Trust funds have always been associated with individuals having a net worth. The commoner was far from creating a trust fund a few decades back. But nowadays, we have observed many inclining towards trust funds, as it is becoming a tool for estate planning irrespective of their financial stand. In this article, we will discuss what a trust fund is and how you set up one. 

What Is A Trust Fund?

A trust fund is an estate planning tool, which is a legal entity. This holds property or assets for an organization or individual. Moreover, a trust fund can hold onto various assets like money, real property, stocks, bonds, or a combination of assets or properties. 

To establish a trust fund, you will require three parties. They are the grantor, the beneficiary, and the trustee. Similarly, trust funds are supervised by the trustee, who acts to benefit the grantor and beneficiary. 

Further, trust funds take various forms and can be quickly established under multiple stipulations. Similarly, they also offer tax benefits, financial protections, and support for the involved parties.

How Does A Trust Fund Work?

A trust fund is a legal entity that provides individuals with financial, tax, and legal protections. Moreover, they need a grantor to establish the fund. Along with two to three beneficiaries who receive the assets/property when the grantor dies. Finally, a neutral trustee who is known to manage and distribute the assets for a later date. 

Trust funds occur within the estate planning process, which includes determining an individual’s assets and other financial matters. This is usually done to determine how their property or assets shall be managed or distributed after death. 

Moreover, this includes any bank accounts, personal property, investments, life insurance, debt, real estate, or artwork. It will be the most popular estate planning tool. However, trust funds are also a popular legal tool.

Parties Involved In The Establishment Of A Trust Fund

Three parties are generally required to establish a trust fund. Let us explore the three parties who are essential in setting up a trust fund: 

Grantor 

The grantor is the first party. They are known to set up the trust fund and populate it with the assets. Moreover, a grantor also typically creates an arrangement that serves a variety of reasons. 

This is specially created for an individual who is no longer mentally capable or has passed away. 

Beneficiary(s)

A beneficiary is the second party that establishes a trust fund. They are the party for whom the asset or the properties are managed within the trust fund. 

Trustee 

The third and final party for establishing a trust fund is a trustee. The trustee is a neutral third party charged with managing the assets/properties within the trust fund. 

Due to this, a trustee can be any neutral individual, a trust bank, or another professional fiduciary. 

Moreover, as the appointed fiduciary, a trustee is entrusted with carrying out the grantor’s interests. This generally includes allocating living/ educational expenses while they are alive. Otherwise, they could also pay out a lump sum directly to the beneficiary. 

Benefits and Protections of Establishing a Trust Fund

A trust fund can provide specific benefits and protection to those establishing for themselves or their beneficiaries. Here are some examples: 

• Some types of trust funds can keep assets or properties away from any creditors. This is true when the parties decide to pursue the grantor for unpaid debts. 
• In some circumstances, the parties can avoid going for a probate. Going through probate, you can effectively determine how to analyze and distribute assets/properties. This is especially true when the individual has passed away without any instructions. 
• Some trust funds reduce the estate and inheritance tax amount that might be owned after the grantor dies. Only after such taxes are paid. Then, the asset/property can be distributed amongst the beneficiaries. 
• The trust fund could be named the beneficiary of an individual retirement account (IRA). Moreover, it will be subjected to accelerated withdrawal requirements and shortcircuit spousal inheritance provisions. 

Special Considerations for Trust Fund

Wealth and family arrangements can grow into complex matters when millions or billions of dollars are at stake for multiple generations of family or other organizations. Moreover, a trust fund can include complex options and specifications. All of these are included to suit the needs of the grantor. 

However, compared to what most of us believe, trust funds are for more than just the uber-rich. They can be appropriate for anyone regardless of their financial circumstances. 

Similarly, discuss your needs with a probate lawyer or a financial advisor to determine what kind of fund will suit you and your personal needs.

Types of Trust Funds

There are a variety of different types of trust funds that you can establish based on your personal financial needs. Consult with a tax attorney to ensure you have the best resources to understand the various types of trust funds. However, this is not an exhaustive list: 

Asset Protection 

Asset protection is a trust fund that protects an individual’s assets from their creditor’s future claim. 

Blind Trust Fund 

This fund tries to erase any evidence of a conflict of interest. Moreover, the fund’s grantor and beneficiary must learn about the holdings. Or how they are managed. However, it does provide control to the trustee. 

Charitable Fund 

A charitable trust fund benefits a particular charity or the general public. Similarly, it includes a Charitable Remainder Annuity Trust (CRAT), which pays a fixed amount at the end of the year. 

A Charitable Remainder Unitrust distributes assets to a specified charity once the fund expires. Moreover, it also gives the donor a charitable deduction and a fixed percentage of income to the beneficiary. 

Generation-skipping Fund 

This fund includes tax benefits when the beneficiary is one of the grantor’s grandchildren or anyone at least 37½ younger than the grantor. 

Here are some of the trust fund options you can set up as a grantor based on your personal needs and requirements.

How Do I Start a Trust Fund?

To set up a trust fund, you must determine which fund is best suited for your needs. So, you must know every fund’s function to choose the most suitable one. 

After deciding on the type of trust fund that suits your needs, you must determine how to fund it. The next step you must consider is who you will appoint as a trustee. Similarly, a trustee will assist you in drafting all the required documents and going through the legal process. 

Finally, when all the above tasks are completed, you’ll have to take the initiative to fund the trust fund. As with other financial ventures, ensure a trust fund is the best option for you, your beneficiaries, and your financial circumstances. Make sure to hire a local tax or estate lawyer to guide you through setting up and managing the fund.

Conclusion

Now, you have a clear idea of what a trust fund is and how it is established. Hire an experienced estate or probate lawyer before establishing a fund under your name. Moreover, you can also consult with a financial consultant to learn in detail about the most appropriate kind of trust that will suit your personal needs. 

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