A trust fund is a legal entity that holds property, often financial assets, for the benefit of a third party.
A trust fund may be set up to hold assets during an individual’s lifetime or after their death. However, most people associate trust funds with inheritances. The term ‘trust fund baby’ is often used pejoratively to describe someone who has never worked and lives of their inheritance.
How Does a Trust Fund Work?
When you create a trust fund, you create instructions that your trustee must follow in managing the assets of your trust. Typically, these instructions are created with the help of an attorney who can help ensure that your instructions are legally enforceable and valid.
When you write these instructions, you must designate beneficiaries — the people who will benefit from the trust. These beneficiaries may receive income from the trust, and they may receive distributions of principal from the trust. The beneficiaries may also be entitled to full ownership of all of the assets in the trust at some point in time.
You can also designate a contingent beneficiary in case your primary beneficiary doesn’t survive you. In addition, if you choose to create more than one trust fund for one beneficiary, you can specify that each share of your trust fund is treated separately or that they all be treated as part of one larger whole.
Benefits of Trust Funds:
- There are several reasons why you might want to use a trust fund instead of just giving people their inheritance directly:
- Limiting Access: You may want to make sure that people don’t have access to the money right away. It could be part of a retirement plan where payouts start at age 65, or it could be set up as part of an estate plan where only certain people get access after someone dies.
- To protect the beneficiary. You can set up a trust fund so the beneficiary doesn’t receive all of their inheritance at once, but instead receives payments in smaller increments over time. This can help prevent the beneficiary from spending the full amount too quickly. For example, if you wanted to leave money for your child’s college education, you could set up payments to be made directly to their university when they’re ready to enroll.
- To manage funds for minors or young adults. If someone would like to leave money or other assets to children or young adults who aren’t yet old enough to manage their own finances
- Parents often use trusts to provide financial support for their children throughout childhood, then put conditions on how their children can spend any remaining funds after they turn 18 or 21. For example, they might require that their children spend the money on college before they’re allowed to spend it on anything else.
Are There Any Drawbacks to a Trust Fund?
There are many reasons people use trusts to hold their assets, but the most common is to control the distribution of their money in order to minimize taxes and maximize the amount that goes to their beneficiaries. For example, putting money into a trust allows you to avoid probate, and it may allow you to avoid capital gains taxes.
Trust funds are established to provide a steady source of income for your beneficiaries. However, they are not without drawbacks. Often, trust funds are set up with an age restriction stipulating that the beneficiary must be over a certain age before they can have access to the money in the fund.
Sometimes, setting up a trust fund is more expensive than an alternative option like a savings account. There may also be ongoing fees which will eat into the amount of money you leave behind.
Setting up a trust fund is also more complicated and time-consuming than other options. You’ll need to choose a trustee who will manage the account and follow your instructions to distribute the money as you specify.
Types of Trust Funds
There are many different types of the trust fund and they can serve a variety of different purposes. Some common types include:
What exactly is a Blind Trust Fund?
The recipient of a Blind Trust Fund is unaware of the identity of the Trustee, or person in charge. The Trustee has the entire responsibility for the operation of the Blind Trust Fund until the assets are disbursed.
Blind Trust Funds are often utilized when an individual wishes to prevent a conflict of interest, such as when the Trust involves business or investments. Blind Trusts can also be used to add an extra degree of privacy to Trust administration.
What is a Unit Trust Fund?
A Unit Trust Fund is a form of mutual fund structure that permits earnings to be transferred directly to the client (who would be the beneficiary). Unit Trust Funds enable investors to maximize their payouts without reinvesting their earnings in the fund.
Unit Trust Funds can invest in a wide range of assets, such as securities, stocks, and bonds. They are most typically used by investors as a tax shelter approach rather than as a tool for estate planning.
What exactly is a Common Trust Fund?
A financial institution manages a Common Trust Fund on behalf of a group of persons. Common Trust Funds are similar to mutual funds in certain ways, but their membership is limited to individuals who have Trust accounts.
Common Trust Funds are less often employed than they previously were because alternative Trust and investment kinds can provide more benefits. They are now regarded as a specialized investment structure.
Frequently Asked Trust Fund Questions
Who can set up a trust fund?
Anyone can create a trust fund. You don’t need to be rich or super-educated to do it; you just need to have some money and assets you’d like to leave someone else.
How does trust work?
The trustee administers the trust according to its terms and manages the assets it contains on behalf of the beneficiary(ies). A trustee is generally bound to act in the best financial interest of the beneficiary, but some trusts actually require that all distributions be made according to an arbitrary standard such as the beneficiary’s health, education, maintenance, or support.
What is the definition of a Trust Fund Beneficiary?
The individual who will receive the assets in a Trust Fund is known as the Trust Fund beneficiary. If you want to understand more about how Trust assets are distributed to beneficiaries, read this overview.
What is the value of a trust fund?
The amount of money in a Trust Fund varies according to the originator of the Trust, the type of Trust, and how much the account has grown since it was founded. In most situations, any income earned on funds held in a Trust Fund is also given to the recipient.
What is the average size of a trust fund?
The precise average Trust Fund amount is unknown, but according to the Survey of Consumer Finance, it is roughly $4 million. It should be noted that this statistic is based on a 2017 survey of around 6,482 households and so may not be a good representative of the full United States. Many people are relieved to learn that Trust Funds provide the benefit of secrecy; however, this also implies that there are no definitive answers on average Trust Fund amounts or frequency of usage.
What Is the Distinction Between a Trust and a Trust Fund?
When it comes to Estate Planning, the difference between a Trust and a Trust Fund is subtle but significant. A trust is a legal document that specifies how specific assets will be handled and distributed. When the Trust is established, the assets are deposited in a Trust Fund, which is a legal entity. The formation of a Trust and the establishment of a Trust Fund are inextricably linked, which is why you may hear these terms used interchangeably at times.