A special kind of legal entity known as a trust fund holds assets for the benefit of another individual, team, or company. Trust funds come in a wide variety of forms, and there are numerous provisions that specify how they operate.
Trust Funds: A Definition and Examples
A trust fund is frequently employed as a tool in estate planning. It is used to reduce taxes and avoid probate, which is the court-supervised process for allocating a decedent's assets. Although there are many different kinds of trust funds, there are two main groups:- Revocable: A "living trust" is another name for this kind of trust. These trusts are adaptable and dissolvable. On the grantor's passing, they typically change into an irrevocable trust.
- Irrevocable: Once established, this trust transfers assets outside of the grantor's estate and cannot be changed. Compared to a revocable trust, this type of trust offers more tax advantages and creditor protection.
How Trust Funds Work
Asset transfer procedures are governed by a trust fund. Let's say someone wants to leave money to their grandchildren, but they are worried that they will spend it all while they are still young. The grandparents could place some assets in a trust that allows access to money once the grandchildren turn 30. They could also state that the money can only be used for educational purposes. In all trust funds, there are typically three parties involved: The grantor is the person who creates the trust, donates the assets (such as money, stocks, bonds, real estate, works of art, a private company, or anything else of value), and establishes the terms of administration. The trust fund's intended beneficiary is the person for whom it was created. Although the trust's assets do not actually belong to the beneficiary, it is intended that they will be managed in a way that benefits them, in accordance with the precise guidelines and rules established by the grantor when the trust fund was established. The trustee is in charge of ensuring that the trust fund continues to fulfill its obligations as outlined in the trust documents and in accordance with applicable law. The trustee may be a single person, an organization, or a number of trusted advisors. A small management fee is frequently given to the trustee. In some trusts, the trustee is responsible for managing the trust's assets, while in others, the trustee is required to choose qualified investment advisers to handle the money. Trust funds adhere to state laws as well as the wishes of the grantor. Depending on what the grantor wants to achieve, some states may provide more benefits than others. When drafting your trust fund documents, it is crucial to work with an experienced attorney. The spendthrift clause is among the most frequently used clauses in trust agreements. This provision forbids the beneficiary from using the trust's assets to pay off debts. Perpetual trusts are legal in some states and can last forever. Unless they are charitable trusts, other states do not permit these trusts (trusts that benefit charitable organizations).Advantages of a Trust Fund
Trust funds are so common for a number of reasons:- Intentions: A trust fund with an impartial third-party trustee can frequently allay your fears if you don't trust your family members to carry out your wishes after your passing. For instance, you could use a trust fund to ensure that your children from a previous marriage inherit a lake cabin that must be split among them.
- Benefits from taxes: Trust funds can be used to reduce estate taxes, allowing you to distribute more money to more distant generations.
- Protection: Treasured assets, such as a family business, can be shielded from your beneficiaries by trust funds. Consider that you are an ice cream factory owner who has a strong sense of loyalty to your staff. You want the company to stay successful and be run by the employees, but you also want a portion of the profits to go to your adult child who is struggling with addiction. You can accomplish that by using a trust fund and giving the trustee control over management. Despite having no control over how it is run, your child would still receive financial benefits.
- Ongoing transfers: Creating a small trust to purchase a life insurance policy on the grantor is one of the interesting ways to transfer large sums of money using a trust fund. The insurance payouts are given to the trust upon the grantor's demise. The beneficiary then benefits from the investments made with that money, which produce dividends, interest, or rent.
Main points
- A special kind of legal entity known as a trust fund holds assets for the benefit of another individual, team, or company.
- Three parties are involved in a trust fund: the grantor, the trustee, and the beneficiary.
- The distribution of assets to beneficiaries is governed by a trust fund.
- Revocable or irrevocable trust funds are available. More advantages come with an irrevocable trust.
- Trust funds provide tax advantages while ensuring that your family abides by your wishes.
