What Is a Trust Fund?
A trust fund is a sophisticated estate planning tool designed to hold property or assets for an individual or organization. Trust funds can encompass a diverse range of assets including money, real estate, stocks, bonds, or business interests.
Three essential parties are required to establish a trust fund: the grantor, the beneficiary, and the trustee. The trustee, typically a neutral third party, manages the assets in the fund to benefit the grantor and the beneficiary.
Key Takeaways
- A trust fund holds and manages assets for someone else’s benefit, overseen by a neutral third party.
- Trust funds include three parties: grantor, beneficiary, and trustee.
- The grantor sets terms on asset management and distribution.
- Trustees oversee fund management and follow the directives, while beneficiaries receive the assets or benefits.
- Trust funds can be revocable or irrevocable, with multiple variations suited for specific purposes.
How Trust Funds Work
Estate planning involves arranging how financial affairs and assets will be managed and distributed after an individual passes away. This can include bank accounts, investments, personal property, real estate, life insurance, artwork, and debt. Trust funds can serve as pivotal tools in estate planning.
To set up a trust fund, the grantor transfers assets into the trust. These assets are managed by the trustee and eventually distributed to the beneficiary based on preset stipulations provided by the grantor. This management can continue through the lifetime of the grantor or after their death.
Benefits of Trust Funds
- Protection from Creditors: Assets in a trust fund can be shielded from creditors.
- Avoiding Probate: Trust funds can facilitate asset transfer without the delays and costs associated with probate.
- Tax Benefits: Certain trust funds can minimize estate and inheritance taxes.
- Flexibility: Trusts can be designed to accommodate various financial strategies and goals.
Revocable Trust Funds vs. Irrevocable Trust Funds
Trust funds are broadly categorized into revocable and irrevocable trusts. Here’s a brief overview:
Revocable Trust Fund
A revocable trust fund allows the grantor to retain control over assets during their lifetime. Changes can be made, and the trust can be revoked prior to the grantor’s death. This type of trust avoids probate and maintains privacy.
Irrevocable Trust Fund
In contrast, an irrevocable trust fund is difficult to alter or revoke once established. This type offers considerable tax benefits as the assets are removed from the grantor’s taxable estate. Typically, these trusts avoid probate.
Types of Trust Funds
Revocable and irrevocable trusts can be further classified into various types, depending on the assets involved and the needs of the beneficiary:
- Asset Protection Trust: Protects assets against creditors.
- Blind Trust: Grantor and beneficiary have no knowledge of holdings or management.
- Charitable Trust: Benefits charity or the public, including Charitable Remainder Annuity Trust (CRAT) that pays a fixed amount annually.
- Generation-Skipping Trust: Tax benefits when the beneficiary is a grandchild or significantly younger individual.
- Grantor Retained Annuity Trust: Allows transfer of appreciating assets to reduce estate taxes.
- IRA Trust: Trustee manages IRA distributions.
- Land Trust: Manages property-related assets.
- Marital Trust: Funded at one spouse’s death and benefits surviving spouse.
- Medicaid Trust: Enables long-term care qualification under Medicaid.
- Qualified Personal Residence Trust: Reduces gift tax by moving personal residence into the trust.
- Qualified Terminable Interest Property Trust: Provides for a surviving spouse with specific posthumous instructions.
- Special Needs Trust: Designed for individuals receiving government benefits without disrupting eligibility.
- Spendthrift Trust: Restricts beneficiaries from hastily disposing or spending assets.
- Testamentary Trust: Arranged in the will to disburse estate assets post-death.
What Is a Trust Fund Baby?
A trust fund baby is an individual whose parents set up a trust fund in their name. Often used pejoratively, the term implies that the individual is privileged and financially cushioned.
References
- Cornell Law School, Legal Information Institute. “Trust”.
- Cornell Law School, Legal Information Institute. “Irrevocable Trust”.
- American Bar Association. “Revocable Trusts”.
- Internal Revenue Service. “Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)”. Pages 11, 14.
- University of Minnesota Extension. “Trusts: Definitions, Types and Taxation”.
- Internal Revenue Service. “Instructions for Form 5227: Split-Interest Trust Information Return”. Page 2.
- Journal of Accountancy. “The Generation-Skipping Transfer Tax: A Quick Guide”.
