Why would I need a trust fund?

This important part of estate planning isn't just for the wealthy.


Elissa Suh

Published December 3, 2019

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  • A trust fund is simply trust, which is a legal entity that can distribute money or assets to a beneficiary over a period of time

  • Some types of trust funds can provide a shield from creditors and taxes

Most people associate trust funds with ultra-wealthy people who have lots of property and belongings. However you don’t need to own a lot of assets to qualify to open a trust fund. Even if you have just a few valuable assets, or even one, like a house, a trust fund might be right for you. A trust is a secure and solid way to set aside money for your loved ones after you pass away. It’s an important part of an estate plan, whether you want to leave a legacy or simply have some control over your family’s future finances to ensure that they are comfortable. You can even set up a trust funds while you’re still alive as a way to distribute money to your loved ones.

In this article:

Trust vs trust funds

What exactly is a trust fund? A trust is a legal arrangement where money and assets are set aside for beneficiaries. Many people create trusts to disburse assets or give money to heirs over the course of their lifetime. A trust fund is generally synonymous with a trust. All trusts are funded — assets (money, real estate, and more) are retitled or transferred into the trust, which is a separate legal entity. These assets are referred to as trust assets.

Learn more about how a trust works.

How to set up a trust fund

To set up a trust fund is the same as setting up a trust.

The grantor or trustmaker names the beneficiaries to receive the assets and chooses a trustee to manage the trust. If you’re creating a trust you should also name a successor trustee to take over if the trustee is unable to perform their duties. A trust document contains all of this key information.

When you create a trust fund while you’re still alive, it is called a living trust. A trust fund that are created after you die, through instructions in your will, is called a testamentary trust.

With a trust, you can make rules and set stipulations as to how the money can be used. You might have the trust pay out periodically, like once a month or on certain milestones, like birthdays. You might specify that trust funds should only be used for a house or a car or for college tuition. This is one of the great advantages of a trust.

You can be as specific as you want about what happens to the trust funds. To ensure that all your desires and details are captured, you might consult with a lawyer, like an estate planning attorney, to help draft the terms of your trust document.

Revocable vs irrevocable

When setting up the trust find, you might also think about whether or not you want to be able to change it. Trusts that can be changed are revocable trusts and ones that can’t are irrevocable trusts. All trust funds fall into either category. The difference between these two types of trust funds is significant, since they hold different tax implications — irrevocable trusts can help minimize taxes, while revocable trust funds cannot. A professional like an estate planning attorney can help you better understand and follow the IRS guidelines so that your irrevocable trust fund is viewed as such by the IRS.

Learn more about revocable trusts and irrevocable trusts.

Other types of trusts

Trust funds can further be distinguished into different types. There are many kinds, but here are the some common ones:


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Benefits of a trust fund

In addition to providing income for your beneficiaries to live off of, here are some other reasons you might choose to open a trust fund:

Continuous control

As previously mentioned, a trust offers flexibility and many options. You can tailor it to meet your needs and the trust can continue to exist and distribute money to your heirs even after you pass away.

A revocable living trust, which you establish while you’re alive, doesn’t have to distribute any assets until after you pass away, if that’s what you want.

Avoid probate

The process of proving a will and distributing assets is called probate and it can take a long time, especially for larger estates. But the assets in a trust fund will bypass the probate court, since they are distributed separately.

Minimize taxes

Trust funds can offer some tax benefits for both the grantor and the beneficiary, depending on the type of trust. Although a trust fund can help you minimize taxes, the trust itself may have to pay taxes on its assets.

An irrevocable trust helps minimize the estate tax. However, because the tax exemption is set very high ($11.58 million for 2020), estate taxes are typically only a concern for the very wealthy.

An irrevocable trust may also help you avoid paying income tax, but only if it meets certain IRS guidelines. Check with a tax advisor or accountant to make sure. There are many types of taxes and a trust fund may still be useful in offering some benefits.

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