A trust fund is a legal entity that holds property, in the form of cash, stocks, bonds, or other types of financial instruments, or anything else of value, such as real property, for the benefit of another person, group or organization. While there are different types of trust funds, set up for different reasons, all of them have three things in common: a grantor, a beneficiary, and a trustee.
The grantor is the person who creates the trust fund and contributes the money or property to it. The grantor also decides the nature of the fund’s terms, how it will be managed, and who will manage it. The grantor also chooses the fund’s beneficiary.
The beneficiary is the person or organization for whom the trust fund is established. The beneficiary does not own the fund’s assets until the terms of the trust are realized. Typically, if the beneficiary of a trust fund is a minor child, he or she must wait until reaching a certain age, or until a specific event occurs, such as marriage or graduation from college, before receiving the trust’s benefits.
The trustee can be an individual, a group of people, or an institution, such as a bank, a corporation, or a law firm that is responsible for overseeing the trust fund according to the specific terms under which it was established. The trustee may also be charged with managing and/or investing the fund’s assets. The trustee cannot change the stipulations of a trust, unless that right is specifically approved by the grantor.
Reasons to Establish a Trust Fund
While people often associate trust funds with wealthy individuals, people of more moderate means can also establish trust funds in order to satisfy a variety of financial objectives. For those rich enough, though, establishing a Charitable Trust Fund, for example, can shield certain extensive financial assets from income taxes while benefitting a charity. Trust funds can also help reduce the federal estate taxes that are only levied on large estates (generally more than $5.25 million, in 2013). However, the following reasons to establish a trust fund are applicable to anyone:
- They can provide for minor children or other family members who are too young, too inexperienced, or too incompetent to handle financial matters.
- They can provide for the management of assets if the grantor should become unable to handle them due to incapacitation or diminished mental capacity
- A trust fund can protect certain assets from disputes arising among beneficiaries.
- Upon the death of the grantor, a trust fund can help avoid the costs and delay of probate.
- As opposed to a will, whose terms are in the public domain, the terms of a trust can be kept private.
Types of Trust Funds
There are two main types of trust funds – testamentary trusts and living trusts.
These are trusts that are created only after the grantor dies, and as specified in his or her will. Usually, these types of trusts are made for minor children or other individuals, such as relatives with disabilities, who are not deemed fit by the grantor to manage money. Assets bequeathed to the survivors are not immediately dispersed, but rather held for them and/or managed until a certain time in the future. The grantor can make changes to a testamentary trust during his or her lifetime, but once he or she dies, the trust becomes irrevocable, meaning no further changes can be made. Testamentary trusts do not avoid probate.
Living or “inter vivos” trusts are established, and go into effect, during the grantor’s lifetime. They can either be revocable, meaning their terms can be changed at any time, or irrevocable, meaning they cannot be changed or revoked after they are finalized. Irrevocable trusts generally provide better tax shelter benefits, but they are less common than revocable trusts. There are many different types of living trust options available, including: charitable trusts, bypass trusts, spendthrift trust, and life insurance trusts. Also, in some living trusts, the grantor, the trustee and the beneficiary can all be the same person.
Setting up a Trust Fund
As a trust fund grantor, you have the right to set up the fund according to your own desires and goals, and to specify how the fund’s assets can be invested. You have the right to indicate exactly how those assets can be granted to the fund’s beneficiary. You have the right to either grant the beneficiary the option to remove or replace the fund’s trustee, or not. You have the right to ensure that, upon your death, any assets that are outside the trust can be transferred to it, by way of a “pour-over will.”
But, generally speaking, it is unwise to set up any kind of trust fund, yourself. Every state has different statutes and procedures, and there are so many different ways to set up a trust fund that you should only proceed upon the advice of a qualified and competent attorney who specializes in the field. He or she will help you get the maximum benefits from your trust, while helping you sidestep any potential drawbacks.
In addition, if you plan to set up a revocable, living trust, you need to remember that, by design, it is a flexible entity that you can change, amend, or completely revoke at any time and for any reason. That, of course, is another rationale to work with an experienced attorney, upon whom you can continually rely for advice and guidance as your needs change or unanticipated situations arise.
Consulting a Trust Attorney in Orlando
If you live in the Orlando area and would like to learn more about creating a trust, we have the experience and know-how to help you set up the trust fund that is most appropriate to your needs and your financial situation. Let us guide you through the process, while assuring you that your fund will be created, managed, maintained, and dispersed, according to your directives, by our company of dedicated and professional trust fund advisors. Contact our office for a free consultation.