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What is a Trust Fund?

Trust Fund

A trust fund refers to the assets held inside of a trust. A trust is simply a legal tool used to hold property for another party’s benefit. The fund, in this context, consists of the assets held inside of the trust according to the trust’s terms. While the term “trust fund” conjures up an image of high net-worth individuals, middle-class people are increasingly turning to trust funds so their estates avoid probate and so that they can better control how heirs receive assets.

Setting up a trust fund is one of the best ways to ensure financial security for your loved ones. This is because a trust can reduce estate taxes, eliminate probate, make investment, and schedule monthly distributions to yourself or your loved ones. Most importantly, it can protect assets from lawsuits. After all, if a greedy law firm plunders your wealth, the prior points are moot.

Moreover, a trust can can provide these benefits during your lifetime and long after you have passed. This article will discuss these advantages in detail. The bottom line is, no matter your net worth, you can create a trust fund to provide financial security for yourself and your loved ones. Incidentally, you can even use a trust to protect them from themselves. That is, if you fear your heirs might not handle their bequests responsibly, you can set up the trust fund to address those issues. Thus, with a trust fund, you can distribute your assets the way you would like.

trust fund baby

What Is a Trust Fund Baby?

A trust fund baby refers to a person, especially a younger individual, for whom a trust was established that provides sufficient income so the individual does not need to work to earn a living. Parents or grandparents typically establish such financial arrangements in-trust that provide for the living expenses of a child, grandchild or other individual.

The stereotypical image of a trust fund baby is that of an individual living a high-society existence without putting forth the entrepreneurial exertion required to produce such a lifestyle. People envision the individual driving exotic cars, jet-setting around the globe going on exotic vacations.

In truth, according to, those who receive trust funds represent fewer than two percent of the U.S. population. Moreover, the median amount received, they continue, is only about $285,000. Most, but not all, people who are the beneficiaries of trust funds still need to work; the trusts simply provide single lump payments or ongoing supplemental income.

Those who leave substantial estates behind often insert spendthrift provisions into their trusts. That is, the trusts appoint a trustee who limits the trust’s financial outgo. Those with forethought often structure this arrangement to prevent young people from spending foolishly and “burning through” their inheritances.

trust deed document

Most Popular Trusts

Among the most popular tools to create trust funds are inter vivos, or living trusts. We call these tools revocable trusts. This means that the owner can make many sorts of changes to the trust during their lifetime. That includes changing or adding beneficiaries and moving assets in and out of the trust. Once the trust owner dies, however, the living trust becomes irrevocable, its provisions not subject to change.

A living trust does not hold significant income advantages. It can, however have significant estate tax advantages for the trust fund recipients. This is because the trust can divide assets into two subtrusts. Trust “A” is for the first spouse. Trust “B” is for the second spouse. Typically it works this way. When one spouse dies, the other spouse has full access to one of the subtrusts. The surviving spouse can access the income that the other trust fund produces.  When both die, this arrangement doubles the amount that heirs can receive estate-tax free.

Moreover, when you set up a living trust, your estate does not go through probate. Probate is the legal process of proving that a will is valid. This process typically involves lawyers (i.e. legal fees). A judge must approve the probate process. Consequently, there are often substantial probate fees that are due as part of the process. Plus, probate is a very public ordeal that lays assets out in the broad daylight of the public records. Thus, people are turn toward such trusts to protect privacy. They use them to reduce or eliminate estate taxes and probate fees. In addition, they use them to speed up asset distribution to beneficiaries.

Trustee Distribution

How Trust Funds Work

For financial and estate planning purposes, several types of trusts are available, but the two of interest to most people are the aforementioned inter vivos trust and the testamentary trust. While similar to an irrevocable trust, a person’s will creates a testamentary trust fund. Therefore, it does not exist prior to the individual’s death.

A grantor, also known as a settlor, is the person creating and funding the trust fund. This individual also determines the trust’s management terms. The trustee, which is either an individual or financial institution, is the entity responsible for overseeing the trust. With many revocable trusts, the grantor is also the trustee. Settlor establishes the trust fund for the beneficiary. The beneficiary does not own the trust assets. Rather, the trustee managers trust assets in the best interests of the beneficiary as per the trust agreement. The grantor names the beneficiaries and the trustee.

Beneficiaries receiving money from a trust account will find that how often the money is distributed depends on the stipulations in the terms of the trust. Beneficiaries might receive all of the proceeds in one lump sum or receive payments on a monthly, quarterly or annual basis.

mistakes parents make trust funds

Biggest Mistake Parents Make with Trust Funds

The biggest mistake parents make when setting up trust funds is giving children the entire estate at once. This is especially troublesome if the trust gives a lump sum without regard to age.

Say the parents die in a car crash when the children are in their late teens or early twenties. Inherited money is easy to spend. So, it is not unusual for children to blow through inherited funds within one year.

So, smart estate planners prepare for this. Here is an example of a well thought-out trust. We often draft our client’s trust so that there is a responsible third-party trust company. Below the age of 25, the trust provides for the food, clothing, housing, healthcare and educational needs of the children. So, in addition to physical needs, the trust can pay for college, for example.

Then, at age 25, the child receives one-third of the trust assets. At age 30, the child receives another one-third of the trust assets. Finally, at age 35, the child has access to the remainder of trust assets.

Alternatively, the trust is set up so there are no lump-sum payments. The trust simply provides a monthly or quarterly payout. So, there is no risk of depleting the trust.

living trust

More About Living Trusts

Living trusts are set up during the grantor’s lifetime, and typically the grantor is also the trustee so they may manage the assets. Professional often design revocable living trusts to end with the grantor’s death, with assets distributed to beneficiaries. While the grantor lives,  he or she may buy and sell trust assets and move them in and out of trust.  The grantor reports all trust income on his or her tax returns. When the grantor dies and the trust becomes irrevocable. Someone values the assets for estate purposes as of the grantor’s date of death.

Revocable vs Irrevocable Trust

Irrevocable Trusts

Oftentimes, we establish trusts for clients that are irrevocable from the start. Most settlors establish these instruments to keep creditors away from assets. In addition, these trusts can significantly lower estate taxes.  With an irrevocable trust, the grantor transfers assets into the trust and can receive income or lump sums according to the terms of the trust. Certain types of irrevocable trusts must file their own tax forms each year. Others simply flow through to the tax returns of the settlor without separate filings.

When a person sets an irrevocable trust without naming themselves as a beneficiary, assets in such a trust are not part of the grantor’s estate. Some irrevocable trusts are quite detailed and, unlike revocable living trusts, can provide substantial asset protection benefits. That is, when a lawsuit strikes, the trust can shield the trust fund from legal attacks. The irrevocable trust often continues beyond the grantor’s death. As a result, it may continue making distributions to certain beneficiaries. In these situations, the tax code considers these distributions as taxable income, payable at the beneficiary’s rates.

The strongest asset protection trusts are include the Cook Islands trust (the Cook Islands are south of Hawaii) and the Nevis trust (in the Caribbean). Domestic courts do not have jurisdiction over trustees in these countries. Plus, these two regions do not recognize foreign judgments that might attempt to attach to the trust fund.

college savings

Beneficiaries and Trust Funds

Beneficiaries have some rights when it comes to trust funds, but understanding the provisions of the trust is critical. If a beneficiary does not understand how the settlor originally designed the trust and how it operates, he should contact an estate planning specialist. The specialist will explain the process and check to make sure the trust is operating as per its terms.

Current beneficiaries of trust funds may request in writing an accounting of the trust from the trustee. These beneficiaries should receive the payments granted to them by the terms of the trust. When a beneficiary does not feel a trustee is acting in their best interests, it is possible to file  a court petition for trustee removal.

Beneficiaries receiving money from a trust fund account collect their funds as per the terms of the trust. For example, the beneficiary may receive all of the funds in a lump sum, or payments are sent on a monthly, quarterly or annual basis.

asset protection trust

Placing Restrictions on a Trust Fund

When creating a trust fund, the grantor may stipulate how heirs or beneficiaries receive income. That doesn’t mean the grantor can place any conditions he or she wants in the trust, as the trust must conform to the law. For example, a grantor cannot state an heir receives money only if she divorces her spouse. The trust might state that the money is limited in use for specific purposes, such as college tuition, rent or mortgage payments. The grantor may decide that heirs cannot receive assets until age 30, for example, if they think a young person may squander the inheritance. The trustee may ask for receipts from the  beneficiary as proof that the beneficiary used the funds as per the trust’s terms.

While the grantor cannot make an heir’s divorce a condition of receiving trust funds, they do have the ability to protect the beneficiary – usually a relative – so that in case of life changes such as divorce, any settlement does not include trust assets.

While many grantors do not include restrictions in their trusts, or such restrictions are based on the age of the beneficiary,  when a trust does include difficult or possibly unfair restrictions, it is necessary to head to court to make changes.

tax planning

Irrevocable Trusts and Taxes

Whether beneficiaries must pay taxes on distributions from trust funds held inside of irrevocable trusts depends on the trust terms. The state in which the settlor created the trust also plays a role. The majority of people inherit assets from living trusts that become irrevocable upon the grantor’s death. If the government levies taxes, they do so at the same rate as any other form of inherited asset.

Federal and State Inheritance Taxes

For persons dying in 2019, the federal estate tax exemption is $11.4 million. The IRS taxes the remaining assets above the exemption limit at a rate of 40 percent. This isn’t an issue when the trust fund is set up as irrevocable from the beginning. It is, however, an issue for living trusts that become irrevocable when the grantor dies. However, even if a beneficiary inherits more than $11.4 million from the trust, the trust pays the federal estate tax, not the heir. Twelve states and Washington, D.C. levy an estate tax; but the state pays this tax, not the heir.

Some states impose an inheritance tax, although whether a beneficiary must pay such tax depends on their relationship to the deceased. Lineal heirs, including children and grandchildren, usually do not have to pay state inheritance tax. Heirs whose relationship with the deceased was not one of direct lineage or there was no familiar relationship at all will likely find themselves subject to state inheritance taxes. For 2019, the following states impose inheritance tax:

  • Iowa
  • Kentucky
  • Maryland
  • Nebraska
  • New Jersey

Laptop Computer on Desk

Other Types of Trust Funds

There are many types of trust funds that experts design to deal with the particular needs of the grantor and beneficiary. Many professionals design these trusts to help beneficiaries who cannot care for themselves or whom the grantor thinks does not does handle money responsibly.

If you have a child or other relative with special needs, a special needs trust fund can ensure your loved on retains a good quality of life without the risk of losing government benefits. Medicaid regulations allows special needs trusts set up in  either irrevocable or revocable forms. Parents, grandparents, a legal guardian or the court are the only entities permitted to set up special needs trusts.

When naming a trustee for a special needs trust, keep in mind that the trustee must keep with government program changes and the effect any changes may have on the beneficiary. An attorney may recommend choosing a professional trustee with a thorough understanding of their fiduciary role for such a position.

A professional drafts a spendthrift trust fund ensure that a beneficiary does not waste all of the trust assets. While it is set up in a similar manner to an ordinary trust, the trust agreement contains specific language making it clear that the grantor intended to create a spendthrift trust. A spendthrift trust is irrevocable, and there are provisions such that a creditor cannot attach assets in the trust. However, a creditor can go after assets from the trust distributed to the beneficiary. For example, if the trust assets are valued at $10 million and the beneficiary receives the income, a creditor can go after the income but not the trust’s principal.

Best Offshore Asset Protection


A trust fund simply consists of assets within a trust. There are a variety of trusts that hold such funds. The best step is to contact a professional who can discuss your particular needs. There are numbers you can call on this page to do just that. In addition you can complete a consultation form on this page for more information.

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