You see it all the time in movies. A rich kid walks into a high end store and buys a 100K watch or purse using money from the trust fund that his or her parents have set up. But are trust funds only for the rich? Can normal people like us benefit from them? What do they even do? Let’s find out.
What is a Trust Fund?
A trust fund is a legal entity that can hold a wide range of assets. It is typically used to hold wealth for someone who is not old enough to manage his or her own finances. The people who manage and set up the particular trust fund write the rule book on how the money and assets in the trust can be used and distributed to the beneficiaries.
Formal definition of a trust fund: A trust fund establishes a legal entity to hold property or assets for a person or organization. A trustee is tasked with managing the assets of the trust fund. The trust can hold and invest in a wide range of assets including cash, property, stocks, bonds, and corporations.
Before we get too deep into it, there are a few terms that you’ll need to understand:
- Grantor: This is the person or people who sets up the trust.
- Trustee: This is the person or people who manage the trust. The Trustee can also be the Grantor.
- Beneficiary: This is who the assets go to.
Here’s an example of how a trust fund might be set up. Grandpa John just got his first granddaughter (Fiona). Grandpa John wants to make sure that Fiona has enough money for her wedding and education. He sets up a trust fund, and lists himself and Fiona’s dad (Luke) as the trustees. Fiona is listed as the beneficiary.
In this case, the Grantor is John. The Trustees are John and Luke. The Beneficiary is Fiona. The assets will be under Fiona’s name, but managed by John and Luke until the rules of the trust fund allows Fiona to access and control it.
The trust fund can be set up with simple or complex rules. In a simple case, Fiona might get control of all assets in the trust as soon as she turns 18.
In a more complex case, the trust might be set up such that Fiona only has access to 10% of the funds mandated to be used only for educational purposes until she completes a college degree – at which time the rest of the funds will be unlocked. You have a wide range of options when setting up a formal trust fund.
What is the Purpose of a Trust Fund?
One of the main reasons for creating a trust is to control who receives your assets, and what the assets get used for. As an example, you might want the trust fund to provide for your child’s education or their first home down payment – not an around-the-world vacation or a fast car.
Trust funds are most often created for passing on wealth to your children or grandchildren. The wealth transfer can happen as soon as they reach the age of majority depending on how you have set up the trust.
Another reason for setting up a trust fund is for tax efficiency as you may be able to split some of the tax obligations from the trustee and grantor to the beneficiary – who usually has less money.
How to Start a Trust Fund
We would usually bore you with a long checklist of items to go through to start a trust fund, but the only way to do it properly is to find a good lawyer. There are so many nuances with local laws and personal situations that this is really one of those instances where hiring a competent attorney will save you money in the long run.
If you want to start a trust fund, then start lining up some free consultations from lawyers in the field to find someone that you’re comfortable with.
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