When we think of trust funds, we often imagine wealthy families setting up their children for life. But in reality, non-wealthy families can also benefit from trust funds. A trust fund is a fund that consists of assets intended to benefit an individual or organization. A trust fund might be comprised of assets such as stocks, bonds, cash, or property. In the case of an individual beneficiary, the recipient of the trust must often wait to reach a certain age, or until a certain event occurs, to receive income from the fund. Until then, a trustee is tasked with managing the fund as per the specifications of the person who set up the trust.
Parties in a trust fund
There are three important players in a trust fund. The first, the grantor, is the individual who establishes the trust in the first place. This grantor is the person who contributes assets to the fund and who decides how the fund should be managed. Then there's the beneficiary, the person who gets to benefit financially from the trust. A trust fund beneficiary is often the child or grandchild of a wealthy grantor, but it can also be a charity or organization. Finally, there's the trustee, who can be a single person or a group of people tasked with overseeing the trust fund and ensuring that it's managed as per the instructions of the grantor. Trustees are often paid a fee in exchange for their services, and some are given more power than others in managing trusts. Some, for example, are given the authority to select investments for the funds they manage, while others are simply responsible for distributing payments as per the grantor's request.
Benefits of trust funds
Setting up a trust fund is a great way to ensure that your beneficiaries are taken care of financially, especially after your passing. While a will serves a similar function, a trust fund offers an added layer of protection if you fall ill or become mentally or physically incapable of managing your own finances and affairs. Furthermore, there are certain tax advantages to be gained by setting up a trust fund. Trust funds can be established in a manner that helps minimize estate taxes, thus ensuring that more money goes to your beneficiaries.
A revocable, or living, trust is a type of trust in which a grantor places assets during his or her lifetime. Those assets are then transferred to the fund's beneficiaries after the grantor's death. The benefit of revocable trusts is that the grantor has the ability to make changes to the way they're set up. Another major advantage of revocable trusts is that, unlike wills, the assets in question aren't subject to probate, an often-lengthy legal process following a person's death. Rather, the assets are typically distributed quickly to the beneficiaries designated in the trust.
Charitable remainder trusts
A charitable remainder trust is a type of trust in which a grantor designates assets to be donated to a specified charity. The charity serves as the trustee of the trust and manages its assets. As those assets produce income, the charity pays the grantor, or another named beneficiary, a portion of that income for a certain period of time as established in the trust. Once that period ends (which may or may not coincide with the death of the grantor), the assets go to that charity. With a charitable remainder trust, the grantor gets an immediate tax benefit, and once the trust's assets are completely transferred to the assigned charity, they're no longer subject to federal estate taxes.
Though there are several benefits to setting up a trust, the process can also be complicated. Most individuals therefore require the help of an attorney in establishing trust funds for their beneficiaries.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at firstname.lastname@example.org. Thanks -- and Fool on!