Trust funds are a great way to build an asset for your future generation. A grandfather who wants to leave a good amount for his grandchild to help her complete her higher studies can build a trust fund. But, not only him, anyone who wants to help his/her children have a stable and worriless future can establish a trust fund. People have a misconception that trust funds are only for rich people as a way to pass on their wealth to family, friends, or charities after they die. Yes, some part of it is true. But, not entirely.
Trust funds are formed to allow a person’s money to be used effectively even after his or her death. A person with a nominal income can also start a trust fund. Today we shall share with you what a trust fund is and how you can establish one without earning big.
What is a Trust Fund?
A Trust is a legally formed entity that holds the property or asset of the person who has established the trust. If you establish one, you will be referred to as the Grantor, Donor or Settler. A trust can also hold property and wealth of another group or organization and not necessarily only of a person. There are several types of trust funds and more types of trust fund provisions that operate differently from each other.
How do Trust Funds work?
Basically, a trust fund is managed by three primary individuals, namely The Grantor, The Trustee, and The Beneficiary.
The Grantor: The property owner who decides to donate his property will be the Grantor. A property can be anything, including cash, stocks, bonds, jewelry, private business, art, land, building, mutual fund, farm or anything that has appreciating value. The Grantor will determine the terms of management of the trust fund.
The Trustee: A trustee can be a single individual, a group of advisors or an entire institution. The trustee will be responsible for regulating the trust fund in the right direction, such as maintaining its duties conforming to the trust laws and policies. If an entire institution is granted as a trustee, then the institution can appoint one of its reliable staffs to the responsibility. Most often, an institution in the form of a bank is granted as a trustee.
The Beneficiary: The beneficiary is the individual for whom the trust fund was established. The assets or properties in the trust may not belong to the beneficiary, but they are managed in such a way that it will benefit him or her throughout his life. The rules and regulations of how it will benefit the beneficiary are laid out by the grantor during the formation of the trust fund.
Structure of Trust Funds
Trust funds are structured in different ways, depending upon the state’s legislature of the state the grantor lives in. For instance, certain states have more advantages over the others. The grantor’s vision and goals will also be an essential factor for structuring the fund. It is very important that you take legal advice when drafting the documents.
During this period, as a grantor, make sure you insert this particular provision into the trust fund, which is popularly known as ‘Spendthrift Clause’. The Spendthrift Clause ensures that the beneficiary cannot pledge the assets of the trust to pay his or her debts. The clause will also ensure that the beneficiary does not become penniless after he or she incurs a large debt due to unforeseen reasons, such as gambling, business loss, lawsuit etc. It is especially useful for children who are very irresponsible. The clause will give some peace of mind to parents of such kids, regardless of how successful or unsuccessful they become in their lives.
Advantages of Trust Funds
- A trust fund with an independent third-party trustee can help you safeguard your assets and wealth if you are not able to trust your family members. For example, if you want your children from your first marriage to inherit a part of your property after you pass away.
- You will get a significant tax advantage using trust funds. You can actually save thousands of dollars from taxes, especially if you run a charitable trust fund.
- It can maximize estate tax bypasses.
- Educational trust fund could be a great source for start-up capital for grandchildren once their educational expenses are paid by the trust. The balance principal can be distributed as per rules by the grantor.
- Trust funds can protect assets, a and family business that can help your trusted employees in the future.
- Trust funds can help you transfer a large amount of money by forming smaller trusts. For instance, the trust funds can be used to buy a life insurance policy on the grantor and when the grantor passes away or when the term finishes, the insurance proceeds can be invested that generate interest, and rents.
All in all, if you worry about your children’s future, and want to use your assets to help them for years to come, invest in a trust fund today. It could be the most selfless act you can do in your life. And, we encourage that you should if you are financially capable.
Tips for Establishing a Trust Fund
We have outlined the reasons for and benefits of starting a trust fund. But, before you put a stamp on the decision, look at these following tips:
1. Work with an Attorney:
Trusts are highly regulated and are legal and financial structures. The norms, rules, and regulations to establish one vary from state to state. So, if you are totally clueless, then you should definitely consider hiring an attorney who is proficient in trust issues and is familiar with the local laws.
2. Work On the Flexibility of the Trust Fund
A grantor can mention in his Will to establish trust after his death. If a trust is created after the grantor’s death, it is always irrevocable, which means it cannot be changed. However, if the grantor himself establishes the trust or is alive when the trust is formed, it can be set into revocable or irrevocable status. Revocable trusts bring flexibility. However, you may have to look up the tax benefits and laws. Again, a lawyer may give you the best insights into it.
3. Do Not Leave the Investment Decisions to the Trustee
It is going to be your trust fund, so it should run according to your wish. You as a grantor have all the power to spell out how the assets should be invested. You have to exercise all rights. For instance, you may wish for a steady and conservative investment but your trustee may have a different vision and put your money on high-risk investments.
4. Determine When and How Will You Disperse Money to Your Child or Beneficiary
You can direct the trust to disperse some money to the beneficiary before they reach the legal age to enjoy the complete benefits of the trust. You can provide an annual income to the child, even as a minor, either directly or through the custodian if the child is too young to understand money (Section 2503(b) Trust).
Or the trust can use up all the incomes and principals from the trust for the beneficiary and once the beneficiary reaches the age, he must be given the remaining funds and he will decide if he wishes to continue the trust or close it.
5. Include Trustee Removal Clause
If your trustee doesn’t perform well or the service he provides is unsatisfactory, you can include the Trustee Removal Clause that lets the beneficiary to remove or replace the trustee once he comes of age. However, you can specify a good bank trust department or someone reliable to appoint a new trustee from their facility to protect the beneficiary from committing mistakes. A family member or friend can also take the place of the trustee.
6. Avoid Scams and Frauds
Sometimes trusts can be big scams. So be aware of high-pressure and high sales pitches, and local probate laws. Again, if you are going through with your attorney, then you should be on the safer side. Forming a trust can be complex, involving many steps. You have to ensure the paperwork is legal and the transferring of assets into trust conforms to legal laws. If it is not properly done, everything may become null and void.
7. Consider a Special Needs Trust
A Special Needs Trust is a Supplement Care Trust that lets you provide savings to your beneficiary apart from other benefits from the trust, so as to not jeopardize her ability to receive government benefits.
How to Establish a Trust Fund
Step 1: Collect the basic details, such as why are you creating a new legal structure in the form of a trust fund? Who will be the grantor, the trustee, and the beneficiary? What are the assets that will be transferred? How will the assets be managed, invested, treated, and distributed? How long the trust would run and will the trust be revocable or irrevocable?
Step 2: Hire an attorney to do the legal works. Since trust fund law differs from state to state, you need someone who specializes in the regional laws. Let the attorney create the declaration of the trust or the entire legal document that codifies the elements discussed in step 1 on behalf of you. Based on the number of beneficiaries, the assets involved, and the size of the trust, the document can be simple and short or long and complex. When the paperwork is done, make your trust declaration, sign the instrument, and put it to effect.
Step 3: Register the trust with the IRS. Since trusts are legal entities, it will need to obtain their own Tax Identification Number or TIN. TIN is similar to EIN in business and SSN for individuals. The TIN will allow the trust to file its own tax returns, open bank account, brokerage firm account, and other legal operations a trust handles every day. Just like EIN, you can apply for TIN in your state’s IRS website by downloading the SS4 form.
Step 4: Allocate the assets or trust the wealth to the trust fund, once you have obtained your TIN. You have to retitle the assets you want to transfer in the name of the trustee. For transferring shares you need to change the stock certificate title listed in the corporation’s registration records from your name to the trustee’s name. For real estate transfer, you need to go to the recorder of deeds and for transferring cash, you will need to open a bank account or a brokerage account and make a deposit. The steps can be complicated and we repeat again, you definitely should get the help of your attorney and if possible, other experts related to trust funds before you transfer any property.
Step 5: Administer the trust and related accounting work. That should be your final step. You need to set up the administration of the trust, such as keeping all records and transactions, documenting all operational activities etc. just like how you will administer your business. And, as you grow older, you will have to start looking for people to whom you can turn over the responsibilities, such as accounting, finance, management, investment etc. Many financial firms offer these services in the form of packages. You could use the privilege and hire experts to do the administrative work or recruit your own professionals.
If you do not wish to establish a trust fund yourself, yet like to do something for your future generation, write a Will. A Will would not cost you much and you would not have to deal with all the legalities and formalities either. However, on the downside, your property will be subject to more taxes and the will terms can be easily contested in the probate process. Moreover, how your assets are managed and controlled will not be up to you. So, although it is simple and easy, it may put your property as well as your beneficiary through several challenges.
So, this was all you needed to know about trust funds, and how they are formed. If you have any doubts, do raise them in comments below. We shall get back to you with a suitable solution.