What Is a Trust Fund?

A trust fund is a legal entity you create that takes ownership of your assets and ensures that they’re used in a way that’s beneficial to your loved ones, explains Yahoo Finance’s article entitled “How to Start a Trust Fund the Easy Way.” Trust funds are commonly used in estate planning and can provide long-term financial support to beneficiaries, sometimes even shielding assets from estate taxes and probate.

How Does a Trust Fund Work?

Trust funds are created by a grantor, who sets up the trust and transfers money or property into it. The trust is created for a beneficiary who will benefit from the property held within the trust. However, the trust is the legal owner of that property. The grantor names a trustee who has a fiduciary responsibility to manage the trust assets and follow the instructions in the trust agreement.

Benefits of Setting Up a Trust Fund

There are many benefits of setting up a trust to protect your family’s finances. You can use a trust to transfer assets outside of probate, and certain trusts arrangements may also help ensure that you don’t lose your money paying nursing home costs toward the end of your life.

Trust funds allow you to tailor exactly how and when your beneficiaries receive assets. For example, you can set conditions such as releasing funds at a certain age or for specific purposes like education, healthcare, or living expenses. This makes trust funds especially useful when leaving money to younger adults or beneficiaries who may need guidance managing their inheritance.

Types of Trusts and Legal Setup

The specific advantages of a trust depend on the type of trust you create. Trusts can be revocable—allowing changes—or irrevocable, where terms are locked in once established. Typically, you’ll work with an estate planning attorney to draft the trust document, designate a trustee, and outline how and when assets should be distributed.

Control and Management of Trust Assets

Once the trust is established and funded, the trustee is responsible for managing the assets, distributing funds, and ensuring the trust operates according to the grantor’s wishes. This could mean paying out income regularly or covering specific expenses, like tuition or medical bills.

Tax Benefits and Misconceptions

Many people assume trust funds are only for the ultra-wealthy, but that’s not the case. According to Federal Reserve data, the median trust fund value is about $285,000. Trusts also offer potential tax advantages, but since tax treatment varies by trust type, it’s important to consult a tax or estate planning professional for guidance.

Reference:  Yahoo Finance (March 18, 2022) “How to Start a Trust Fund the Easy Way”