What is a Trust Fund? If you are just hearing of this term for the first term time, you might be asking yourself what it means, right? Well, a trust fund is an estate planning tool that allows a person to set aside some money and assets.
These assets will be held by a trustee and later distributed to the beneficiaries named on the trust. Let’s dive in for more details on this term.
What is a Trust Fund
A trust fund is a legal entity that holds several assets of different types for a named guarantor. This includes real cash, properties, investment accounts, heirlooms, businesses, and more. As earlier stated, these assets will be held by the trustee. Furthermore, they will remain in the Trust until the time comes to pass the assets.
How Does a Trust Fund Work?
Trust funds involve three parties; the grantor, the beneficiary, and the trustee. The guarantor is the individual who sets up the trust. More so, the beneficiary could be one or more individuals are the ones who’ll receive the assets. Meanwhile, the trustee could be an individual, a trust bank, or a fiduciary charged with managing the assets.
When a trust fund is set up, the grantor names the beneficiaries. Thereafter, together with a lawyer, an agreement will be drawn up on the terms of the trust fund. These terms include the asset each beneficiary will receive, and how and when the assets should be distributed.
Depending on the grantor’s choice, the Trust fund could be set up to pay the funds out in small lumps annually. Also, a grantor could set up a trust fund on the agreement that the funds will only be paid out when the beneficiary reaches a certain age.
Also, a grantor could specify that the funds should be directed toward the tuition fees of the beneficiaries or for a down payment on a house. However, whichever way it is set up, the assets or funds will be held by the trustee and won’t be distributed till the circumstances of the agreement are met.
What is the Purpose of a Trust Fund?
The main reason Trust funds are set up is to control who receives a person’s assets. People set up Trust funds to ensure that their assets will be distributed in the manner they choose. This could be done either while they are alive or after their death.
What are the Types of Trust Funds?
There are several types of trust funds. Each type has its tax implications and payout methods. However, below you’d find some of the most common types of trust funds
Bypass trusts are designed for estate tax purposes and are mostly used by spouses. When one of the spouses passes away, assets are passed to the bypass trust and are held for the surviving spouse. On the death of the other spouse, the assets will then go to the beneficiaries.
These trusts are designed for making donations to charity in a tax-efficient manner. It allows the beneficiaries to receive benefits like income from the gifted property.
Spendthrift trusts are one of the most common types of trust funds. It doesn’t allow beneficiaries to access the assets and funds in the trust without specific stipulations. This trust only distributes money in small amounts to the named beneficiaries over time. Spendthrifts are under the supervision of an independent trustee.
This type of trust fund is set up in such a way that both the grantor and beneficiary of the trust will not know how the assets are managed. However, it gives control to the trustee. This trust is designed to remove conflicts of interest.
These trusts are made through a will and holdings in it are not funded till the guarantor dies. It leaves assets to the beneficiary with specific instructions following the death of the trust’s grantor.
Is Trust Fund a Good Idea?
A trust fund can be an effective tool for nearly everybody’s circumstances. They provide financial protection, tax benefits, and long-term support to you and your loved ones. If you have funds or assets that you’ll like to contribute to your loved ones before or following your debt, you might want to consider setting up one.
What is a Trust Fund Baby?
A Trust Fund Baby is the person who will receive the assets or money kept in a Trust when they reach a certain age. Although the legal term for this individual is beneficiary, Trust Fund Baby is commonly used in our popular culture.
Why Should You Set Up a Trust Fund?
Trust funds are very useful if you want to leave money, properties, or assets asides for your beneficiaries and ensure that they are paid out. In addition, Trust funds also reduce some of the problems that you might face with a will.
Unlike wills, Trust funds are not subject to probate. Without having to go through the process of probation, your assets are kept private.
What are the Benefits of a Trust?
The benefit of a trust fund is numerous. Trust funds protect and preserve your assets. It also controls how your assets are contributed. In addition to this, trust funds minimize federal and state taxes on your assets.
Do Trust Funds Pay Taxes?
Yes, they do. When money is deposited into a Trust Fund, interest accumulates on it over time. This interest is taxable as income to the beneficiary. When the time comes for the trust beneficiaries to take out the money, they’ll pay taxes on the interest.
How Do Trust Funds Pay Out?
This depends on how the grantor sets up the trust. The funds in a trust could be paid out monthly, quarterly, or annually. If the holding is real estate, the trustee it to the beneficiary by writing the deed or selling the property and giving them the money either by check or cash.
The holdings in the trust could also be directed to the tuition fee of the beneficiaries.
How Do I Start a Trust Fund?
To start a trust fund, you have to first decide on the type that is best for you based on how it operates and its payouts. Thereafter, you’ll have to look for whom you want to appoint as the trustee.
When that is done, you’ll draft all the documents needed to set up the fund with the aid of the trustee. Finally, you can deposit the funds into the Trust.
Can a Beneficiary Terminate a Trust?
If all the beneficiaries of a trust who have attained the full age on the Trust funds term agree collectively to terminate, the trust could be ended. Thereafter, the assets will be distributed according to their entitlements.
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