Trust fund has become a term that is commonly used when speaking of generational wealth, especially among wealthy people and/or their children. But what is a trust fund? We hear much said about it, but do we really know what it means?
In this blog post we will explain trust funds and how they work.
ORIGINS OF TRUST FUND
Roman law, which was the legal system of Ancient Rome, had a concept of wills. That is, they had a concept of asset distribution upon death, but they did not have a living trust that was applicable during the life of the creator.
It was not until the 12th and 13th centuries in England, during the time of the crusades, that the concept of a living trust materialized.
WHAT IS A TRUST FUND?
According to Wikipedia, a trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for the party’s benefit.
In simple terms, a trust is an estate planning tool. It is a legal entity in which property or assets for a person or organization are held. The assets and/or property that can be held in trust funds are, but not limited to, money, bank accounts, investments, art work, real estate property, debt, life insurance, a business, bonds and stocks.
REQUIREMENTS TO ESTABLISH A TRUST FUND
In order to establish a trust fund three parties are required. You must have the grantor, the beneficiary and the trustee.
The grantor is the person who creates and funds the trust. The beneficiary is the person(s) and/or corporation(s) for whom a trust is created. The trustee is responsible to manage the trust and must act for the sole benefit of the grantor and beneficiary.
BENEFITS OF A TRUST FUND
There are many reasons as to why trust funds are established. Here are a few:
- Tax Benefits/Tax Planning: Trusts offer tax benefits and financial protection and support for those involved. In many scenarios, the tax consequences of using a trust are better than what the alternative would be. Therefore, trusts are frequently used for the purpose of legal tax avoidance.
- Charities: Trusts are a tool for charitable donations. In some jurisdictions all charitable donations must take place via a trust. Corporations may be charities also in certain jurisdictions.
- Asset Protection: A trust may be what is called bankruptcy remote. This would allow the beneficiary to protect assets from creditors. Though legally and ethically controversial, trusts may attempt to preserve anonymity with a completely unconnected name.
Trust funds generally fall into two categories. Revocable or irrevocable trust funds. Their explanations are simple.
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REVOCABLE TRUST FUNDS
A revocable trust fund is one where the grantor stipulates that upon his/her death, the funds/assets will be passed on to the beneficiaries as stipulated. Perhaps the biggest beneficial caveat of a revocable trust to the grantor is that while he/she is alive the trust can be completely revoked prior to the grantor’s death.
IRREVOCABLE TRUST FUNDS
When it comes to irrevocable trust funds they are extremely difficult to change or revoke. Irrevocable trusts can only be modified, amended or terminated with the permission of the grantor’s beneficiary or by the order of a court.
The primary reason why irrevocable trust funds are set up is to reduce estate taxes, access government benefits and protect assets from creditors. This is because when the grantor gives away control of the assets to the trust fund, this reduces the value of the grantor’s estate.
STARTING A TRUST FUND
In order to start a trust fund there are a few steps that you must follow. You must first decide which trust fund is best for you as there are a variety and variations of trust funds. Then you must also decide how you will fund the trust.
The following step, which is of significant importance, is figuring out who you want to appoint as your trustee. This person should also be able to help you draft up the necessary documents to go through the legal process. Now, go ahead and fund your trust from a variety of options. For example, stocks, bank accounts, bonds, mutual funds, real estate, digital assets, etc.
And as always we like to close with a saying, quote or adage and today’s is from Shark Tank’s Kevin O’Leary (video below): MY TRUST GOES MULTIGENERATIONS.
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WHAT IS A TRUST FUND?
No. Trusts can also be used to manage assets during the grantor’s lifetime.
In a simple trust fund all income must be paid out to the beneficiaries. However, in a complex trust fund, the trustee can reinvest the income, distribute it to the beneficiaries or donate to charity.
Trust funds can serve to ensure that your assets are properly managed until your beneficiaries are of lawful age. There are cases where trust funds can be used for specific purposes such as health care or educational costs.
No. If you’d like to set up a trust fund you can do so by hiring an estate planning attorney, using an online service provider or by opening one up on your own.
If you are planning on setting up an irrevocable trust, it is very certain that you will need an estate lawyer. The reason is because irrevocable trusts must meet certain rules in order to function correctly.
Yes, they do. Taxation of funds taken from a trust fund are taxed differently than ordinary investment accounts. The beneficiaries of trusts have to pay taxes on income and distributions they receive from a trust. However, trust beneficiaries do not have to pay taxes on returned principal from the trust’s assets.