How Does a Trust Fund Work?
Trust funds are a popular and tried-and-true estate planning tool. This legal agreement enables individuals to protect their assets and decide how their assets will be allocated once they pass.
While a trust fund might seem like something only the wealthy would have, trusts can be useful for just about anyone. If you’re looking for a solution to protect your assets, take care of your loved ones, reduce taxes, and steer clear of probate, then a trust fund might be a suitable option for you, too.
Here, we’ll delve into what exactly a trust fund is and how it works, the types of trusts that exist, and their key benefits. We’ll also explore the responsibilities of a trustee and common misconceptions of trust funds. Lastly, we’ll help you decide when and if you need a trust.
What is a Trust Fund?
A trust fund is a legal arrangement in which one’s assets are reserved for certain beneficiaries. The assets held in a trust fund will be distributed based on the trust fund owner’s wishes once they pass away.
The owner of a trust fund is called a grantor, trustor, or settlor. Once the grantor passes, a trustee will be legally in charge of the trust and will maintain responsibility for accurately distributing the assets.
Types of Trusts
This is the most popular type of trust fund. Revocable living trusts can be modified or voided as often as the grantor would like, making it a highly flexible estate planning option.
Irrevocable Trust
Unlike revocable living trusts, irrevocable trusts cannot be changed or revoked without the beneficiaries’ permission. It’s commonly used for those wanting extra protection over their assets or lower estate taxes.
Testamentary Trust
Testamentary trusts are made through a person’s will. They only come into effect after the grantor dies. This option is typically chosen to manage the assets of minor children or other dependents.
Special Needs Trust
When a grantor wants to distribute their assets to someone with a disability, they can do so with a special needs trust. This trust ensures their loved one(s) will have access to their assets without disqualifying them from receiving government benefits.
Charitable Trust
As the name implies, charitable trusts are a tax-benefitted type of trust used to allocate assets to non-profit organizations.
How a Trust Fund Works
While each type of trust has its share of differences, they all ultimately work in the same way.
Creating the Trust: A grantor can draft a strong trust with the right estate planning attorney. The trust will communicate everything from the terms to the beneficiaries and the responsibilities of the trustee.
Funding the Trust: A trust isn’t active until it’s been funded. During this step, the grantor will transfer all associated assets into their trust. This can include bank accounts, stocks, properties, and more.
Trust Management: The named trustee will be responsible for managing the assets in the trust based on the wishes of the grantor. They’ll also be liable for engaging in tasks like filing taxes, keeping accurate records, and investing trust assets.
Asset Distribution: It’s the trustee’s responsibility to ensure the assets outlined in the trust will be allocated to the right beneficiaries. Not only must they be distributed correctly but also at the right time and/or after certain conditions have been met.
Key Benefits of a Trust Fund
There are many benefits to setting up a trust fund, both during and after you pass away.
The grantor is able to control where their assets get distributed to, providing them extra peace of mind.
Probate can be avoided, which can otherwise be an expensive, time-consuming, and stressful process.
Unlike a will, a trust fund ensures your financial information will remain confidential.
Trusts can lower estate taxes and allow for tax planning.
When creating an irrevocable trust, there’s an extra layer of asset protection from divorce settlements, creditors, and lawsuits.
Trustee Responsibilities
The job of a trustee involves carrying out multiple responsibilities, all in the best interests of the grantor. Their responsibilities include:
Maintaining records of all trust transactions
Filing and paying taxes
Making investment decisions
Distributing assets according to the trust’s terms
Communicating with beneficiaries
Due to the wide range of responsibilities involved, choosing the right trustee is critical. It should be someone you truly trust to make sound judgments, engage in different administrative tasks, have good time management skills, and generally do the right thing. This individual may be a close family member, friend, or even a legal professional.
Common Misconceptions
Let’s debunk some common misconceptions about trust funds.
“Trusts are only for the rich.” Trust funds can be for anyone. They’re a popular option for middle-class individuals looking to avoid probate or manage assets for their minor children.
“It’s too expensive to set up a trust fund.” Trusts are more expensive to create than writing a will. However, when you consider how much is saved in probate fees and taxes, this outweighs the initial cost.
“When I create a trust, I’ll lose control over my assets.” With a revocable trust, you maintain 100% control over your assets. Even if you choose an irrevocable trust, you’re still able to establish clear rules as the grantor.
When Do You Need a Trust?
There are different reasons why you might want to create a trust fund:
You want to avoid probate
You want lower estate taxes
You want to set up a plan in case of incapacity
You own properties in more than one state
You have minor children
You have dependents with special needs
You want your assets protected from creditors or lawsuits
Conclusion
Trust funds are a powerful estate planning tool that can be drafted to suit any individual’s specific circumstances or needs. Whether your primary goal is to ensure your loved ones get access to your assets, reduce taxes, or avoid probate, a trust fund can be customized just for you.
When in doubt, our expert estate planning attorneys can ensure your trust is properly and adequately set up. You deserve to rest knowing your wishes will be carried out accordingly, and it all starts with creating a solid trust.