Why would I need a trust fund?

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

Elissa

By

Elissa Suh

Elissa Suh

Personal Finance Editor

Elissa Suh is a senior editor of estate planning at Policygenius in New York City. She has researched and written extensively about wills, trusts, and personal finance since 2019, with an eye towards making difficult (and at times gloomy) topics easy to understand for readers. Her articles and data stories has been cited by the likes of MarketWatch, CNBC, PBS, Inverse, The Philadelphia Inquirer, and more.

Published December 3, 2019|4 min read

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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 fund while you’re still alive as a way to distribute money to people right now.

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Key Takeaways

  • A trust fund is simply a 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 minimize taxes

Trust vs trust funds

A trust is a legal arrangement where one person manages money and assets for the benefit of another person. Many people create trusts to disburse assets or give money to heirs over the course of their lifetime.

So what exactly is a trust fund? 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. These assets are referred to as trust assets.

How to set up a trust fund

Setting 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 (who can be the same person as the grantor) to manage the trust. The grantor also usually names a successor trustee or two 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's 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.

With Policygenius, you can create both a will and a trust using attorney-approved tools.

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 set up your trust.

Revocable vs irrevocable trust funds

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. (The trust created by through Policygenius is a revocable living trust.)

All trust funds fall into either category. The difference between these two types of trust funds is significant. The IRS treats a revocable trust where the grantor is the only beneficiary during their life as if it doesn’t even exist. This means people who want a trust to minimize their taxes generally use an irrevocable trust. An irrevocable trust may also cause you to pay more in taxes, however, so it’s important to structure it correctly. A professional like an estate planning attorney can help you better understand and follow the IRS guidelines so that your irrevocable trust fund performs as desired.

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 of trusts, but here are some of the most common ones:

  • A charitable trust donates income to both a charitable organization and to beneficiaries. You can open a charitable remainder trust or a charitable lead trust.

  • A special needs trust preserves assets and disburses money to a person with disabilities.

  • A life insurance trust holds the proceeds of a life insurance policy.

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.

Learn more about probate court.

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 may help minimize the estate tax. However, because the tax exemption is set very high ($11.58 million for 2020 and $11.7 million in 2021), 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.