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.” Trusts that are legally established are generally referred to as trust funds. A trust fund is a legal entity that holds and manages assets on behalf of another individual or entity.

There are three key parties that comprise a trust fund - grantor (sets up a trust and populates it with their assets), beneficiary (person chosen to receive the trust fund assets), and trustee (charged with managing the assets in the trust).

The primary motivation to establish a trust 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. This is the key feature that differentiates trust funds from other estate planning tools. Generally, the grantor is creating 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 and income, 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.

There are numerous types of trust funds, but the most common are revocable and irrevocable trusts. Below is a quick overview of each trust fund.

• 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 give away control of the assets to the trust fund. Irrevocable trusts most often avoid probate.

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 trust funds.

Asset protection trust: created to protect a person's assets from claims of future creditors.

Blind trust: created so 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. This includes a Charitable Remainder Annuity Trust (CRAT) that pays a fixed amount each year. A Charitable Remainder Unitrust (CRUT) 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: can help to avoid gift taxes.

IRA trust: can help to minimize taxes on qualified assets held in the trust.

Land trust: allows the trust to manage property held in the trust.

Marital trust: funded at one spouse's death and is eligible for the unlimited marital deduction.

Medicaid trust: helps elderly individuals avoid tax and probate issues in regard to assets related to Medicaid matters and payments.

Qualified Personal Residence trust: moves a grantor’s residence out of the estate.

Qualified Terminable Interest Property trust: benefits a surviving spouse but allows the grantor to make decisions after surviving spouse’s passing. 

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.