Trust funds are more than deposit accounts that enable you to grant a person or organization money -- they are legal entities. The provisions for trust funds determine how different types operate. One thing all trust funds have in common is the existence of a grantor, a trustee, and a beneficiary. One person can serve in all three roles. Some people have shied away from trust funds because they believe they are exclusive to wealthy people. However, they are an effective way for anyone to establish an inheritance and preserve assets.
The person who sets up the trust fund and donates property is known as the grantor. This person also decides how the trust fund will be managed, including income and assets. The grantor typically names beneficiaries to a trust fund and has the power to change the beneficiary at his or her discretion.
The trustee is responsible for keeping a trust fund on its mission, ensuring proper management, and looking out for the best interests of beneficiaries. This responsibility can fall to a single person, multiple people, or an institution. The job of trustee is sometimes challenging because they must balance the intentions of the trust with local applicable laws. This is not always something a trustee does directly. In some cases, the trustee is merely the person who selects the advisors or institutions that will oversee the money and assets.
Trust funds are typically created for the benefit of the beneficiary. Although most beneficiaries do not own the assets or funds that belong to a trust, the contents of the trusta are managed for their benefit. Beneficiaries have the right to ensure the trust that benefits them is properly managed. In some cases, this means removing the trustee. Though there may be a grantor or trustee determining what happens to assets, the trust document determines the rights of the beneficiaries, which may include distribution. They also have a right know about the trust, including accounting. Additionally, beneficiaries can end a trust, if the purpose has been fulfilled or seems impossible. However, they will need to petition the court to do so.
Contrary to what many people believe, a trust fund does not only hold money or stocks and bonds. Many other assets can become part of a trust, including art collections, real estate holdings, a private business, safe deposit boxes and bank accounts, life insurance, intellectual property, and foreign assets. You may also keep a promissory note in trust for money that someone owes to you.
Irrevocable trusts, which can be complicated, can't be changed or ended without the beneficiary's permission. The grantor has removed all ownership rights to any of the assets he or she donates to the trust fund. If the grantor and beneficiary are the same person, this will not matter. In most cases, the grantor and trustee for an irrevocable trust cannot be the same person. There are a few advantages to having an irrevocable trust, including minimizing estate taxes, preventing asset misuse by beneficiaries, giving assets as gifts while keeping income from the assets, giving principal residences to children, and holding a life insurance policy to separate death proceeds from an estate.
Revocable trusts, also called living trusts, have been effective financial tools for privacy and avoiding probate — or having to prove the validity of a will. The trust is private because it does not go through a probate process and is not part of a public record. However, if an heir contests the estate and takes the matter to court, other heirs could get a copy of the trust document. Revocable trusts also make it easier for your family and executors to transition your estate after you die. The grantor of a revocable trust can change the terms of the trust up until his or her death.
Some trust funds do not go into effect until after the grantor has died. A trust set up during the grantor's lifetime is called a living trust. Testamentary trusts, on the other hand, are funded at the time of the grantor's death with the assets of his or her estate. The language of a will must give explicit instructions for moving assets into a trust fund. It is always best to hire an attorney to ensure the language of your trust or will clearly specify your wishes.
One of the primary goals of a trust fund is to avoid excessive estate taxes. If you have set up an irrevocable trust, you will not be taxed on your assets because you have given up ownership of your property. Revocable trusts, however, can be taxed, as the grantor is still considered the owner.
Naturally, when considering beneficiaries for a trust fund, most people think of their children. However, provisions can be made if the children pass away before the grantor, or before full depletion of the trust assets. Grandchildren of the grantor may have a right to the trust fund under the laws of certain states, but this should be clarified when the trust is set up to avoid any confusion or disagreements among heirs later.
It is not enough to understand the purpose of a trust and set up a fund legally. You also need to know how you will fund the trust. You may take assets that are in your name or the joint names of yourself and others and transfer ownership to the trust. If you hold your assets outside of the trust, the designated trustee cannot manage them, and they will be subject to probate. Finally, if you leave your trust unfunded at the time of your death, your executors may have to petition the court to show that you intended to fund the trust.