In setting up your financial plan, estate planning is one of the important steps to ensure your assets are preserved for the sake of posterity. Among the numerous approaches to estate planning, we look at the most popular approach called ‘Trust Fund’.

What is a Trust Fund And How Do Trust Funds Work?
What is a Trust Fund And How Do Trust Funds Work?

What is a Trust Fund?

A trust fund is a financial account where assets are held on behalf of another person or organisation, typically to support family members, contribute to charitable causes, administer inheritances, care for ageing parents, or save for retirement.

These funds serve to ensure financial stability for dependants and can be comprised of various assets such as cash, real property, insurance, stocks, and more.

In this arrangement, the individual or entity owning the assets is the trustor, the one benefiting from the trust is the beneficiary, and the person overseeing the trust fund is the trustee.

How Do Trust Funds Work?

In a trust, a fiduciary relationship is established where the trustee holds legal title to the assets (trust property) on behalf of the trustor for the benefit of the beneficiary.

A trust fund, as a financial account, serves as the custodian of the trustor’s assets for the designated beneficiary, managed by the trustee.

The trustor, or grantor, is the asset owner and the one establishing the trust fund, transferring ownership to the trustee.

The trustee, commonly a trust company, lawyer, or a trusted individual, is responsible for managing the trust fund and ensuring the beneficiary receives the agreed-upon benefits.

The beneficiary, an individual or entity, is the recipient of the trust fund’s benefits.

The trustee’s duty is to act in the best interests of the beneficiary, ensuring the trust fund serves its intended purpose.

A trust agreement outlines the roles of the trustor, trustee, and beneficiaries, as well as the management and details of the trust fund’s assets.

Categories of Trust Funds

Trust funds are categorised as either revocable or irrevocable, and understanding this distinction is crucial as it dictates how trust assets are managed and whether the trustor can make modifications to them.

Revocable Trust Funds

A revocable trust fund allows the trustor to modify or revoke the trust’s terms at any time. This flexibility allows changes to the trustee, addition or removal of assets, alteration of beneficiaries, and adjustments to other stipulations as deemed necessary by the trustor.

The advantage of a revocable trust lies in its adaptability; the terms can be adjusted to align with changing circumstances.

However, a downside is that revocable trusts do not offer the same level of asset protection as irrevocable trusts and are subject to estate taxes, unlike their irrevocable counterparts.

Irrevocable Trust Funds

Irrevocable trusts, once established, are permanent and cannot be changed. The trustor relinquishes all ownership and control of the trust assets to the trustee, who is then responsible for managing them in accordance with the trust agreement.

These trusts are frequently utilised in estate planning due to their ability to provide tax advantages and asset protection.

Most Common Types of Trust Funds

Indeed, trust funds come in various types, and a crucial step in selecting the most suitable one for your needs is to comprehend their differences and functionality.

Asset Protection Trust

An asset protection trust is an irrevocable trust designed to safeguard assets from creditors. The transfer of assets into the trust is permanent, and the trustee assumes full management. This arrangement removes the trustor’s ownership of the assets, preventing creditors from accessing them.

Charitable Trust

A charitable trust fund is created to provide financial support to a charitable organisation and its initiatives. The trustee oversees the usage of funds to ensure they benefit the designated charity. These trusts are favoured for charitable donations due to the tax benefits they provide to donors. Donors receive a tax deduction for the value of the assets contributed to the trust fund.

Generation-Skipping Trust

A generation-skipping trust is an efficient method for the trustor to transfer assets directly to their grandchildren, bypassing the children or the next generation. This strategy helps avoid estate taxes. The beneficiary can be the trustor’s grandchildren or any individual at least 37.5 years younger than the trustor, excluding spouses or ex-spouses.

Spendthrift Trust

A spendthrift trust is established to safeguard the assets of the beneficiary from being recklessly spent or wasted. It is commonly used to protect the assets of individuals, particularly children or young adults, who may not be financially responsible. The trustee plays a key role in overseeing that the funds are utilized for essential needs such as education or housing.

Blind Trust

Blind trusts are often created to mitigate conflicts of interest. In this arrangement, the trustor relinquishes control of the trust to the trustee, who gains full authority over assets and investments, managing them for profitability. While the trustor can revoke the trust, they have no influence over trust movements and receive no reports from the trustees. Politicians frequently use blind trusts to avoid conflicts of interest between personal agendas and public service.

Testamentary Trust

A testamentary trust is a distinct type of trust embedded within a person’s last will and testament. It outlines when assets will be distributed to designated beneficiaries and becomes effective after the trustor’s death.

Benefits of A Trust

Control Over Asset Management

Trust funds offer a convenient means of asset management and can serve diverse purposes. They provide an opportunity to customise an estate plan with specific details. Trustors can include conditions, such as age attainment provisions or specific parameters outlining how the assets should be utilised.

Probate Avoidance

Trust funds enable the transfer of assets outside the probate process, circumventing court decisions on the distribution of an individual’s money and property. This not only saves time and money for the beneficiary but also maintains the privacy of estate details by avoiding probate processes.

Personal and Financial Privacy

Trust funds offer a level of personal and financial privacy for both the trustor and beneficiaries. The specifics of the trust are not publicly accessible and are not subject to disclosure, providing a valuable option for individuals who wish to keep their financial matters confidential.

Prevents Conservatorship

Trust funds serve as a preventive measure against conservatorship, a legal process where a court appoints someone to manage the affairs of an individual unable to do so. By using a trust fund, the beneficiary can have the necessary funds to support their lifestyle without the requirement for a conservatorship.

Disadvantages

Additional Paperwork

Establishing a trust fund usually requires additional paperwork. The trustor is tasked with creating the trust document, outlining the terms and conditions of the trust. The trustee must also sign the document, committing to adhere to the specified terms. While this process can be time-consuming, ensuring all details are in order is crucial.

Complex Structure

One disadvantage of trust funds is their inherent complexity. With numerous types of trusts, understanding their intricate workings can be challenging. The establishment of detailed and accurate written records necessitates professional expertise to navigate the complexities associated with various trust structures.

Cost

Setting up and maintaining a trust fund comes with expenses, encompassing legal fees, accounting fees, and trustee fees. Additionally, there are taxes and filing fees associated with trusts. On average, the cost of drafting a trust can range from $1500 to $2500, but this largely depends on the trust’s complexity and the state’s regulations. In certain scenarios, these costs may outweigh the benefits of the trust fund.

How To Set Up A Trust

Setting up a trust is very delicate and should be handled by a professional so, the first thing you’ll need to do is hire an estate planning attorney who’ll oversee the process.

Here’s How the Process Goes

Choose the Type of Trust

Seek guidance from your estate planning attorney to determine the most suitable trust type for your goals.

Decide Trust Details

As the trustor responsible for creating and funding the trust, designate the trustee, beneficiaries, and outline how assets will be distributed after your passing.

Formalise the Trust

Your estate planning attorney will create a declaration of trust on your behalf. Ensure the trust documents comply with state requirements and sign them in the presence of a notary public.

Fund the Trust

After creating the trust, re title relevant assets in the trust’s name (unless forming a testamentary trust).

Register the Trust with the IRS

If establishing an irrevocable trust, the trust becomes a separate entity for tax purposes. Obtain a taxpayer identification for the trust and register it with the IRS.

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By Dee

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