A trust fund is a legal entity that holds property or other assets on behalf of a person, a group of people or an organization. Trust funds are commonly used as estate planning tools to protect certain assets and ensure that your wishes regarding them are carried out.
The creation of a trust fund establishes a relationship where an appointed fiduciary—the trustee—acts in the sole interest of the grantor. A trust is created for a beneficiary who receives the benefits, such as assets and income, from the trust. The fund can contain nearly any asset imaginable, such as cash, stocks, bonds, property, or other types of financial assets.
A single trustee—this can be a person or entity, such as a trust bank—manages the trust fund in a manner according to the trust fund’s stipulations. This usually includes some allowance for living expenses and perhaps educational expenses, such as private school or college expenses.
- A trust fund is designed to hold and manages assets on someone else’s behalf, with the help of a neutral third-party.
- Trust funds include a grantor, beneficiary, and trustee.
- The grantor of a trust fund can set terms for the way assets are to be held, gathered, or distributed.
- The trustee manages the fund’s assets and executes its directives, while the beneficiary receives the assets or other benefits from the fund.
- The most common types of trust funds are revocable and irrevocable trusts, but several other variations exist for specific purposes.
Types of Trusts
- An irrevocable trust generally can’t be modified or terminated without the permission of the beneficiary and/or judicial authorities. It may be useful for federal estate tax planning.
- A revocable living trust generally lets you transfer ownership of your property into a trust throughout the course of your lifetime. It gives you more control over your estate, both before and after death.
- A testamentary trust is generally created by the terms of your will and goes into effect upon your death. It can’t be amended or revoked.
- A special needs trust is created to provide supplemental income for the welfare of an individual with a disability. The trust can supply funds for travel, education, out-of-pocket medical expenses, and personal care expenses not covered by government programs.