All You Need to Know About Trust Funds

People often assume that trust funds are a legal entity that is only for the rich people to utilize.

However, trust funds are not only for the wealthy people but can be used by anyone who is capable of earning an income.

What is a Trust Fund?

Trust funds are created by a person to benefit any other person, group or organization. These funds can be chosen to be distributed to specific people immediately or at the time selected by the grantor.

Trust funds do not have to be just monetary.

Real estate, investments and many other properties can be part of a trust fund. This legal entity is the best way to ensure your child’s or grandchildren’s financial security. Trust funds are so far the most efficient way to get your wealth distributed after your death, just the way you want.

Your savings can be transferred to the specific person or organization at the time when you desire. For example, when your grandchildren head to college or when your child plans their wedding day.

How Does a Trust Fund Work?

Once you decide exactly what assets are going to be a part of your trust fund, you must thoroughly understand what a trust fund is and how it works.

Trust funds are common among people who do not trust their family with their wealth. Hence, an unrelated trustee is the best person to hold their wealth for the time being and distribute it when the time is right. If you set up a trust fund for a charity, you do not have to pay any taxes on that money or property. This way, you save a lot of money and are able to provide more to the charity than you would without a trust fund.

If the property or assets in the trust generate profit or income, the grantor specifies what has to be down with this profit that gets collected over the years. The trustee then distributes the rightful share among the beneficiaries. 

3 Types of People Involved in a Trust Fund

• Grantor: This is the founder of the trust fund. A grantor decides what he wants to include in the trust fund. This could include investments, properties, stocks, bonds, cash or any valuable belonging which they would like to be passed on to the beneficiary at the time specified by them in the document.
• Trustee: A trustee is a professional and certified attorney or bank firm who creates the trust fund documents and manages the property for the grantor. When the time comes, the trustee is then responsible for distributing the trust to the rightful beneficiary. Some people also appoint themselves (grantor) as a trustee. In this case, a successor trustee in case of the grantor’s death. It is also ideal to appoint a successor trustee no matter who is the main trustee, in case they aren’t able to manage the trust fund for some reason. A trusted family member can also be appointed as a trustee.
• Beneficiary: This is the person or group for whom the trust funds were set up by the grantor in the first place and to whom the assets will be granted to in the future.

How to Set Up a Trust Fund

Before you begin, make sure you are fully aware of the terms and conditions of trust funds. A trustee is decided by the grantor. This could be a lawyer, a family member or any other trusted person.

However, the laws have to be followed by the trustee. Consulting a financial advisor will assist you in deciding what you should invest in this fund. There are many types of trust funds but the most common one is a living trust. It is a trust fund that is distributed only after the grantor’s death. Moreover, it may also be used for the long-term care of the grantor if needed.

These trusts are ideal as they are also revocable. A revocable trust is allowed to be changed or revoked by the grantor during his life time. Irrevocable trusts cannot be amended or revoked once the documents have been made. A grantor decides whether the beneficiary should receive the trust on a monthly basis, annual basis, or all together on a certain date. This information is included in the documents of the trust fund.

The trust is drafted by a trust litigation attorney.  In most cases, this lawyer is also the trustee.

Then, the beneficiary is informed about the trust fund. This is either done immediately by the grantor or by the trustee when the time is right. The grantor must file a separate tax return and the beneficiary will be paying the tax for the income they receive from the trust fund.

Social Security Trust Fund

These trust funds are financed by the Department of the Treasury. The payroll taxes that are paid by the employees are used to fund these trust funds. The fund is used to pay for the benefits of the retired elderly and the disabled.