What is a Trust Fund

What is a Trust Fund? Get Complete Details About Trust Funds

As we all know life offers both uncertainty and certainty. Do you have any backup plans for such uncertainties? In the ride of shocks and surprises, secure the future of your family and future generations with the trust fund. Even your family and future families will always remember you for making their life more secure and protected. Many people have this misconception that trust funds are meant for Richie rich families and not for middle-class families. But the truth is that it is more useful to middle-class families than rich families, wonder how? Let’s unwrap the details about the trust fund in this post.

What is a Trust Fund

Source: adaptwealth.com.au

What is a Trust Fund?

A trust fund is a fund that controls or holds assets and properties on behalf of you for your family and future generations. The fund consists of property, cash, stocks, valuable assets or a mixture of some or all. The fund will be managed by a third person, who will act as a trustee and a beneficiary or beneficiaries will reap the benefits. We now hope that the trust fund definition is pretty clear to you.     

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To Understand it Better, Let Take an Example

There is a person named Mr. X, who has worked hard day and night to purchase a house. Now Mr. X wants to give the house to his grandchild baby Y, once baby Y attains a certain age. But here Mr. X doesn’t trust his children, so he shall opt trust fund. He opts for the service of Mr. Z, who acts as a mediator between the creator and beneficiary. When the time comes, Mr. Z will handover the house to Y.     

In the majority of trust, there is a clause called “spendthrift clause”. This clause prevents the beneficiary from spending the trust fund to pay his debts. This way, Mr. Y will still have a backup of a house or property even after debts.

The trustee acts as a legal holder of the fund, till the right time to pass it to the beneficiary come. Trust fund serves the purpose of safeguarding the future of loved ones from legal battle and along with that it provides tax benefits to the creator of the fund.

Parties Involved in the Trust Fund
  1. Grantor: Grantor is the one who creates a trust fund in the form of stock, business, property or cash. The grantor decides the terms and conditions as he donates the fund.
  2. Trustee: Trustee act as a mediator between the beneficiary and the benefactor. The trustee can be an individual or an institution like a bank, firm. His main role is to maintain the terms and conditions of the deal and handover the fund at the decided time. In some cases, the trustee is responsible for managing the asset or even choosing the qualified recipients.
  3. Beneficiary: The beneficiary is the one who reaps the benefit of a trust fund. Although the beneficiary is not the owner of the asset, he can manage the fund in such a way that he can reap benefits of it. Like in the above example, Y is not the owner, but he can avail of the benefit by staying in the house.   
Types of Trust Funds

There are different types of trust, but the most important trusts are discussed below

Revocable

Revocable also known as living trust as throughout the lifetime the grantor can change or modify the terms and conditions or can revoke the fund. This kind of trust helps in avoiding probate but after the death of the grantor, the current trust becomes irrevocable. Its flexibility and easy property distribution after the grantor’s death make it a favorable choice.

Irrevocable

As the name suggests, it is irrevocable in nature. Once it is made, no modification or revocation is entertained even at the request of the grantor himself. Its tax-efficient nature makes it a popular choice for transferring assets to the next generation. 

Discussed above were two important trust funds and other pool of funds includes funded or unfunded, Charitable Trust, Asset Protection Trust, Special needs trust. 

What is a Trust Fund

Source: moneycrashers.com

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Bottom Line

We hope the post has answered queries like what is a trust fund, types of trusts and other trust-related doubts. Let us know your views on the Trust fund in the comment section below. Your one-stop solution for all finance queries is the FinanceShed.