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What is a Trust Fund?

Last Updated: September 11, 2023

Key Takeaways:

  • A trust fund holds assets (such as real estate, financial accounts, stocks, and personal property) for a beneficiary to inherit eventually.
  • Trust funds involve three key roles: the grantor (creator of the trust), the trustee (manager of trust assets), and the beneficiary (the one who inherits the assets).
  • Benefits of trust funds include avoiding probate, controlling asset distribution, ensuring privacy, setting age limits for beneficiaries, and more.

What is a trust fund?

A trust fund is a type of fund that holds assets for a beneficiary to inherit eventually. Trust funds help individuals pass on their assets like other estate planning tools. There are many different types of trust funds, each with unique parameters.
Most people associate this type of fund only with money, but you can place real estate, financial accounts, stocks, business ownership, or personal property within a trust fund. Generally, people don't include vehicles, checking accounts, and low-value personal items in trust funds.
To create a trust fund, you must complete a trust document, such as a Revocable Living Trust, and transfer your property into the trust.

How trust funds work

A trust fund operates by a grantor appointing a trustee to control the assets that a beneficiary inherits. Here is a more detailed explanation of each role:
  • Grantor: The party who creates the trust document, fills the trust fund, and appoints a trustee to manage the assets within the trust fund is known as the grantor.
  • Trustee: The party who the grantor appoints to manage assets within a trust fund is the trustee. For Revocable Living Trusts, most people appoint themselves as trustee so they retain control of their assets during their lifetime. For other types of trusts, individuals may have to appoint a third party to act as their trustee.
  • Beneficiary: The beneficiary is the party who will inherit the assets within a trust fund.

Types of trust funds

There are various types of trust funds, but on a basic level, all trust funds are either revocable or irrevocable.
A Revocable Living Trust allows a grantor to continue controlling their assets after they're placed in a trust. The term 'revocable' means that a grantor can amend or revoke the trust fund at any time, adding or removing assets as needed. Most often Revocable Living Trusts transfer assets to children or grandchildren.
An irrevocable trust prevents the grantor from modifying terms without the beneficiary's or beneficiaries' permission. An irrevocable trust is very difficult to change or revoke but can result in tax benefits. The grantor transfers their ownership of assets into the trust and legally removes all of their ownership rights to the assets. Losing the right of ownership for these assets removes them from the grantor's taxable estate.
In addition to being either revocable or irrevocable, trust funds can be designed for a particular intent. The following types of trust funds all serve a unique purpose:
  • Asset protection trust: Use an asset protection trust to protect your assets from creditors.
  • Blind trust: Create a blind trust to protect the trustee's identity from the beneficiary so they don't know who controls the trust.
  • Charitable trust: Create a charitable trust to benefit a particular charity and leave behind a sizable donation.
  • Spendthrift trust: Use a spendthrift trust if you want to add restrictions on how your beneficiary can spend or sell the assets within the trust fund.
  • Testamentary trust: Create a testamentary trust if you want to leave specific instructions for your beneficiaries after your passing.

How to set up a trust fund

You can set up a trust fund by following these steps:
  • Create a trust document: Depending on how much control you want to retain, you can create a Revocable Living Trust or an Irrevocable Living Trust. Then, provide a detailed and accurate description of each asset. For your financial accounts, include the account number and financial institution.
  • Print and proofread your trust document: Pay special attention to the asset descriptions, your trustee's contact information, and any clauses you wrote yourself.
  • Inform the trustee(s) about their duties: Trustees must manage the property in the best interest of their beneficiary.
  • Sign your trust document: Sign with your trustee and any witnesses in front of a notary public. Using a notary public is important as many banks and private institutions will be hesitant to accept a living trust that is not notarized.
  • Transfer property ownership to the trust: Use either a Warranty Deed or a Quitclaim Deed if you are transferring real estate. Use either a Bill of Sale or a Gift Deed if you are transferring tangible personal property without a title or registration, such as jewelry or furniture.
  • Learn about estate tax exemptions: A trust fund may not protect you from the federal and state estate taxes that become payable when you die. Your trustee may have to pay estate taxes out of your Living Trust.

Due to the complex nature of trust funds, some people may enlist the help of an estate attorney when setting one up.

Benefits of a trust fund

The primary benefit of trust funds is the avoidance of the probate process. Once you pass away, any assets not listed in a trust must go through this process before your beneficiaries can inherit them. This includes assets you listed in your Last Will and Testament and anything that you may have forgotten to distribute. Probate can be a time-consuming and expensive process for your beneficiaries, resulting in significant delays before they can fully inherit your assets.
Setting up a trust fund has other benefits as well. Here are some more reasons you may decide to create a trust fund:
  • Control who inherits your estate: If you have a blended family and want your biological children to inherit certain assets, a trust fund can ensure that they are the beneficiaries of its assets.
  • Ensure your privacy: Trust funds are private and don't go through probate court which leaves public records. This keeps certain individuals from accessing details of your asset distribution.
  • Set an age limit: If you don’t think a beneficiary will be ready or mature enough to access a trust fund until they're older, you can set up a trust that is inaccessible until a certain age.
  • Specify usage requirements: Create a spendthrift trust to stipulate specific usage rules for the beneficiary of your assets.
  • Protect your beneficiary: Prevent a beneficiary from spending all the money in a trust fund at once by specifying that the money is paid out periodically.