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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 organizations.

BREAKING DOWN 'Trust Fund'

A trust fund can contain cash, stocks, bonds, property or other types of financial assets. The trust fund recipient must typically wait until a certain age or until a specified event occurs, like graduating college, to receive 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 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. Most often used to transfer assets to children or grandchildren, the primary benefit of a living trust is that the assets avoid probate, which leads to fast asset distribution to the beneficiaries. Living trusts are not made public, meaning an estate is distributed with a high level of privacy.

A charitable remainder unitrust is a trust formed to pass assets to a specified charity at the expiration of the trust. A CRUT has two main benefits. First, the donor establishing the trust contributes assets and immediately receives charitable-contribution tax credits. Second, the assets in the trust pay a fixed-percentage of income to the beneficiary during the life of the trust. This type of trust is a great way to remove 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 trust's remaining assets 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 benefit of this type of trust is to provide income for the surviving spouse while guaranteeing the deceased spouse's children receive an inheritance.

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