The Essentials of Trust Funds: Setup, Benefits, and Types

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Understanding Trust Funds: A Comprehensive Guide

People often associate trust funds with the ultra-wealthy, but anyone can establish one. A trust fund is a legal entity that holds property or other assets on behalf of a person, group, or organization. Many individuals find trust funds helpful for estate planning or assisting loved ones in managing their finances. Here’s a detailed look at how trust funds work, their benefits, and how to get started.

What Is a Trust Fund?

A trust fund holds property and other assets for the benefit of a person, group, or organization. It might be set up to provide regular income or periodic distributions to grandchildren or to pass along assets to heirs. Trust funds are commonly used in estate planning to protect assets from creditors, avoid taxes and probate, and ensure that a person’s wishes surrounding the distribution of assets are carried out as intended.

How Does a Trust Fund Work?

A trust fund begins with a legal document, the trust, that spells out terms and identifies three key parties:

• Grantor: Sets up the trust fund and places their assets in it. The grantor also creates the rules that govern how the fund’s assets are managed, accumulated, and distributed.
• Trustees: Manage the trust fund and carry out the trust’s directives. Trustees have a fiduciary duty to the beneficiaries of the trust, meaning they must act in the beneficiaries’ best interests within the terms set by the grantor.
• Beneficiaries: Can be an individual, a group of people, or an organization. The grantor designs the trust for their benefit.

What Is the Purpose of a Trust Fund?

Trust funds may be established for various purposes:

• Provide income for beneficiaries, such as a special needs child
• Distribute assets after the grantor’s death
• Provide support and pay expenses if the grantor is incapacitated
• Contribute to charity

Trust funds may hold different types of assets, including investment accounts, businesses, real property, or bank accounts. Grantors decide when and how beneficiaries receive assets, and they may specify how the funds can be used, such as for college expenses or a home down payment.

How to Set Up a Trust Fund

To set up a trust fund, you’ll need to make key decisions about the type of trust, trustees, and beneficiaries you want, then prepare trust documents and fund the trust. Working with an estate planning or trust attorney can be invaluable. Although it’s possible to set up a simple living trust with the help of a guidebook or dedicated software, an attorney can help you decide which type of trust works best for you, create trust documents that fit your needs, and walk you through the process of moving assets into it.

Types of Trust Funds

There are many types of trusts, each designed to meet different needs. Here are some commonly used types:

• Revocable Trust: Allows the grantor to control the assets during their lifetime and make changes or revoke the trust at will.
• Irrevocable Trust: Once assets are placed in this trust, the grantor no longer has control over them, and it can be difficult to make changes or revoke the trust.
• Blind Trust: Neither the grantor nor the beneficiary sees what assets are held in the trust.
• Charitable Remainder Trust: An irrevocable trust that pays income to a beneficiary for a limited term or for life, then donates the remaining assets to designated charities.
• Special Needs Trust: Provides for an individual with special needs without disqualifying them from receiving government disability benefits.
• Generation-Skipping Trust: Assets pass directly to the grantor’s grandchildren, bypassing estate taxes that might apply if assets passed to the grantor’s children.

Revocable vs. Irrevocable Trust Funds

Choosing between revocable and irrevocable trust funds can be confusing. Both types allow you to pass assets to your heirs privately without going through the probate process, but they differ in their structures and benefits.

Revocable Living Trusts

A revocable living trust is easier to modify than an irrevocable trust. The grantor can amend the terms of the trust at any time and manage the trust fund as its trustee. A revocable living trust may offer more flexibility by allowing the grantor to:

• Name a different (or additional) trustee
• Change beneficiaries
• Pull assets out of the trust

Irrevocable Trusts

Irrevocable trusts aren’t as easily amended as revocable trusts. In an irrevocable trust, the grantor relinquishes ownership of any assets they place in the trust. Because the assets in an irrevocable trust no longer belong to the grantor, they may have additional protections, such as being protected from creditors and potentially qualifying for certain government benefits.

5 Benefits of Trust Funds

There are many reasons to set up a trust fund. Here are five benefits to consider:

1. Avoiding Probate: A trust allows your plans to remain private and helps you avoid the costly and time-consuming probate process.
2. Minimizing Taxes: An irrevocable trust can protect certain assets from federal, state, and local estate taxes.
3. Controlling the Distribution of Assets: As the grantor, you can stipulate exactly how the assets in the trust should be managed, accumulated, and distributed.
4. Protecting Assets From Creditors: Transferring ownership of your assets into an irrevocable trust may help protect them from creditors.
5. Helping a Family Member Manage Finances: A trust can provide a framework for offering needed financial help and guidance for a family member or friend.

The Bottom Line

Not everyone needs a trust fund, but if you’re concerned about distributing assets to your loved ones—while you’re alive or after you’ve passed—a trust fund may help ease the process, minimize taxes and other expenses, and provide some protection against creditors. If you want to learn more but aren’t sure where to start, consider finding a local estate planner or trust attorney to answer your questions and suggest a trust that will suit your individual needs.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial future with confidence.

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