What Is A Trust Fund

What Is A Trust Fund

When the trust fund is mentioned, what comes to our imagination is a spoilt rich kid living off on the wealth of his or her past parent. As a result of this people often associate trust funds to an opportunity available for only the rich. As a result, most middle class and low-income persons does not operate a trust fund. However, the basic truth about trust fund is you don't have to be rich to operate a trust fund. Trust funds are available for all irrespective of your level of income. It is one of the best ways to secure the future of a family member and the future of an asset. Trust fund helps to maintain the continuity of an organization that might be brought to ruin if not kept in a trust.

What Is A Trust Fund?

A trust fund is a legal agreement that keeps properties or other valuable things with a third party for the benefit of another person or group of people. “A trust,” according to Fidelity Investments, “is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries.” Most often than not, people shy away from trust funds because they feel it is for the rich. As a result,  it is usually the rich families that patronize this type of investment opportunity. However, this is one of the surest ways to build wealth for generations to come. It can make a lot of sense for anyone who just wants to help his or her children or grandchildren. Trust funds can be used by a spouse to secure the future of his or her wife or husband after death or to secure a child's education. For instance, a widowed grandmother with just $30,000 in her custody can keep the money in a trust as a contribution to the education of her grandchild.

There are different types of trust funds and trust fund provisions that define how the different trust fund works. In general, there are for main parties involved in trust funds, these include the grantor, the beneficiary, the trustee, the attorney, and the principal.

The Grantor

The grantor is the person operating the trust fund. It is the individual who deposits his or her money, valuables or investment for the benefit of the beneficiary. The grantor decides the terms and conditions the trust fund would work with. He or she also decides the time the fund would be accessible by the beneficiary.

The Beneficiary

This is the person whom the trust fund was established for. The grantor already set out the terms binding the assets in the trust fund and how the beneficiary would benefit from it. The beneficiary might not have assessed a trust fund until the death of the grantor. However, this is not to say all trust fund is till after the death of the grantor. There is some trust fund that can be assessed when the grantor is still alive. This part would be discussed later in this article.

The Trustee

This could be an individual, an institution like the bank of trust department that appoints one of its staff to handle the trust fund process and management, it could also be a group of trustees responsible for the operation and management of the trust fund. The operation of the trust fund is already laid out in the pursuant to applicable law and other legal documents binding the trust fund. Depending on the type of trust fund involved, some trust allows the trustee to manage the trust assets while others require that the trustee gives out the management of the assets to a qualified investment adviser. The trustee gets his or her management payment from the grantor. 

The Attorney

This is the person who drafts out the legal binding of the trust fund. The attorney's content would determine the response of the state to the trust fund. Every trust fund would always require the attorney. Most time, the attorney charge exorbitant prices for their services. 

Principal

This is the property, money or asset to be deposited under the care of the trustee. This is what the trust fund is all about. It is the property that is legally deposited under the care of a trustee following the legal agreement drafted by the attorney and authorized by the state court. The principal is managed and operated by the trustee.  

The Structure Of A Trust Fund

Trust funds are made legal by the state legislature of the state where the fund is carried out. The advantages offered by the legal institutions would be determined by the intention of the grantor and the asset that the grantor wants to keep in a trust fund. As a result, it is advisable that as a grantor, you should work with your attorney to create the trust fund documents.

It is noteworthy that some states allow a long-lasting trust fund, which can be forever while others do not permit this for the fear aiding in the creation of another landed gentry class that could lead the future generation into inheriting a large percentage of wealth the beneficiary did not even earn.

One of the very popular provisions used in the trust fund is the spendthrift clause. Basically, the clause is usually a condition that does not permit the beneficiary to use the money in the trust fund for debt settlements. Most times, a parent with irresponsible children use this condition as a way to ensure that their children despite being in debt would not be broke. They have the money for their upkeep while they look for a way to settle their debts.

Why You Should Have A Trust Fund

Aside from the fact that trust funds help to protect the beneficiary's future, there are other reasons trust funds are popular, some of these are explained below

Intentions

Most times people operate trust funds to tame their families or children's intentions, especially when they know that the conditions stated in their will would not be adhered to when they pass away. Trust funds can also be used to achieve one's desire. For instance, if there is a particular property you want a specific person to inherit, the trust fund can be used to achieve this.

Tax Benefits

Trust funds can be used as a way to reduce tax payable on the estate and other landed properties. This would give you an avenue to cash more money for the beneficiary.

Grandchildren

In most cases, grandparents use the trust fund as an avenue to alleviate the educational expenses of their grandchildren. Most times the money set up in the trust fund is enough to cover expenses, while the children use the remaining to start their life after college.

Protection

The trust fund is also a means to protect the asset you cherish from your family members who might be contending for the asset. For instance, if you have a company with employees whom you have built a very good relationship with and you know your son might end up running the company down with his excesses, a trust fund can be used as a way to avoid this. In this case, the trustee or group of trustees run the company while your son gets the financial gain. 

Ongoing transfers

Trust fund allows you to transfer a large sum of money into the trust fund account. You can even operate a small trust fund that buys a life insurance policy on behalf of the grantor. When the grantor passes away, the money can be used for other interests.

The Different Types Of Trust Funds

As already explained, trust funds are created to achieve different goals and objectives. Hence before getting started with a trust fund, it is important to understand the different types of trust funds and which one would fit your demand. Here are a few types of trust funds.

Marital or A trust

This type of trust is designed for couples. It is a way of ensuring that the surviving spouse is well taken care of. Usually, it is attached to the taxable estate of the surviving spouse. To operate the account the grantor place some asset into a trust. The asset keeps generating more money until the grantor dies. When the grantor dies, all the money acquired by the asset goes to the surviving spouse.

Credit Shelter Trust Fund

This is also another option of a trust fund for couples. The trust allows both couples to maximize the potential of their tax-exempt estate. In 2019, the maximum amount of money that can be generated from this type of trust funds is $11.4 million per single person or $22.8 million per married person. When the asset exceeds these amounts of money, it would be subjected to a 40% estate tax when the grantor dies.

Charitable Remainder Trust

In this type of trust fund, the beneficiary gets money for a given period of time. When the time elapsed, the rest of the money would be donated to charities.

Revocable Trust And Irrevocable Trust

Most times, people think the trust fund operates in the same way as a will, that is, they interpret trust fund as a way of passing wealth when the grantor dies, but this is not the truth. Trust funds are not limited to the money paid after the death of the grantor. It can also be paid when the grantor is still alive. In this case, all you need is a revocable trust fund.

A revocable trust fund is also referred to as a living trust fund. This type of find lets you retain control of the asset while you are still alive. It can be created and dissolved while you are still living

The disadvantage of the revocable trust find is that when you are still alive, your assets are out of probate, however, once you die, you won't escape estate tax.

“Revocable trusts are among the most common estate planning vehicles, particularly when there is a desire to avoid the costs and delays that can accompany probate in certain states,” says Bruce Colin, a certified financial planner with his own firm in Rancho Palos Verdes, California.

However, irrevocable trust fund work as the name implies. It is the opposite of the revocable trust fund. An irrevocable trust fund cannot be altered once it is opened. The advantage of this is that it generally protects the beneficiary from estate tax and probate.

Why You Should Create A Trust Fund.

Trust funds are created for different reasons. However the most common of these reasons is to use it as a way to ensure that the beneficiary is financially supported when you are alive or dead. Trust funds allow the grantor to have control of the asset while he or she still lives however this control is transferred to the beneficiary once the grantor dies. Here are some of the reason for creating a trust fund

1.    As a means to give out the management of some or all your firm by someone else.

2.    If for instance, you have a very successful business and do not want the productivity of your business to be negatively affected when you die, a trust fund is the surest way to achieve this.

3.    Trust funds can be used as a means to guide your assets from being managed by an incompetent person.

4.    It is a way to help reduce the conflict that might arise when you are no more and your will is read.

How To Choose A Trust Fund

The best way to decide on which trust fund would work for you is to consult with a trusted advisor. The advisor would tell you whether or not you are making the right decision, but this would be based on your reasons for wanting to operate a trust fund and the asset you want to keep in a trust.

“You just have to remember that trust is an entity, just like a person, and sometimes it makes sense for that entity to own something for the benefit of someone else,” according to Lora Hoff, a CFP in Dallas whose practice focuses on medical professionals

The Drawback Of A Trust Fund

There are some downsides to creating trust funds, the biggest of these downsides is the attorney fee. A trust fund is like a human in the eye of the tax law, the attorney would be responsible for crafting a compelling and well-detailed agreement that would favor the grantor. Most tome, the trust fund attorneys charge exorbitant prices. The only type of trust fund that does not cost much is the irrevocable trust fund. In some cases, it might cost more than expected. Generally paying an attorney for trust funds is very expensive.

Summary

Trust funds are the surest way to leave money to spouses, children, and grandchildren. This is a very good option for those who don't have a high net-worth. A trust fund is not only accessible by the beneficiary when the grantor dies. The beneficiary can also access this when the grantor is still alive. A good example of a trust fund that allows this is the revocable and irrevocable trust fund. Also, the general notion that the trust fund is only for rich families is a pervasive one. Trust funds can be used by anybody irrespective of financial or social level.