What is a Trust Fund

According to author Cathy Pareto, a trust is “an agreement that describes how assets will be managed and held for the benefit of another person.”  All trusts are first created by a grantor (can also be called a trustor or settlor) that establishes a trust and is able to make changes, or move property or assets according to the agreements established. 

Trusts that are established are generally referred to as a trust fund.  Related terms include trust assets or trust estate.  The primary motivation to create such a fund is for an individual (or entity) to create a vehicle that sets terms for the way assets are to be held, gathered, or distributed in the future.  Generally, this individual is trying to set an arrangement that, for a variety of reasons, is carried out after he or she is no longer mentally competent, or alive. 

The creation of a trust fund establishes a relationship where an appointed fiduciary (or trustee) acts in the sole interest of the grantor.  A trust is created for a beneficiary who receives the benefits (such as assets, income, etc) 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 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.

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Trust Fund

General Types of Trust

There are nearly a limitless amount of trusts, but generally there are revocable and irrevocable trusts.  Below is a quick overview of each.

  • A living trust, also known as a revocable trust, lets a grantor better control assets during the grantor’s lifetime.  It is a type of trust in which a grantor places assets into a trust  that can then transfer to any number of designated beneficiaries after the grantor's death. Most often it 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.  While the grantor is still living (and not incapacitated), the trust details can be changed, or revoked. 
  • An irrevocable trust is very difficult to change, or revoke.  Because of this arrangement, there can be considerable tax benefits for the grantor to effectively giving away control of the assets to the trust fund.  Irrevocable trusts most often avoid probate.

More Specific Trusts

From here, a trust fund can contain a surprisingly complex array of options and specifications to suit the needs of a grantor.  As you can imagine, wealth and family arrangements can grow quite complicated when millions (or even billions) of dollars are at stake for multiple generations of a family or entity.  Below is an attempt at a laundry list of trust funds, with brief introductions to help you decide if further investigation is warranted.  Tax and trust attorneys specialize in the intricacies of each of these trusts.

  • Asset protection trust:  designed to protect a person's assets from claims of future creditors.
  • Blind trust:  created where the beneficiary is not aware of who holds power of attorney for the trust (generally the trustee).

Charitable trust:  created to  benefit a particular charity or the public in general.  Includes Charitable Remainder Annuity Trust  (CRAT) that pays a fixed amount each year.  A Charitable remainder unitrust is 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.

  • Generation skipping trust:  contains tax benefits when beneficiary is grantor’s grandchildren.
  • Grantor Retained Annuity Trust:  a GRAT can help avoid gift taxes.
  • IRA trust:  can help minimize taxes on qualified assets held in the trust.
  • Land trust:  lets the trust manage property held in the trust.
  • Marital trust:  funded at one spouse's death and is eligible for the unlimited marital deduction.
  • Qualified Personal Residence trust:  moves a grantor’s residence out of the estate.
  • Qualified Terminable Interest Property trust: QTIP trusts benefits a surviving spouse but let the grantor make decisions after surviving spouse’s passing. 
  • Medicaid trust:  helps elderly individuals avoid tax and probate issues in regard to assets related to Medicaid matters and payments.
  • Special needs trust:  created for a person who receives government benefits so as not to disqualify the beneficiary from such government benefits
  • Spendthrift trust:  beneficiary cannot sell, spend, or give away trust assets without specific stipulations.
  • Testamentary trust:  leaves assets to a beneficiary with specific instructions following the grantor’s passing.