A Beginners Guide To Trust Funds
Trust funds are often thought of as one of the many tools that the wealthy use to pass on their wealth. Yet, the truth is that trust funds are within the financial reach of the middle class. Setting up a trust fund costs a few thousand dollars, a figure that many middle class people could afford. Trust funds detail precisely how assets that you leave behind to your beneficiaries are to be used. In this article, we will give a beginner’s guide to trust funds, explaining just what they are and how you can set one up.
What is a trust fund?
A trust fund holds assets on behalf of a person, organization or group. It is a powerful tool in estate planning and ensures that your trust is overseen by a neutral third-party called a trustee. A trust fund can hold cash, bonds, stocks, businesses, other assets or some combination of these. The trustee oversees the trust fund until such a time when the assets are passed onto the trust’s beneficiaries.
Trust funds give their creators, known as trustors, a greater degree of control over their assets than wills or other estate planning vehicles do. You see, when you die, your will enters the public record and is contestable in a court of law in a process called probate. However, with a trust fund, the terms and the names of the beneficiaries are known only to the trustees and the trust’s beneficiaries. The terms of the trust fund are incontestable. Indeed, certain types of trust funds protect your assets from claims and lawsuits and provide attractive tax benefits.
How do trust funds work?
A trust fund has three interested parties: the trustor or grantor, the trustee and the beneficiaries. The grantor sets up the trust and funds it with their assets. The trustee oversees the trust, ensuring that it operates according to the terms outlined by the grantor. The beneficiaries are those who will benefit by receiving an allocation of the trust’s funds.
In order to set up a trust fund, a grantor must consult with a trust lawyer and nominate beneficiaries and outline the terms of the trust. The trustee may be a lawyer, a bank, a friend or family member or anyone you feel will be able to do the job. Beneficiaries can be friends, family, your church, a cause or some organization. The terms stipulate what assets are to be in the trust fund, which beneficiaries get what assets, the conditions that the beneficiaries have to accept in order to receive the assets, and what those assets are to be used for. The trust lawyer will draft a trust agreement which, if the grantor agrees to it, will serve as the basis of the trust. As the grantor, you might also want to consult with a financial advisor in order to determine the best allocation of your assets and the best way to ensure that they last for a long time.
As we have said a few times, with trust funds, you can stipulate just what the beneficiaries can do with the assets they receive or how and when they receive them. For example, you can decide if a beneficiary will receive funds on an annual or monthly basis or within some other period. You may decide to pay out a lump sum of money to a beneficiary once they reach a certain age. The grantor can even specify that the funds can be used for a specific purpose such as college education, or purchasing a home.
Many trust funds have a “spendthrift clause” which forbids the beneficiary from using the trust fund’s assets to pay down their debts. So, if for instance, your grandson gambled away his own funds and incurred a lot of debt, his creditors wouldn’t be able to touch the trust fund.
The Types of Trust Funds
An irrevocable trust fund is a type of trust fund. It is a trust whose terms cannot be changed. The grantor cannot rescind the trust or change its terms or how the assets are distributed. There are benefits to this inflexibility. Firstly, the grantor is liberated from paying income tax on income earned by the assets in an irrevocable trust. The effect of this may be that the grantor moves into a lower tax bracket or even avoids paying estate tax. Another benefit is that the assets under a trust fund are protected from any claims resulting from liabilities incurred by the grantor. So even if the grantor were to go bankrupt, that would not affect the trust fund.
On the other hand, revocable trust can be changed at any time. They are also known as living trusts. They can be updated any time. So if you want to add or remove assets or beneficiaries, you can do so. A revocable trust can be dissolved, returning the assets to its grantor. Revocable trusts give the grantor more control and flexibility given that changes can be made all the way till the grantor passes away. However, this comes at a price. The flexibility and control that a revocable trust gives mean that the revocable trust’s assets remain part of the grantor’s estate. Consequently, they are open to legal assault if the grantor ever faces any claims on his estate.
We also have what is known as a charitable remainder trust, or a charitable annuity trust. Thi8s is a kind of trust fund that is used if you want to leave your assets to a charity. The assets held by the trust provide the charity with a fixed percentage of the trust fund’s income during the trust’s lifespan. The moment you set up a charitable remainder trust, you become eligible for charitable contribution deductions.
As we have said on this site, estate planning is very important, yet, it is often neglected. You need to start thinking about setting up a trust fund if you want to pass on any of your assets to your friends, family, church, causes, or other persons and organizations in ways that are definite, uncontestable and align with your wishes. You can have it pay out in specified periods, or have it be used for specific purposes such as paying for college education. You can pay it out in increments or in lump sums. Trust funds are a powerful tool that you should not neglect.