What Are Trust Funds?

Trust funds can be strong estate planning tools, offering an effective way of building wealth for future generations. However, as with many estate planning tools, it is vital to not only understand how trust funds work and their advantages, but also the disadvantages they may present.

What Is a Trust Fund?

A trust fund is a legal entity designed to hold property or assets for another person, group, or organization. Trust funds are managed by a neutral third party called the trustee and can hold various assets such as property, money, or stocks.
Trust funds can be powerful estate planning tools presenting many advantages. Depending on the type of trust established, it can be used for a range of purposes, including:

  •  Reducing estate taxes
  • Reducing gift taxes
  • Ensuring children and grandchildren under 18 will be beneficiaries of an estate
  • Safeguarding the financial future of family members with special needs
  • Protecting assets from lawsuits
  • Protecting assets from creditors

How Does A Trust Fund Work?

Trusts generally involve three parties, the grantor, the beneficiary, and the trustee. The grantor is the person who is creating the trust, contributes the assets, and determines how the trust should be managed. There are different types of trusts that can be created, including revocable and irrevocable trusts. How the trust fund will work depends on the type of trust the grantor has created and the rules they have specified. The beneficiary is the individual, group, or organization for the trust fund that has been established. The trustee is a neutral third party entrusted to manage a trust.

What Are the Advantages of Setting Up a Trust?

Trust funds when effectively planned and managed can help ensure the financial well-being of your children. One of the largest advantages to establishing a trust for a minor is that a reliable trustee will manage the funds until the beneficiaries' age reach 18 or beyond. Other advantages to consider with a trust fund include:

  • Tax benefits such as maximizing estate tax bypasses.
  •  Asset protection includes reducing the potential for lawsuits between heirs.
  •  Trust funds can establish parameters for how and when funds are distributed, and how the trust assets can be used

What Are the Disadvantages of Setting Up a Trust?

While trust funds can provide many advantages, they also have potential disadvantages. As noted above, one of the largest advantages to establishing a trust for a minor is that a reliable trustee will manage the funds until the beneficiaries reach turns the age of 18. However, not all 18 year- olds are prepared to handle the financial responsibility of one lump sum. Luckily, trusts can be strategically designed to head off this problem by ensuring that the money is distributed over time or for a specific purpose.

Another potential pitfall of trust funds is heavy taxation on distributions. Trusts must be well-planned and designed carefully to reduce the amount of taxes on their distributions. Trust law varies by state and can be very complicated. An experienced trust attorney can help you determine the type of trust you need, and carefully structure it to meet the needs and goals of your individual situation.

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