What is a Trust Fund? 

Trust funds are designed to provide financial support and protection for your loved ones, and can be an effective financial tool depending on your circumstances. If you have assets you’d like to distribute before or following your death, you may want to consider setting up a trust fund. 

Key Takeaways 

• A trust fund holds assets for a grantor on behalf of their beneficiaries and a trustee manages the funds. 
• Trust funds serve several purposes, such as ensuring assets are protected, distributed properly, and transferred smoothly.
• Most trusts are living trusts — trusts that are created and enacted during the grantor’s lifetime — that designate how assets should be managed and distributed when the grantor dies. 
• Unlike assets in a will, assets held in a trust can bypass the probate process because assets can be directly transferred to beneficiaries.   
  

What is a trust fund?

A trust fund is an estate planning tool that allows a person to set aside money and other assets for loved ones. Before we dive into the details of setting up a trust fund, it will be helpful to understand these three common terms. There are three roles associated with trusts:  

• Grantor: The individual who puts the assets in the trust fund 
• Beneficiary: The person who will receive the assets from the trust 
• Trustee: The individual or entity that manages the assets
  

Trusts hold assets on another person’s behalf and are often created by a licensed estate planning attorney. 

Trust funds can include many asset types, including money, real property, investment accounts, a business, or any combination of these assets.

How does a trust fund work?

One of the main reasons people open trust funds is to ensure their assets are distributed in the manner they choose, either while they’re still alive (more on this later) or after their death. A grantor sets up a trust fund and a trustee manages it until the time comes for the beneficiary to receive the payout or other assets. 

At that time, the trust will be distributed in the manner outlined in the fund. For example, assets can be distributed as a lump sum, installments, real estate property deeds, physical item transfers, and more. 

How to set up a trust fund

As with other estate matters, you may want to work with an estate attorney to create a trust fund. If your company offers legal insurance as a benefit, you may be able to find an attorney through them. 

A trust typically includes the following: 

• The trustee and beneficiary information 
• Asset distribution instructions  
• End date
• Assets 
• Trust terms (per the grantor)  
  

There are 4 basic steps in creating a trust fund:

1. Designate your trustee
2. Choose your beneficiary(ies)
3. Create and notarize the trust document
4. Open a trust account and transfer assets

What are the types of trust funds?  

There are different types of trust funds with slightly different payout methods and tax implications. Some common types of trust funds include: ​​

Living trusts: Most trusts are living trusts, or trusts that are created while the grantor is still alive. The assets can be distributed after your death or during your lifetime. With a revocable living trust, you remain in full control of the trust and can make changes to it or even cancel it. With an irrevocable living trust, you name a trustee to control the account. Once created, you cannot change or cancel an irrevocable living trust. 

​Spendthrift trusts: Money in this trust is given to the beneficiary in smaller amounts over time, rather than in a lump sum. 

Testamentary trusts: Also known as “after-death trusts, ” these are funded after a grantor passes away. 

Bypass trusts: This type of trust allows you to leave assets to your spouse and possibly save on federal estate tax.

Charitable trusts: These trusts direct your assets to charities in a tax-efficient manner. 

Trusts and wills 

The primary difference between assets in a will and in a living trust is that assets in a living trust typically avoid the need for probate court. Because the assets are already in the trust fund, they can be transferred to your beneficiaries without going through the courts. Also, the terms of a funded living trust tend to be more private than a will. 

Wills and funded living trusts allow the grantor to iron out details, such as: 

• What conditions do beneficiaries need to meet before receiving the funds (like graduating college, coming of age, etc.) 
• When and how the assets will be distributed
• How conservatively or aggressively to invest assets 

5 benefits of having a trust fund 

Trust funds offer several benefits to individuals and families who want to manage and safeguard their assets. Consider the following reasons to you may want to create a trust fund: 

1. To help avoid or minimize the probate process: A will alone is often not enough to avoid probate, which can be expensive, time-consuming, and subject to public record. Assets held in a trust can bypass probate, allowing for a more efficient and private transfer of assets to beneficiaries.

2. To help protect your assets: Because assets in an irrevocable trust are generally not considered personal property, irrevocable trusts can help protect your assets from potential risks.

3. To help maintain control over your assets: Revocable trusts give you greater control over your assets, allowing you to modify, amend, or revoke the trust within your lifetime. 

4. To help minimize estate taxes: When assets are transferred into an irrevocable trust, they are no longer considered part of your estate for tax purposes. This means your estate tax liability will potentially be lower, allowing more of your assets to go to your beneficiaries. 

5. To help plan for the future: Trusts ensure a smooth transfer and management of assets to help you plan for the future needs of your loved ones. Trusts can help you provide for minors and individuals with special needs and assist with long-term care planning.