People who inherit trust funds are often seen as spoiled, entitled, and ultra wealthy.
Despite what you may think, you don’t have to be wealthy to create a trust fund. Trust funds can be a helpful addition to your financial plan even if you’re not a millionaire.
A trust fund can help your money reach your kids without any problems when you die. This is especially useful if you have written a last will and testament and picked your children’s guardians.
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A trust fund is a legal entity that can exist to hold property on behalf of someone or some group.
The person who creates a trust is called a grantor, trustor, settlor, or trust maker. If a trust is created through a will, the creator could also be called a testator or decedent. This person chooses the rules of the trust and decides what property the trust will own by transferring assets into the trust’s name.
A beneficiary is someone who will receive your money or property when you die. Being named a beneficiary of a trust is different from owning property, because there are generally rules attached to trusts. For example, a trust might allow a beneficiary to live in a home owned by that trust, but not rent it out or sell it. Depending on how the trust is set up, beneficiaries often end up inheriting the trust’s assets, according to some trigger like age—for instance, inheriting money when the person turns 21.
The trustee is the person who manages the trust and ensures that the property is distributed to the beneficiaries as stipulated. The trustee may be an individual or an institution, and there may be more than one trustee. If the original trustee becomes unavailable, a successor trustee may be named in the trust document.
How does a Trust fund work
A trust fund is created when the ownership of certain assets is transferred to the trust itself. The person who creates the trust is known as the grantor, and often serves as the first trustee. The grantor determines the rules regarding how the assets in the trust can eventually be distributed.
Someone else will usually be in charge of the trust after the person who made it dies, to make sure that the dead person’s wishes are carried out. The new trustee has a legal responsibility to act in the best interests of both the trust and the person who benefits from it.
The recipient of your assets gets them according to the trust’s rules, which are put into effect by the trustee.
A trust fund can contain a variety of assets, including cash, investments, real estate, and artwork. In some cases, a trust fund may even include an entire business. Essentially, anything of value can be placed in a trust fund.
A trust is a legal arrangement where you can pass on property to someone in a structured way, with rules that you can set even after you’re no longer around.
You could, for example, say that your beneficiary cannot use the money from the trust fund to pay off debt. Or, you might impose rules on how old the beneficiary needs to be before gaining control over the money.
Trusts can be used to protect assets from being taxed as part of an estate, and from creditors after the owner dies. They are also a very private way to transfer wealth, because only the trustee and the beneficiaries know the details of the trust and how it will be distributed.
Probate is a legal process whereas public record is not.
Types of Trust Funds
Revocable Trusts
A revocable trust can be used to avoid probate. The grantor has a lot of control over a revocable trust and can often act as the initial trustee while they are alive.
Property can be added to or removed from the trust as needed. If the original owner of the trust is still alive, the trust is called a revocable living trust.
Other types of trusts offer more protection for assets because they are not under the control of the trustee. These trusts can be used to protect assets from creditors or to cover the costs of nursing home care.
Irrevocable Trusts
Once an irrevocable trust is created, it can’t be changed easily. Property can’t be removed from the trust, and the grantor must give up more control of the assets the trust owns to the trustee.
Irrevocable trusts can provide stronger protection for assets.
However, the government only pays for nursing home care when the recipient has very little income and few assets. For example, this type of trust allows the grantor to protect their assets in case they need nursing home care. While Medicare and most insurance will not cover this type of care, Medicaid does. However, the government only pays for nursing home care when the recipient has a low income and few assets.
However, if you create an irrevocable trust, you will not own or have control over the assets in the trust.
If you create a trust at least five years before needing to use Medicaid to pay for nursing care, you can keep the assets in the trust and pass them on to your loved ones.
Asset Protection Trust
These trusts are designed to protect assets from creditors. They are usually established in foreign jurisdictions and are irrevocable for a set period of time.
After the trust is set up and the grantor transfers property into it, the grantor no longer has control over the property and it is safe from anyone who might try to take it.
The purpose of an asset protection trust is to protect the trust assets from creditors. The grantor, or person who created the trust, can get the undistributed trust assets back once the trust is no longer needed and there is no longer a threat of creditors.
Special Trusts
Charitable Trusts
Charitable remainder trusts are a common type of charitable trust that help reduce estate taxes and provide for a charitable organization.
With a charitable trust, the person who creates the trust (the grantor) can decide whether to receive income from the trust during their lifetime or leave it to beneficiaries. The trust assets are held by a trustee and, at the end of the trust term, the remaining assets go to a charity selected by the grantor.
Special Needs Trusts
Special needs trusts are created to provide for disabled individuals receiving means-tested government benefits.
For example, a person with disabilities who receives Medicaid and Supplemental Security Income could lose access to these benefits if they directly inherit money. A special needs trust can be created to hold assets on behalf of that person.
The trustee is allowed to use the trust’s assets to provide for the beneficiary in ways that won’t put government benefits at risk.
Spendthrift Trusts
This type of trust is created when the grantor is worried that the beneficiary will spend the money irresponsibly. The trustee is responsible for managing the money and distributing it to the beneficiaries.
The assets in the trust cannot be accessed by the beneficiary’s creditors, cannot be spent irresponsibly, and are safe from being lost in the event of a divorce.
Setting up a Trust Fund
If you’ve decided that using a trust is a good option, you need to follow these steps to get started.
1. Decide on Your Goals
If you’re trying to protect your assets while you’re alive, you’ll create a different kind of trust than if your main goal is to avoid probate or pay for a disabled loved one or avoid estate tax.
You’ll need to carefully consider the purpose of the trust so you can create the right type.
2. Choose the Type of Trust
After deciding what your goals are, you will then be able to choose what kind of trust will help you to achieve them.
This could include irrevocable and revocable trusts, charitable remainder trusts, or special needs trusts.
3. Choose Your Trustee and Beneficiaries
You will need to decide who the beneficiaries of your trust are and who will manage the trust.
The trustee you select should be someone who will manage the trust assets wisely and follow the terms of the trust.
The people who will benefit from the trust are the ones you create it for. This might be a spouse, children, business partner, charitable organization, or anyone else you choose.
4. Create the Trust
The next step is to complete the required paperwork to create the trust as a separate legal entity. This will involve following the specific state laws and guidelines for how a trust document must be written.
It is generally advisable to consult with an attorney when drawing up legal documents, but there are also online tools that can guide you through the process.
5. Fund the Trust
The final step is to transfer assets into the trust. The trust will be the legal owner of the assets and will use them to provide for your chosen beneficiaries.
Assigning a Trustee
One of the most important aspects of setting up a trust is designating a trustee. The trustee bears the fiduciary responsibility of acting in the best interests of both current and future beneficiaries of the trust.
This means that the trustee must manage the assets of the trust in a prudent manner and in accordance with the provisions set forth in the trust agreement.
You should select a trustee whom you believe will follow your wishes and someone who is good with money to manage the assets of the trust.
Trustees should be able to make sound decisions and manage the trust for as long as is necessary.
Make sure to take into account how old the trustee is likely to be and how healthy they will be throughout the time that their services are needed. Additionally, think about how close the trustee is to the property that will be managed and the beneficiaries who will gain from the trust’s assets.
If you choose the wrong trustee, it could weaken the reason for setting up the trust.
If you feel it would be better to have multiple people providing input, or if you are worried about the ability of your chosen trustee to manage assets over the long term, then in some cases you may want to name co-trustees who have joint power to manage trust assets.
Another option would be to select a trust company to manage your assets.
The Benefits of a Trust Account
Here are some common reasons people choose to create trust funds:
Be specific about who you want to receive your estate. For example, if you have remarried and want to make sure your children (not your new spouse’s children) get your money.
You can decide how old your beneficiaries need to be in order to gain access to the money you leave behind. If you don’t think they’ll be ready at 18 (the legal age), you could set up a trust that doesn’t grant access until they’re 21, or 25, or 35, or whatever age you choose.
The assets can only be spent on education.
If you want to prevent your beneficiaries from spending all the money at once, you can arrange for a trust to be paid out at intervals. For example, they could receive one payment when they turn 25, then another at 35, and another at 45.
You could stipulate that the assets in the trust can’t be sued to satisfy debts, preventing the beneficiary from bankrupting themselves.
You could choose to have your money go directly to your future grandchildren, rather than waiting for it to be passed down a generation.
Choose someone to take care of your affairs in case you become unable to do so yourself. For example, if you have a family history of Alzheimer’s or dementia, you could use a trust to set up a system whereby a professional would take over if you became incapacitated.
If you want to protect your employees’ jobs and pass down profits to one of your children, you could name a trustee to oversee the management of the business.
There are a few different ways that you can reap tax advantages by setting up a trust, including a charitable annuity trust, a charitable remainder trust, a GRIT, or a qualified personal residence trust. Each of these will be explained in more detail below. In addition to the tax advantages, trusts can also be used to optimize estate tax planning.
A trust will keep your inheritance private, unlike a will which would go through probate court and leave public records. If you want to make sure people in your extended network or the media don’t have access to the details of this inheritance, choosing a trust would be the best option.
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