How to Set Up a Trust Fund? How Much Should Be in a Trust Fund?

What Is a Trust Fund? Maximize the Benefits of Your Trust Fund

There are uncountable ways to secure the future of your loved ones. One such way is a trust fund. Well! If you have yet to hear about a trust fund, this blog will help you understand how you can secure your children's or grandchildren's future financial success by setting up a trust fund for them.

Understanding the Basics of a Trust Fund

A trust fund is a legal entity that holds property or assets on behalf of another person, group, or organisation. Simply put, your assets are managed by a neutral third party or trustee, where you can set your money, properties, stocks, business, or a combination of these. A trustee holds all your properties and assets in a fund until the time comes to pass these assets to your chosen beneficiaries. 

A trust fund: financial security for the future. Learn how trust funds work and who owns them. #FinancialPlanning #WealthManagement

A trust fund might confuse you with a will, but trust funds provide more control and ensure that the documents are private records. Only the trustee and the beneficiaries know the terms and conditions of the fund. Trust funds also protect you from legal actions and sometimes may provide tax benefits.

Key Highlights

  • In a trust fund, a granter transfers his property to his ultimate beneficiary, which is managed and safeguarded by a trustee.

  • There might be several reasons to create a trust fund. However, the ultimate aim is to protect the beneficiaries and establish a line of inheritance.

  • There are different types of trust funds where the grantor chooses one that fits his needs.

How Do Trust Funds Work?

You probably don't know how it works if you haven't heard of a trust fund. Here's how the trust funds work.

A trust fund has three parties: the grantor, the trustee, and the beneficiary. A granter is a person who creates a trust fund and keeps their assets in that fund. A trustee is a person or institution who holds and manages these assets. The beneficiary is the person who will receive this fund after the grantor dies.

To set up a trust fund, a grantor must work with a lawyer or can choose a financial advisor to seek help to allocate the assets in the best way possible. The grantor then selects a trustee who is often a financial institution. He must also name the beneficiaries of his trust fund, like children or grandchildren, a business partner or a charitable organisation. Here, a lawyer plays an important role in drafting the terms of the trust fund. The terms include how the assets must be allocated or distributed to all the beneficiaries.

The trust fund provides flexibility to the grantor and ensures how the beneficiaries will receive the assets. If a grantor wants, he may choose to pay the funds out annually or in a lump sum after the beneficiary reaches a certain age. The grantor even specifies that the funds can go towards certain expenses like college fees or a down payment on the house.

It is essential to understand that trust funds include a common clause of 'spendthrift.' The trust ensures that the beneficiary will not use these funds to pay off their debts. This prevents ancestors' property from losing their property in any gambling game.

What Are the Different Types of Trust Funds?

Different types of trust funds are set by law, which brings different advantages and benefits to asset allocations.

1- Irrevocable Trust Fund

As the name suggests, an irrevocable trust fund, if established, can't be changed again. The grantor cannot change an irrevocable trust fund's terms or asset allocation. However, this rigidity has some benefits, as the grantor no longer owns these assets. He doesn't need to pay income tax on money generated by these assets. The assets in the irrevocable trust fund are no longer counted as the grantor's property, which puts the grantor in a lower tax bracket.

2- Revocable Trust Fund

A revocable trust fund means the grantor can change the terms and conditions anytime. It implies the grantor can remove the assets or beneficiaries per his terms. This is the most significant advantage as it offers the flexibility and control of the assets until the grantor dies. However, the assets are still part of the grantor's property in a revocable trust fund. Therefore, the grantor is liable to pay taxes.

3- Blind Trust Fund

Blind trust funds are another type of trust fund in which the beneficiary is unaware of the property or assets he will have in the future. Here, a trustee plays an essential role by creating a layer of separation and eliminating any conflict of interest.

4- Charitable Remainder Trust

It is also called a charitable annuity trust, where if the grantor dies, the property passes on to a specific charity instead of any relative. In this type of trust fund, a fixed percentage of income is transferred to the beneficiary during the life of the trust. The charitable remainder trust benefits the granter from a charitable contribution tax credit.

5- Generation-Skipping Trust

In a generation-skipping trust, assets or properties are directly transferred to the grandchildren or great-grandchildren without being passed on to the children.

Are Trust Funds a Good Idea?

Trust funds are a good idea because they allow for the legal transfer of ancestral property. They ensure that the assets remain in safe hands and are well managed by a third party who holds a neutral instance until the beneficiary takes ownership. We all know that in the absence of a trust fund, most properties are transferred through a will, and to gain access to the inheritance of the property, many individuals head to court, which is an expensive and time-consuming process.

What are the Disadvantages of a Trust Fund?

There are a few downsides to setting up a trust fund, the most notable of which is the cost. Trust funds require you to work with an experienced state planning attorney to create a trust, which might require significant legal fees and expenses. However, a specialised attorney is the only way for a grantor to set up a trust fund in a legal framework.

Final Words

If you are deciding to establish a trust fund, you must know what a trust fund is and how it will benefit your ultimate beneficiary. It can be difficult, and you don't need to go alone, as a financial advisor can help you take the proper steps. However, trust fund means providing financial support to your loved ones throughout their lives. Establishing one may cost you legal fees, but it is worth it as it can give you some mental peace as you know your property is going to your loved ones.

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23 Jan, 2024

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