People assume that trust funds are for wealthy individuals. In the past, they were helpful to protect a person’s massive inheritance for their rightful heirs. But trust funds are accessible to everyone now, and they serve as crucial devices for managing one’s assets. You can open a trust fund as well to secure the financial prospects of your family – wife, children, or grandkids.
It will ensure that your descendants manage and distribute your wealth correctly. Some families enlist the assistance of a financial advisor to understand the complex structure of trust funds since trusts are integral components of estate planning in the 21st century. So, let’s start with the basics and answer the question, “how do trusts work?“.
How do trust funds work?
How do we define trust? It’s merely a legal entity that holds assets/property on behalf of one person or an organization. What are these assets? Your assets contain – in usual cases – money, stocks, property, heirlooms, businesses, or other elements of economic importance. These objects are placed in the “trust” until certain conditions get fulfilled. After which, they get transferred to the chosen recipients. So, you can specify that your children will inherit your property when they turn 18, marry, or graduate college.
Three parties are involved in the creation of a trust fund. A grantor/settlor establishes this agreement by placing their property into the trust funds. A trustee holds these assets on behalf of the grantor –an individual or an institution – and manages this wealth. Finally, we have beneficiaries or the eventual recipients of this trust fund. They are supposed to receive this wealth when they turn of age. Now, we will answer the most crucial question here. How to set up a trust fund for your children?
How can you set up a trust fund?
In normal settings, the three parties mentioned above involve different individuals. But one person can assume more than one role in rare cases. A living trust – for example – has the grantor also undertaking the character of the trustee. However, we’re concerned with setting up a formal agreement. So, what can you do to set up a trust fund? Learn that this process isn’t confusing, expensive, or time-consuming. There are some simple steps involved – especially if you’re working with a trusted lawyer – such as:
- Name a beneficiary – your wife, children, grandkids, a business partner, or an organization – to receive your assets eventually.
- Specify the purpose of this trust fund. How do you want beneficiaries to spend your money? You can set up a trust funds for sponsoring your child’s education, for instance.
- Choose someone trustworthy to become the trustee and manage your assets. Select someone responsible and reliable for this critical responsibility. People choose – normally – a family member or a financial institution, e.g., a bank.
- Working with a lawyer, you can determine how your money will be spent on the beneficiaries. So, your beneficiary may receive some funds annually or the assets in their entirety once certain conditions are met. These specifications are entirely up to the grantor’s disposal.
- In the end, you’ll have to create a document that finalizes this process legally. There are several methods of accomplishing this legal procedure. You can contact an estate planning attorney or try affordable online services. Some grantors often insert a “spendthrift clause” in a trust fund. It prevents beneficiaries from squandering their wealth and using your money to pay off their debts. You must hire an expert lawyer to help you out with these legal intricacies.
Different types of trust funds
We’ve already discussed living trust funds that are revocable and give you more flexibility and control. In such cases, you can update assets and add/remove beneficiaries. So, how many types of trust funds are there? We’ll now talk about three categories of trust funds briefly that you should know about here:
- Blind trust fund:- In this case, beneficiaries don’t know who manages the trust. The identity of the trustee remains a secret for avoiding any conflict of interest. This trust fund layer provides a layer of privacy for asset management and a blanket of security for the trustee.
- Irrevocable trust fund:- The contents of an irrevocable trust fund are constant once you’ve established them. So, what’s the catch here? As the grantor doesn’t own these assets anymore, they don’t need to pay taxes on money these assets have made. So, even if the grantor falls into debt, beneficiaries can still benefit from these assets.
- Charitable remainder trust:- Your assets aren’t transferred to a relative; instead, they get passed to a charity of your choosing. Thus, you’re not merely donating your property to a just cause but also benefiting from charitable contribution tax credits. Also, your beneficiaries will continue receiving a fixed percentage income from this charitable remainder trust.
Pros of setting up a trust fund
What makes trust funds so important? Well, they’re better than creating wills. Since a will becomes a public record after the death, there’s no guarantee that your wishes are honoured. But, only trustees and beneficiaries know the specific conditions you’ve set when it comes to a trust fund. So, your assets get secured against any legal action after your passing. We shall discuss both the benefits and drawbacks of this process here. So, some advantages of setting up a trust fund include these:
- We’ve already talked about tax benefits a trust fund – an irrevocable one – provides. Since you have excluded some assets from your estate, this action comes with some tax benefits. Similarly, charitable remainder trusts also offer you some taxation relaxation.
- A trust fund allows you to control your assets after your death. You can ensure that creditors or ex-wives don’t control your wealth. Still, your rightful inheritors keep benefiting from these assets. It also prevents your children from wasting their inheritance in gambling.
- As explained above, unlike a will, the contents of your trust fund remain private. Since there’s no probate process involved, your family’s financial matters remain hidden from public view. It’s also expensive and time-consuming to enter the probate process. So, trust funds help you avoid all these legal complexities and public shaming.
- The contents of your trust fund remain private. They can’t get challenged in a court of law since only trustees and beneficiaries know what’s inside. Unless one of your beneficiaries isn’t pleased with you, nobody can contest the contents of this document. Thus, a trust fund reduces the possibility of a court challenge significantly – especially if you have a smart lawyer.
- Also, you can protect your family from conservatorship by setting up a trust fund. What do we mean by conservatorship? It refers to a court-appointed adjudicator who manages a person’s finances when that person is incapacitated. So, a trust fund removes any need for your family to contact that adjudicator or go to court for fulfilling their financial requirements. Thus, a trust fund saves your family embarrassment and discomfort.
Statistics show that some 2% of Americans receive financial assistance from a trust fund that amounts to $4,062,918 on average. Repeating what we’ve mentioned above, a trust fund involves a grantor/settlor, trustee, and beneficiary. You (the grantor) establish a trust fund by nominating someone as a trustee or the person who manages your assets on your behalf. Beneficiaries are the people who will receive these assets when certain conditions get met. A trust fund – unlike a will – keeps a family’s financial matters private. Some forms (such as irrevocable trust funds) even provide you tax benefits. A trust fund offers your family economic security in case of your passing. It allows you to control your assets after death.