Most people want to make sure that their loved ones are taken care of, which often means leaving them money or other assets. As with a will, trust funds are a form of estate planning and help you to prepare for the future. Trusts are legal contracts that enable you to decide who will have access to your assets under which circumstances.
While some people view trust funds as a tool for the very rich, they can serve a variety of purposes for people from different backgrounds. Many parents create trust funds to help their children through college or to avoid conflict if an individual remarries and wants to hold property for their family.
It’s a good idea to seek legal aid if you are estate planning, but you can also do your own research when it comes to reviewing your options.
In this guide, we’ll look at what a trust fund is, how you can set one up, and the various legal obligations, depending on the type of account you use.
What is a trust fund?
Trust funds are accounts that are set up by an individual with assets that are designed to benefit another person or entity. The account can include items such as jewelry, real estate, and vehicles, as well as money. Some parents set up trust funds for their children, which they can only access once they reach a certain age.
Individuals who come from affluent backgrounds are often referred to as ‘trust fund babies’ in popular culture, which implies that they rely on their families for money and don’t have to work for a living. However, trust funds can also be used by people from modest backgrounds who want to secure their family’s inheritance or to make a donation to a charity of their choice.
It is up to the creator of the account to decide when the beneficiary can access the assets. Some accounts enable the beneficiary access as soon as the creator of the account passes away or if the beneficiary meets other stipulations. The amount of money or assets that are in a trust fund can vary, depending on the contributions made by the account’s creator and the type of account. The interest rate will also impact how much the beneficiary will receive, as will the account’s growth since it was first created.
There are no statistics on how large the average trust fund is as the accounts are private. However, the most common estimates fall anywhere between $200,000 and $4 million.
What are the different types of trust funds?
There are two main types of trust funds: revocable trusts and irrevocable trusts. Below is a breakdown of the different types of accounts that fall into these two categories.
Revocable living trusts
Revocable living trusts (sometimes referred to as inter vivos trusts) are created during the lifetime of the grantor. The creator of the account has full control over the trust fund and can modify or revoke it at any time. They can also transfer and remove property from the account at any time, which means that the creator often serves as the initial trustee of the account.
The benefit of setting up a revocable living trust is that the assets in the trust at the time of the creator’s death aren’t subject to the probate process. The fund will also help to minimize the size of the taxable estate as assets in the fund aren’t legally part of the creator’s estate.
As the creator retains full control over the account, they can withdraw the assets if the intended recipient becomes incapacitated. They can also adjust how and when the recipient gains access to the account.
One of the downsides to living trusts is that they don’t have asset protection. This is because while the assets remain in the creator’s possession, they are also available to the creator’s creditors. If the guarantor falls into debt, some or all of the assets could be taken from the account to repay their creditors.
An irrevocable trust can either be created during the grantor’s lifetime or after their death. Unlike a revocable trust, the account’s grantor cannot take assets out of the account once they have transferred them in.
Rather than the account’s creator serving as the trustee, another individual must take this role instead. The trustee is often a business or financial professional as they can make sure that the beneficiaries receive their assets.
As with revocable trusts, the assets that are in the trust fund at the time of the creator’s death are able to avoid the probate process. Assets can also be distributed straight after the death occurs. This type of trust guarantees financial privacy for the deceased’s assets, as well as reducing or even eliminating gift and estate taxes.
The assets aren’t technically in the possession of the guarantor once they have been admitted to the account, which means that they cannot be accessed by the guarantor’s creditors. Therefore, the assets cannot be used if the guarantor loses a lawsuit. However, the guarantor can still control how and when the trustee gains access to the account.
One of the downsides to irrevocable trusts is that the guarantor cannot change the beneficiaries of the account once they have been named. The trust’s terms and conditions will remain the same, even if there are changes in the named trustee’s life. The guarantor cannot reclaim the assets if they change their mind or need them later. Irrevocable trusts are also more costly to set up and require the assistance of financial advisors.
Other trust types
You can further break the trust types down into subcategories. For example, the guarantor may want to specify that the assets are to help fund a child’s schooling, in which case they would need to open an Education Trust. The beneficiary would only be able to use the assets to cover academic expenses.
Another type of trust fund is a Special-Needs Trust. These are intended for beneficiaries who have disabilities and can help to allocate an income or inheritance. One of the more popular types of accounts is a Charitable Trust, which helps grantors gift assets to charitable organizations.
How can I set up a trust fund?
It’s a good idea to seek legal advice if you want to set up a trust so that they can help open an account that suits your needs. For example, you may want to open a revocable account if you are unsure about which assets to add to the account, as you can transfer assets at any time. These types of trusts are also more flexible in terms of changing who the beneficiaries are.
The legal advisor will help you to list each of the assets that you put into the trust fund, as well as name the beneficiaries. The type of asset can range from a small piece of jewelry to a property, as well as money from different financial institutions. You can also include investments, such as bank accounts, as assets. You can name multiple beneficiaries in the account and decide who will receive which assets.
Once the trust documents have been finalized, you will need to sign them in the presence of a notary. Your legal aid can then file the trust agreement if your state requires it. You will then need to open the account, name the trustee and begin transferring assets into it. The assets you listed in the previous trust document must be transferred into the account. Make sure to register the account with the Internal Revenue Service (IRS) so that they can give you a tax ID number for it. You will need this number when you come to file your tax returns.
The whole process can take anywhere from a few weeks to a couple of months. The length of the process will mainly depend upon which assets you put into the account and how detailed your instructions are for the account after your death.
What are a trustee’s duties?
Trustees can have a range of duties, such as making investment decisions, keeping records, and paying taxes. You should ideally appoint someone who has a similar mindset to you and who can carry out your wishes. It helps if they have strong organizational skills and are reliable.
You may decide to appoint multiple trustees so that you have a combination of family, friends, and professional accountants or attorneys. While corporate trustees are trained and can bring a wealth of knowledge and experience, they will charge a fee for their services. On the other hand, family and friends will likely have an emotional investment in your assets, but they may let their own opinions cloud their judgment.
You will need to name a successor trustee if you are only appointing a single trustee so that they can take over the role if the original trustee is unable to.
Why should I set up a trust fund?
There are many benefits to setting up a trust fund. They can benefit individuals who cannot manage their money, such as those with mental disabilities or children. You can set up stipulations that limit their access to the assets apart from an allocated allowance. Trust funds can be used for beneficiaries who are under 18 years old so that you can allocate assets for them but control their access until they reach a certain age or under certain conditions (such as educational expenses).
Trust funds can also help to protect your assets against potential situations such as divorce or bankruptcy. They carry certain tax benefits, as the assets won’t necessarily belong to you and therefore cannot be used by your creditors. You can also use specific details when allocating the assets. For example, you may gift a house to one beneficiary but stipulate that the money be given to another beneficiary if the property is sold.
Wills only come into effect once you pass away, whereas trust funds can be established in your lifetime. This is helpful if you fall ill or are unable to manage your assets for other reasons. The account trustees can make financial decisions on your behalf, including managing your estate taxes and paying bills. Detailing your wishes in the legal documents of the trust fund can help family members to know exactly what you want, even if you are no longer able to tell them.
Certain types of trust funds, such as revocable accounts, are flexible, so you are able to change your mind at a later date. You may become involved with a charitable organization that you would like to leave money to, or a new baby may be born into the family that you’d like to name as a trustee. The flexibility for certain kinds of trust funds allows you the freedom to adapt your account to accommodate life’s unpredictable nature.
Trust funds usually require the help of an estate planning attorney to help you manage your assets and name beneficiaries when creating a trust fund. Depending on whether you have a revocable or irrevocable trust fund, you may be able to maintain full control of your assets. Revocable accounts give you the ability to remove assets that you have previously added or change the beneficiaries. However, this type of account means that you maintain ownership of the assets, which is why they remain available to your creditors.
Creating an estate plan with an attorney means that your family will know how you want your assets to be distributed after you pass away or if you are otherwise unable to control your estate. Investing involves risk, but combining your assets into a trust fund helps you to secure them for your named beneficiaries so that they are protected. A trust fund also helps to minimize estate taxes and avoid the probate process.