What is a Trust Fund and How Do I Set One Up?
Trust funds can help create guardrails for those coming into money.
Financially taking care of your loved ones, such as a child or grandchild, can give you a lot of peace of mind. By setting up a trust fund, you can transfer assets, money, and property to a family member in a way that provides a lot of control and privacy. You can also help minimize estate and gift taxes by setting up a trust fund.
What Is a Trust Fund?
A trust fund is a valuable estate planning tool that can make it possible to pass your assets along to another party. A lot of people think of a trust fund as just holding cash, but they can contain a wide variety of assets like jewelry, real estate, investments, and cars. Really, you can add whatever you like to a trust fund.
Trust funds usually have stipulations surrounding them. A common one is the recipient reaching a certain age. Maybe you want the recipient to get married or finish college before they can access the trust. You can choose the stipulations that matter to you.
There are different types of trust funds available to you that can help you meet different estate planning goals. Here’s a quick look at the most popular types.
Education trust. Specifies funds will be used to cover academic expenses.
Spendthrift trust. Limits how beneficiaries can use their funds and how they’re distributed.
Special-needs trust. For allocating an inheritance or income to people with disabilities.
Charity trust. If someone wants to bequeath gifts to charitable organizations they can create a specialized trust for this purpose.
There are four components of any trust fund worth understanding as they will affect the outcome of the trust.
Grantor. The person whose name the trust is in.
Beneficiary. This person (or multiple people) will receive the contents of the trust.
Property and assets. The contents of the trust that will eventually go to your beneficiaries.
Trustee. Your trustee will act as a fiduciary for the trust fund and their role will be to carry out the grantor’s wishes whether they are alive or have passed away.
How to Set Up a Trust Fund
If you’re interested in setting up a trust fund, here’s the general steps you will take.
Step 1. Choose a trust fund type. Think carefully about the purpose you want your trust fund to serve and what type of fund will best meet your needs.
Step 2. Outline details of the trust. Now is the time to choose your beneficiary, the property and assets you want to bequeath, and who will act as the trustee.
Step 3. Hire an attorney. There are plenty of DIY trust services available online, but this generally isn’t the safest option to pursue. It’s best to hire a trust or estate attorney to help you create your trust. An attorney will be familiar with local laws and can create a declaration of trust, deed of trust, or trust instrument to properly formalize the trust details you choose.
Step 4. Fund the trust. After creating a trust, you need to fund it and can do so by taking your trust documents to your bank and opening a trust fund bank account with the same name of the trust. Then you can deposit a lump sum of money or can make multiple deposits over time.
Step 5. Register the trust fund. You need to register the trust fund with the IRS after forming it and you will be issued a taxpayer identification number (TIN) specially for the trust fund that you can use on tax returns and financial accounts, among other needs.
Not sure if a trust fund is right for you? Let’s chat about your options for gift giving and estate planning!