Financial Wellness
What You Need to Know About Establishing a Trust Fund
People often associate trust funds with being wealthy. But a trust fund can be an effective financial tool for many people. It’s designed to provide financial support and protection for your loved ones. If you have funds you’d like to distribute, you might want to consider it.
Before we dive into the details of setting up a trust fund, it will be helpful to understand these three terms:
- Grantor: The individual who puts the money in the trust
- Beneficiary: The people and organizations the trust fund holds assets for
- Trustee: The individual or corporation that manages the assets
Establishing a Trust
A trust is a legal document that should only be prepared by a qualified attorney. The trust should outline the following details:
- The trustee and beneficiaries
- How the assets in the trust should be handled and distributed
- When the trust should end
Finally, the trust needs to be funded. How this is done, and legal and tax issues regarding the trust, should be addressed with your attorney and tax advisors.
Living Trusts
Most trusts are living trusts: They are created by the grantor during his or her lifetime.
Most living trusts are living revocable trusts. This is when the trust can be revoked (ended) during the grantor’s lifetime.
For example, a mother may create a living revocable trust and make herself both the grantor and the trustee. This way, she can manage her own assets and can close the trust at any time while she’s alive. If she becomes ill or can’t manage the trust any longer, she can ask a secondary trustee, like her son, to manage the trust for her, with no need for a court to become involved.
Once you put assets into a trust fund, it’s considered a living trust.
Irrevocable living trusts are less common. They’re often created by individuals who are concerned about federal estate taxes (those with more than $5 million in assets) or to help protect the assets added to the irrevocable trust from future creditors and lawsuits. Once created, these trusts cannot be changed by the grantor during the grantor’s lifetime.
Types of Trusts
Spendthrift trusts are one of the most common types of trust funds. Instead of doing a lump sum contribution, money is distributed to the beneficiary in smaller amounts over time and often under the supervision of an independent trustee. For example, if the beneficiary has poor spending habits, this type of trust can protect the assets from the beneficiary’s potential creditors.
Testamentary trusts or after-death trusts are made through a will and funded after the grantor dies. These have become less common in recent years, as living trusts can be set up in the same way, while also avoiding the need for probate (when a will is proved valid and its terms are enforced by a court).
Bypass trusts are used by spouses and are designed for estate tax purposes. When the first spouse passes away, some assets may be passed to the bypass trust and held for the benefit of the surviving spouse without having to pay federal estate tax. When the surviving spouse passes, these assets may go to beneficiaries without the need to pay this tax.
Charitable trusts are a method for making donations to a charity in a tax-efficient manner that may also let the donor continue to receive some benefit (e.g. income) from the gifted property.
Trusts vs. Wills
Wills and funded living trusts allow the grantor to iron out these details:
- What conditions beneficiaries need to meet before receiving the funds (like graduating college)
- When and how to distribute assets
- How conservatively or aggressively to invest assets
The primary difference between assets in a will and in a living trust is that assets in a living trust typically avoid the need for probate court. Because the assets are already in the trust fund, they can be transferred to your beneficiaries without waiting for a will to be carried out. Also, the terms of a funded living trust tend to be more private than a will.
However, a will has benefits a living trust doesn’t. In a will, it’s possible to name guardians for children, and leave specific instructions for how to deal with taxes and debts, for example. It’s important to talk to a financial advisor to determine what best fits your needs.
Designating a Trustee
Trustees have a legal responsibility to manage the trust how the grantor requested. For example, a trustee may need to distribute income or make decisions on investing assets. It’s an important role, and the trustee should understand the terms of the trust before accepting the position.
Whenever you decide the time is right to set up a trust fund—which is often part of estate planning—having the information you need will help you move forward with confidence
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Nothing in these materials is intended to be advice for a particular situation or individual. These materials are for general information purposes only.