A trust fund is an estate planning tool that can be used to secure the financial future of your beneficiaries. And contrary to popular belief, they aren’t just an option for the wealthy. Individuals from varying financial backgrounds have taken advantage of using trust funds to house their assets until the time comes for them to be passed on to children, grandchildren, and other loved ones.
Thinking a trust fund may be a viable option for you? Read on to learn more about how they work, the varying types of trust funds to choose from, and how to get started with opening a trust fund.
How Trust Funds Work
In a nutshell, a trust fund serves as a shelter for assets belonging to an individual, organization, group, or some other entity. Trust funds can house a number of assets, including property, stock, a business, and money intended to be inherited at a certain point in your loved one’s life or when you die.
When you establish a trust fund, it will act as an independent legal entity and be managed by a trustee that acts as a neutral third party. In turn, you will be labeled the grantor since you’re the party that opened the trust fund and the assets belong to you. And the intended recipient will be deemed the beneficiary.
Key Benefits of Trust Funds
Beyond having an objective trust fund manager, there are a few other key benefits trust funds have to offer.
Unless you disclose the details of the trust fund to others, the items in the fund and any applicable conditions will remain confidential as the trustee will not share this information. And when you do pass away, you won’t have to worry about your dying wishes being revealed to the public. Wills go through probate, which makes them public record, but trust funds give your loved ones the luxury to avoid this process.
Protection of Assets for Beneficiaries
In the event your beneficiary makes a few wrong turns and ends up in the hot seat with creditors, their inheritance can’t be swiped away. Thanks to the “spendthrift clause” which can be included when you draft up the terms and conditions of the trust fund, the creditors will be prohibited from accessing money, property, and any other assets in the fund.
Or maybe your intended beneficiary is disabled and you don’t want him or her to be disqualified from receiving help from the government due to their inheritance. A trust fund is a great way to keep this from happening.
Control of the Distribution of Assets
This is arguably one of the greatest benefits of trust funds. Unlike wills, which are subject to scrutiny and don’t always grant the final wishes of the decedent, trust funds are firm and must be followed. Consequently, you’ll have peace of mind regarding the final destination of your assets when you pass away before the distribution period begins.
Even better, you’ll have total control of when and if assets are distributed. How so? Well, you can specify an age or distribution schedule, and you can mandate that distributions be withheld if certain conditions aren’t met.
If you open an irrevocable trust fund, you may be able to avoid taxation on income-producing assets. More on that shortly.
Types of Trust Funds
There are three types of trust funds you should be aware of.
Revocable Trust Funds
Also known as living trusts, revocable trust funds allow you to make changes at any time. This means you can add assets, take them away, swap beneficiaries, or eliminate the trust fund altogether.
While flexibility is a major bonus, there is a drawback to revocable trust funds. Since they are classified under your estate, the assets within the trust fund will be at risk for seizure in the event you are pursued by creditors for unpaid debts or sued in court.
Irrevocable Trust Funds
On the other hand, irrevocable trust funds aren’t as lenient. You can set the terms and conditions of the fund, but once the fund is intact, no additional changes can be made.
This may seem a bit harsh, but there are some perks to irrevocable trusts. For starters, your assets are safe against any claims from creditors or legal action that may come against you. Furthermore, you won’t be subject to taxation on earnings from assets within the fund. Why so? Once an irrevocable trust fund is established, the assets are transferred into the fund for good and are no longer belong to your estate.
Charitable Remainder Trust
Prefer to leave your assets to charity? The charitable remainder trust has you covered. You can decide which charity to fund, for what period of time, and enjoy tax credits that may be available to you. That’s a win-win for all parties involved.
How to Open a Trust Fund
Ready to open up a trust fund for your children, grandchildren, or other loved ones? You’ll start by soliciting the assistance of a lawyer or financial advisor, particularly one who’s experienced in estate planning.
An Overview of the Steps
Step 1: Specify the Name of the Trust
You can name the trust whatever you’d like, but the most common format is “[Your Name] Living Trust”. Along with the name, you will also need to disclose that you are the grantor.
Step 2: Describe the Trust
Draft up a brief description of the type of trust you’re creating, along with the reason for the trust.
Step 3: Identify the Beneficiary and Trustee
During the process, you’ll need to specify the intended beneficiary and who want to appoint as the trustee, or who will manage the trust fund. For the latter, the grantor usually selects a financial institution, but a relative or close friend could also be an option.
Step 4: Include the Property, Terms, and Conditions of the Trust
The next step is to iron out the details of the trust fund. Prepare to provide information on the particular assets that are to be included in the fund (in list form), when they should be distributed, and if conditions apply.
For example, if your grandson is to receive a lump sum of cash distributed monthly over the next 10 years, you would state that in the trust. But if you’d like him to graduate from college before distributions begin, you would need to include that information in the trust as well. And you also have the option to limit the use of the funds to specific purchases, like a down payment for a new home or a car.
Step 5: Death or Incapacitation
It’s essential that details be included on how the trust is to be handled in the event the grantor, beneficiary, or trustee dies or becomes incapacitated.
Do You Really Need a Trust Fund?
Before you dive any deeper into the discussion on trust funds, you’ll want to determine if it is a vehicle you actually need. While the choice is ultimately yours, a trust fund may be a good idea for those who:
- Want to leave assets, including money and physical property, to loved ones without having to worry about if or when the intended recipient will take possession of the items
- Like the idea of shielding detailed information regarding their assets from the general public (since your estate will not go through probate)
- Prefer to avoid probate since it’s not required to transfer ownership of assets to your beneficiaries under a trust fund
The Bottom Line
A trust fund may be the perfect estate planning tool for you. But before you move forward, consult with a financial adviser to determine if it’s a good fit for your financial situation. They can help you determine how to divvy up your assets and provide additional guidance on estate planning strategies. There’s also a possibility that they may advise you to hold off on opening a trust if there are other more pressing financial objectives to be addressed, like retirement planning.