At a Glance:
One way to protect your wealth and pass it on is through a trust. You don’t even need a large amount of money to establish a trust fund. However, because trusts can be complex, it’s a good idea to sit down with a knowledgeable attorney to discuss your situation.
At some point, you’re likely to want to protect your assets and ensure that they’re passed on to your children, grandchildren, or other dependents. One way to do this — and avoid some of the taxes that can reduce what you pass on — is through a trust fund. While you should visit with an attorney to set up a trust, it helps to know the basics. A trust fund can be an essential part of estate planning, and there are different types. For example, there are irrevocable trusts and living trusts among other options.
On this page:
- What is a Trust Fund?
- What Can Be Included in a Trust Fund?
- Types of Trusts
- The Setup of a Trust Fund
- What are the Advantages of Setting Up a Trust Fund?
What is a Trust Fund?
A trust fund is a specific type of legal entity that is made up different assets managed for the benefit of a person or group of people.
“There are lots of reasons to set up a trust,” says Rebecca Neale, an attorney who creates trusts for some of her clients. “You might want to provide for a minor child, but not let them access all the money until later. Or, you might want to pass on your wealth while avoiding estate taxes.”
As the person establishing the trust fund, you’re the grantor. Decide what type of trust you’re going to establish, and figure out if there are any specific conditions you want met. Neale says there are many different ways for a grantor to set up a trust, and many trusts allow you to change the terms later.
“Carefully think about what you want to accomplish with your trust,” Neale suggests. “Let your attorney know what you hope to do, and they can help you create a trust fund that matches.”
Your beneficiary is the person — or group of people — the trust fund is designed to benefit. A trust fund can be set up to benefit one person, various family members, a charity, or even your pets. Depending on how you set up your trust, you can require that beneficiaries meet certain requirements to access the money. For example, you may require your loved ones be a certain age to access the funds.
A beneficiary doesn’t usually manage the trust fund, although in some cases a beneficiary is involved. Instead, that job is often given to someone else who is required to keep the best interests of the beneficiary in mind. The manager of the trust fund may be a third-party in many cases.
When setting up a trust, you ask someone to take on the job of making sure the money is properly managed. This can be a financial institution, financial adviser or a trust attorney, or someone you trust. In some cases, you might appoint a group of family members to oversee a family trust.
“In most cases, though, it makes more sense to find someone who isn’t going to benefit from the trust to manage it,” says Neale. “And realize, too, that you’ll have to pay a fee for management, usually taken from the trust assets.”
What Can Be Included in a Trust Fund?
Almost any asset can be included in a trust, says Neale. For example, if a parent wants to leave a summer home to their children, they could dictate that in a trust. Then, and the asset would be managed by a trustee, with all the kids having access to it. It doesn't have to be a large sum of money, relatively speaking, for a trust fund to be created.
Here are some of the assets you can use to fund a trust:
- Real estate
- Tangible personal property
- Life insurance
- Loans you've made and that are being paid back
- Patents, copyrights, and royalties
- Mineral, oil, and gas rights
Most all type of assets can be included in a trust.
Types of Trusts
There are two main types of trust accounts – revocable and irrevocable. Revocable trusts are ideal for most people because they can be amended. An irrevocable trust is almost completely iron-clad. You usually cannot make changes once it’s established.
“There are irrevocable trusts and testamentary trusts that spring into being when you pass, but there aren’t many situations where they make sense,” says Neale. “Setting up a revocable trust while you’re living makes it easier to change terms or swap out trustees if circumstances require it.”
The Setup of a Trust Fund
You also need to decide if you want a simple trust, where funds are dispersed to a beneficiary at once on a certain date, or if you want something more complicated that limits access to the money so a beneficiary can’t spend it all at once.
Neale suggests speaking with an estate planning attorney about your options so you can figure out how your money will be put to best use, as well as how it can be protected as much as possible for rash decisions made by beneficiaries.
What Are the Advantages of Setting Up a Trust Fund?
Neale points out that there are several advantages to setting up a trust fund. Even if you don’t have a lot of money, your family (or a charitable cause) could benefit from a trust. Here are some of the benefits that a trust offers:
Provide for a Special Needs Child
If you have a special needs child who will continue to need help into adulthood, a special needs trust can help ensure they get the care they need after you’re gone.
In many states, probate can be expensive and difficult. Your estate can be charged a portion of its value, reducing how much your heirs actually get. In many cases, a trust ensures the smooth transfer of assets without the need for probate.
Reduce Estate Taxes
At the state level, a trust can help your heirs avoid estate taxes and it can overall reduce the tax liability quite a bit. “The federal exemption for estate tax is pretty high, but some states have much lower thresholds, like $1 million,” Neale says. “If you have a net worth that triggers state estate taxes, you can shelter your assets using a trust and pass more onto your heirs.” Along with concerns over federal estate tax, there can be other tax liabilities that can be dealt with through the use of a trust fund.
Keep Children and Grandchildren From Spending Unwisely
If you want peace of mind about how your heirs use your money, a trust fund can help. You can measure out how much the trust recipients and future generations can access, and even stipulate that some of the money be used for specific expenses like educational expenses or a first house, says Neale. There are ways to keep the money from being passed down as a lump sum with a trust fund in place.
Establish a Legacy
Finally, with a charitable trust, you can establish a long legacy and be remembered for your contributions not only by future generations of your family but by organizations as well. If you want to leave the world a better place after you’re gone, a trust fund can help you achieve that.
No matter your reason for establishing a trust fund, you can use it to ensure your money will continue to work according to your values. It's important to realize that trust funds aren't just for the ultra-wealthy, and setting one up doesn't have to follow the stereotype of setting your loved ones up as a trust-fund baby. There's a lot more to it than that, including tax liability considerations.