What Is a Trust Fund?
A trust is a legal relationship in which a party, called a trustee, holds legal title to the property for the benefit of another party, called a beneficiary. In this way, the trustee has control over the property and is responsible for it.
Trusts are established for a variety of purposes. Most commonly, they are used to arrange for the ongoing care of someone unable to provide that care to him or herself because of age or disability.
Other common uses include avoiding estate taxes, protecting property from potential creditors and business partners, and providing funds to facilitate education.
Why Use a Trust Fund?
A trust can provide your family with flexibility and control over property that might otherwise be out of reach.
Most importantly, a trust allows you to leave your home or other assets to those who you care about while still providing for their needs and wants.
When properly drafted, a trust will generally allow you to:
- Protect dependents such as children and the elderly.
- Ensure that your property will be available to loved ones, even if they lack the mental capacity to manage their affairs due to disability or illness.
- Maintain control of your assets or manage them during your lifetime
- Provide for dependents after you die.
Types of Trust Funds
There are numerous types of trust funds, each serving a unique purpose in estate planning.
Some of the most common includes:
Asset Protection Trusts
These trusts are designed to protect your assets from legal claims, such as lawsuits and creditors.
When you set up a blind trust, the trustee is in complete control of your assets and makes all decisions about their disbursement. You can still benefit from them, but you don’t know how much money is in the trust or how it’s invested.
For example, you might contribute your retirement account to a blind trust when you start a new job.
By doing so, you will ensure that your future employer cannot demand access to the funds in the account and potentially influence how much of it is paid out each month.
These are created for the good of society.
A trust is often established to benefit a named charity or charities through an ongoing income stream, such as property management, interest earned on investments, or dividend payments from stock holdings.
For example, if you establish a trust that will provide income to a church for its operations, you retain common ownership of the assets until your death.
This trust is designed to divert the assets to heirs who are several generations below you.
For example, if you have children and grandchildren, these trusts can help ensure that your grandchildren’s generation doesn’t pay estate tax on their inheritance.
This type of trust benefits the person who sets up the trust. As the grantor, you retain certain rights over the trust property, including control over investments and producing an income stream.
You also maintain federal tax benefits until you transfer money to your children or other beneficiaries. However, if you die before doing so, your estate will owe tax on the money in the trust.
For example, if you transfer your business to a trust, you can continue to operate it without paying personal income or corporate tax.
These trusts are used to manage real estate and offer privacy.
They can be set up as a small business with you as the majority shareholder, with your family members holding the remainder of the shares.
For example, if you own a vacation home or a plot of undeveloped land that you would like to remain in your family, a land trust can be set up to protect it.
Marital trusts are established with the intent to leave money to a spouse, either during his or her lifetime or through survivorship.
For example, if you were married for several decades, you might set up a marital trust with money that would transfer into your spouse’s hands after your death. This ensures that he or she would have income for life without having to rely on your children.
These trusts are set up to allow the person who sets it up, the trust maker, to qualify for assistance under Medicaid, which is an aid program designed to financially assist those with limited income and resources.
For example, if you had a child with special needs, Medicaid might provide financial assistance for his or her care.
Spendthrift trusts are designed for beneficiaries who might not manage property well due to a history of poor financial decision-making.
If the beneficiary has trouble managing assets, you can put provisions in place that restrict how they can use the trust funds, such as through monthly allowances.
These are trusts that are created by a will.
They are commonly set up to go into effect after you die, although they can be established during your life if there is no immediate need for the funds.
For example, many wills direct that any balance in an account at death goes into a testamentary trust that provides income to a spouse or other beneficiary during their lifetime.
These trusts allow you to change your trust during your lifetime. Also, you keep total control over the trust assets and who benefits from them.
For example, if you experienced sudden financial success such as through an inheritance or business deal, you might want to place that amount in a revocable trust for future generations, rather than allowing your children to have immediate access.
Similar to the revocable trust, you establish an irrevocable trust and retain control over its assets while it is in existence.
However, unlike a revocable trust, once you establish the irrevocable trust you can’t change or terminate it.
For example, if a couple sets up a child with an irrevocable trust that is funded with money earned during his parents’ life, the parents have no control over how their son uses those funds.
Tips for Creating a Trust Fund
You will need an attorney and a financial institution to help you set up the trust.
If you make your living as a business owner, be aware that transferring assets to a trust could impact your right to take advantage of key tax breaks such as depreciation and amortization.
To make sure your trust is set up correctly and doesn’t face any legal challenges, be aware of the following:
- Be specific about what you want to happen to your assets with trust.
- Consider naming a beneficiary for each account you own. This will prevent confusion and protect the money should anything happen to you.
- Don’t name your estate as a beneficiary for an account in which you have an ownership interest.
- Place your trust assets in a different institution than where you keep your checking and savings accounts, such as through a credit union or bank that doesn’t offer financial services to the general public.
Trusts can be complex and it is best to consult the advice of a trusted legal advisor when considering anything that involves your assets before setting one up. Be sure you understand all types of trusts and their corresponding related issues and benefits associated with them.
When choosing an executor for your will or trust, consider individuals whom you trust to make the right decisions and who have a clear understanding of what needs to be done.
If you decide not to go through a trust, you should still maintain detailed financial records that include account names, account numbers, and contact information for the institutions where you keep your assets.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.