Trusts can offer financial protections, tax benefits, and even long term support to loved ones -- making them an invaluable tool in Estate Planning. That being said, Trusts have complex legal structures that can make them challenging to understand. Learning more about Trusts can be intimidating, but it is a necessary step in the Estate Planning process. If you are ready to learn more, a great place to start is by answering the question, “what is a Trust Fund?”
Whether you are creating an Estate Plan of your own, were recently named a beneficiary, or simply want to do more research on the subject, the following guide will help. Continue reading for our overview on Trust Funds and learn more about how they work:
What is a Trust Fund and How Does it Work?
A Trust Fund is a legal entity that contains assets or property on behalf of a person or organization. Trust Funds are managed by a Trustee, who is named when the Trust is created. Trust Funds can contain money, bank accounts, property, stocks, businesses, heirlooms, and any other investment types. These assets remain in the Trust until certain circumstances are met, at which point they will be distributed to the beneficiaries.
The creator of a Trust, who is referred to as the Grantor, will determine how and when assets will be distributed. Typically these requirements are related to age, or place in life. For example, a Trust Fund could be granted to a beneficiary when they turn 21 or graduate college. If you want to learn more about how Trusts work, or when you should create one be sure to read our guide.
What is the Benefit of a Trust Fund?
The benefits of a Trust Fund are numerous, but perhaps the biggest perk is the control it provides over the management of your assets. Trust Funds can guarantee that your assets are properly taken care of until your beneficiaries come of age, while also allowing them to avoid probate. In some cases, Trust Funds can even be used to designate funds for certain purposes, such as healthcare or educational costs.
If you are the beneficiary of a Trust Fund, the biggest benefit is likely the financial support you will receive. While it can be difficult to think about inheriting anything from a loved one, a Trust Fund can greatly help your financial situation. Trust Funds can also help save you the time and emotional labor involved with lengthy probate court proceedings.
Are There Downsides to a Trust Fund?
There are some downsides to a Trust Fund, most notably: the costs associated with set up. You will need to work with an experienced Estate Planning attorney to create a Trust. As you might have guessed, this will make you responsible for any legal fees and costs. However, working with a specialized attorney is the only way to guarantee your Trust Fund is set up with a proper legal framework. Consider these fees necessary costs to receive the tax benefits and peace of mind a Trust Fund will provide.
Another potential downside to a Trust Fund is the set up process and what it could mean to tell your loved ones. Unfortunately, Estate Planning can lead to some awkward or difficult conversations within a family. If you create Trust Funds for certain relatives and want to share that information with the family, it could lead to a discussion about your financial resources and how they are handled.
Types of Trust Funds
There are a few different types of Trust Fund that vary in how they operate: a Blind Trust Fund, a Unit Trust Fund, and a Common Trust Fund. It can be helpful to review the mechanics of each and understand their benefits.
What is a Blind Trust Fund?
A Blind Trust Fund is one where the beneficiary is not aware of the identity of the Trustee, or person in charge. With a Blind Trust Fund, the Trustee has complete control over the management of the Trust until the assets are distributed.
Blind Trust Funds are typically used when an individual wants to avoid a conflict of interest, for example if business or investments are involved in the Trust. Blind Trusts can also be used to provide an extra layer of privacy in the management of a Trust.
What is a Unit Trust Fund
A Unit Trust Fund is the result of a specific type of mutual fund structure that allows profits to transfer directly to the investor (who would be the beneficiary). Unit Trust Funds allow investors to maximize their dividends without reinvesting their earnings back into the fund.
Unit Trust Funds can hold a variety of assets including securities, stocks, and bonds. They are most commonly utilized by investors as a tax shelter strategy, rather than as an Estate Planning tool.
What is a Common Trust Fund?
A Common Trust Fund is managed by a financial institution on behalf of a group of individuals. Common Trust Funds somewhat resemble mutual funds, but their membership is exclusive to those who have Trust accounts.
Common Trust Funds are used less frequently now than they once were, as other Trust and investment types can offer more benefits. Today they are typically thought of as a niche investment structure.
Other Commonly Asked Questions About Trust Funds
Now that we have covered the Trust Fund basics, you may still have some questions about how they work. Read through the following commonly asked questions about Trust Funds to learn more:
What is a Trust Fund Account?
A Trust Fund account is what holds the actual assets after a Trust is created. Only the Trustee can access what is inside the Trust Fund account. A Trust Fund Account could be as simple as one bank account, or it could be much more complex -- it all depends on what is in the Trust.
What is a “Trust Fund Baby?”
A Trust Fund Baby is someone who will receive money or assets from a Trust when they reach a certain age. The legal term for this person is a beneficiary, though “Trust Fund Baby” Is commonly used in popular culture. The term “Trust Fund Baby” can have negative implications and implies that someone is the recipient of generational wealth. It is typically referenced in television shows or movies.
What is a Trust Fund Beneficiary?
A Trust Fund beneficiary is the person who will receive the assets in a Trust. Read this overview if you are interested in learning more about the distribution of Trust assets to beneficiaries.
How Much Money is in a Trust Fund?
The amount of money in a Trust Fund will vary depending on the creator of the Trust, Trust type, and how much the account has grown since being established. In most cases, any interest gained on the money inside a Trust Fund will be distributed to the beneficiary as well.
There are various types of Trusts that can provide the opportunity to invest your funds before they are distributed to the beneficiary. The right choice will depend on your goals when setting it up. Read this guide to learn more about how to fund a Trust.
What’s the Average Trust Fund Amount?
The exact average Trust Fund amount is unclear, though the Survey of Consumer Finance recorded it to be around $4 million. Note that this figure was from a 2017 survey of about 6,482 families -- and therefore might not be a good representation of the entire U.S. Many individuals are happy to know that Trust Funds offer the benefit of privacy, though this also means there aren’t clear answers on average Trust Fund amounts or frequency of their use.
What is the Difference Between a Trust and a Trust Fund?
The difference between a Trust and a Trust Fund is small but important when it comes to understanding Estate Planning. A Trust is an agreement used to specify how certain assets will be managed and distributed. A Trust Fund is the legal entity those assets are placed into when the Trust is created. The creation of a Trust and Trust Fund go hand in hand, which is why you may hear these words used interchangeably at times.
If you are still confused about where to start or how a Trust Fund could help your finances, Trust & Will is here to help. Our team can walk you through all aspects of creating a Trust, and find the best fit for your needs. A Trust Fund is one of several Estate Planning tools we can assist you with.
The answer to “what is a Trust Fund” is simple: it’s a way to provide financial support to your loved ones throughout their lives. Trust Funds are an invaluable tool when Estate Planning and can provide you with complete control over how your assets are distributed. While there are costs associated with creating a Trust Fund, this process can provide you with enormous peace of mind -- not to mention various tax benefits.