What is a trust fund? (with photo)

A trust fund may hold corporate stock.

A trust fund is a financial tool that holds and manages assets for the benefit of another person or organization, called a beneficiary. The initial assets of the fund are provided by a grantor or donor, and a trustee or team of trustees administers the funds in accordance with that person’s instructions. The beneficiary receives payment from the fund in cash or in periodic installments, in accordance with the terms of the trust. Trust funds are often used to set aside property, investments or cash assets to support people who are unable to manage their finances on their own, such as children or people who are sick. People may even set one up for themselves, assuming they will become unable to manage their personal finances at some point in the future.

types of trusts

There are two main types of trust funds – living and testamentary – which differ primarily in terms of how and when they are constituted. The first is constituted during the life of the grantor and can be revocable, that is, it is possible to constitute the trust in a way that it is altered or dissolved by the grantor. The second, provided for in a will, is always irrevocable, since the grantor has died and, therefore, cannot alter or dissolve the trust.

Funds established to lessen or avoid tax obligations generally cannot be changed either. For example, some jurisdictions limit the amount of assets that can be given as a gift without being taxed. People can avoid this limit by establishing an irrevocable trust fund by donating the assets to a beneficiary. Although this person ends up having to pay tax on the assets when they are paid, this can be delayed for a long time. This strategy is also sometimes used to protect life insurance benefits from wealth taxes.

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The structure and procedure for establishing a trust fund varies greatly depending on why it was created. Some are set up so that the admin can use the assets to benefit the beneficiary, but the beneficiary cannot access the funds themselves. Others can only be used to benefit a certain group, class, or organization. An investment fund is set up so that several beneficiaries hold shares in it, and they can then have the trustee pay them out according to how many shares they hold. There are many other different types of trust funds, and each is structured slightly differently.

Creation of a trust fund

Laws governing trusts vary by jurisdiction, so anyone wishing to create one should consult an attorney. With a living trust, all assets must be transferred before the grantor dies or the trust is annulled, and the assets will be disposed of by the government in accordance with probate laws. Any assets of the grantor not assigned to the fund can normally only be transferred to the grantor upon death if there is a clause specifying this in the person’s will. Testament trusts are established after the grantor’s death, as specified in the terms of his will. In this situation, a probate court will oversee the trustee while he manages the fund and may act as trustee if one is not appointed.

Advantages and disadvantages

Trusts have many advantages as they are flexible enough to allow the grantor to adapt it to their needs, they can be used to defer taxes, and they are quite private. They are also generally a safe way to provide to beneficiaries upon the death of the grantor and can spare them the hassle and fees that often result from dealing with the grantor’s assets. Despite this, they are not the best choice for all situations. Grantors can get into trouble if they try to use the assets without consulting the trustees and beneficiaries, and trustees often charge for their management services, which can be expensive. Also, depending on the configuration, the administrator may not have much oversight and may mismanage the assets.

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