Trust Fund

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What is a 'Trust Fund'

A trust fund is a fund comprised of a variety of assets intended to provide benefits to an individual or organization. A grantor establishes a trust fund to provide financial security to an individual, most often a child or grandchild, or organizations, such as a charity or other nonprofit organization.

BREAKING DOWN 'Trust Fund'

A trust fund contains cash, stocks, bonds, property or other types of financial products. The recipient of a trust fund must typically wait until a certain age, or until a specified event occurs, to receive a yearly income from the fund. Prior to this, a single trustee, or a group of trustees, manages the fund in a manner appropriate to the trust fund's specifications. This usually includes some allowance for living expenses and perhaps educational expenses, such as private school or college.

Example Types of Trust Funds

While not a comprehensive list of the many different types of trust funds, below are three very common types of trust accounts and their main benefits.

A living trust, also known as a revocable trust, is a type of trust in which an individual places assets during his lifetime, which then transfers to any number of designated beneficiaries after the individual's death. The primary benefit of living trusts is that the assets avoid probate, which leads to extremely fast distribution of the assets to the beneficiaries. Living trusts are not made public, meaning an estate is distributed with a high level of privacy.

A charitable remainder unitrust (CRUT) is a trust formed to pass assets to a specified charity at the expiration of the trust. This type of trust has two main benefits. First, the donor establishing the trust contributes assets and immediately receives charitable contribution tax credit. Second, the assets in the trust pay a fixed-percentage amount of income to a beneficiary during the life of the trust. This type of trust is a great way to remove very low-basis stock from one's portfolio. For example, assume a person setting up the trust has $500,000 of stock that he wants to contribute to a CRUT, and he decides on a 5% lifetime CRUT. This means that during the person's lifetime, the donor receives $25,000 per year as income, and upon death, the total assets of the trust are donated to the selected charity.

A marital trust gets funded at one spouse's death and is eligible for the unlimited marital deduction. The main benefits of this type of trust are to provide income for the surviving spouse while guaranteeing that the deceased spouse's children receive an inheritance.