature of assets and specific terms defined in the trusts. 

The main advantage of trust funds is that they streamline the design and implementation of complex estates. The disadvantage of trust funds is that they can be expensive and require much effort for maintenance.

Basics of Trust Funds

Trust funds are estate planning tools used to minimize taxes and set terms attached to their operations. For example, you can set up a trust to pass on wealth only if certain conditions, such as those that are related to age, are met.

You might think that trust funds are only used by the rich to pass on their wealth from one generation to another. Actually, trust funds are used for a wide variety of purposes, from estate planning to donating to charities or provisioning care for the disabled and children. They can be set up without legal help using an online DIY tool. Be warned, though, that fashioning a rudimentary trust may be easy but establishing one with all the bells and whistles may require significant funds for setup and maintenance.

Trust Funds versus Wills

Trust Funds Versus Wills

Trust funds often draw comparisons to wills. Both are similar types of instruments in that they are used to pass on assets from one generation to the next. However, trust funds offer several advantages over wills in case of complex and large estates. Some of the advantages are:

  • They are more structured than wills and allow users to specify criteria and terms regarding distribution of their estates.
  • For complex estates that span many asset types and geographies, trust funds are easier to manage and less expensive as compared to wills.
  • Trust funds do not have to undergo a court-mandated probate process.
  • Trust funds provide significant tax deferral benefits to multiply income; wills do not allow such provisions.

What are the components of a trust fund?

There are three main entities involved in the operations of trust funds. They are outlined below.

Beneficiary

A beneficiary can be an individual or an organization who is the recipient of funds from a trust. In most cases, the receipt of funds is subject to certain conditions. For example, the beneficiary may receive the funds only after they reach a certain age or achieve a goal, say getting admitted to a university. The release of funds to a beneficiary may be periodic or as a lump sum. All funds withdrawal is subject to taxes, meaning beneficiaries have to pay regular income taxes on the withdrawn amount.

Trustee

A trustee is responsible for management and administration of the trust. The trustee can either be an individual or an organization and is appointed by the grantor. In some instances, the grantor and the trustee can be the same individual. Trustees are responsible for making all important decisions relating to the trust after the grantor’s death or, if they are the same person, during their lifetime as well.

Third party trustees are compensated by the trust for their services. To ensure that they do not use funds contained in a trust for their personal gain, trustees are bound by fiduciary responsibilities to not use the funds contained in the trust for their personal gain.

Grantor

Also referred to as testators, grantor is the person or organization responsible for setting up the trust. They specify the details – assets to be included, terms of operation, ultimate beneficiaries – in the original trust document. Grantors can also manage the trust as trustees during their lifetime.

One of the main advantages of trust funds is that they can be customized in various ways. Some of the popular types of trust funds are as follows:

  • Revocable Trusts: Also known as living trusts, such trusts can be modified or dissolved after creation.
  • Irrevocable Trusts: Such trusts cannot be changed after creation and they offer significant tax benefits.
  • Blind Trusts: Such trusts protect the trustee’s identity and are generally used by persons in public office to shield them from conflicts of interest.
  • Charitable Trusts: Such trusts are used to donate money to charities, subject to conditions specified by the grantor.
  • Special Needs Trust: Such trusts are established to ensure care and resources for the disabled and children with special needs.
  • Qualified Interminable Interest Property Trusts (QTIP): Such trusts are used to provide income for spouses after death and distribute assets to other beneficiaries.

Advantages and Disadvantages of Trust Funds

Some of the advantages of trust funds are as follows:

  • They are a structured way of passing on assets from one generation to the next.
  • They provide considerable tax benefits, in the form of tax deferrals on income, to beneficiaries and grantors.
  • They reduce the complexity and bureaucracy involved in crafting a will with multiple types of assets.
  • Some trust funds preserve privacy by enabling protecting trust details.  

Some of the disadvantages of trust funds are as follows:

  • They can be expensive to set up and maintain because they incur annual fees and legal help costs.
  • Restrictions on money withdrawal means that trust funds may not be available during emergencies.

Trust Funds FAQs

 

Trust funds are estate planning tools used to minimize taxes and set terms attached to their operations. For example, you can set up a trust to pass on wealth only if certain conditions, such as those that are related to age, are met.
Trust funds are more structured than wills. They are also better tools to manage complex estates and geographies. Unlike wills, trusts also do not have to undergo a court-mandated probate process.
Examples of popular trust funds are revocable trusts, irrevocable trusts, blind trust, charitable trusts, special needs trust etc.
The roles in a trust fund are beneficiary, grantor, and trustee.
Trust funds can be expensive to set up and maintain because they incur annual fees and legal help costs. Restrictions on money withdrawal means that trust funds may not be available during emergencies.