What Is a Trust Fund?

What Is a Trust Fund?

A trust fund holds property and other assets for the benefit of a person, group of people or organization. A trust fund might be set up to provide regular income or periodic distributions to grandchildren, or to pass along assets to heirs.

Trust funds are commonly used in estate planning to protect assets from creditors, avoid taxes and probate, and ensure that a person's wishes surrounding the distribution of assets are carried out as intended.

How Does a Trust Fund Work?

A trust fund begins with a legal document, the trust, that spells out terms and identifies three key parties:

• The grantor sets up the trust fund and places their assets in it. The grantor also creates the rules that govern how the fund's assets are managed, accumulated and distributed.
• Trustees manage the trust fund and carry out the trust's directives. A trustee may be the trust fund's grantor, a friend or family member, or a third party, such as an attorney, trust company or the trust department of a bank or credit union. Trustees have a fiduciary duty to the beneficiaries of the trust, which means they must act in the beneficiaries' best interests within the terms set by the grantor.
• The beneficiary (or beneficiaries) can be an individual, a group of people or an organization—for example, your child, your surviving siblings or your church. The grantor designs the trust for their benefit.

What Is the Purpose of a Trust Fund?

Trust funds may be established for different purposes:

• Provide income for beneficiaries; for example, a special needs child
• Distribute assets after the grantor's death
• Provide support and pay expenses if the grantor is incapacitated
• Contribute to charity

Trust funds may hold different types of assets, including investment accounts, businesses, real property or bank accounts.

Grantors decide when and how beneficiaries receive assets. For instance, they may choose to pay the beneficiary a set amount annually or provide a lump-sum payment when they reach a certain age. The grantor may also specify how the funds can be used, such as for college expenses or a home down payment.

The grantor may even prohibit certain uses of the trust fund assets. A common provision is the spendthrift clause, which prevents the trustee from distributing money to the beneficiary to pay off debts.

A trust fund may also provide some protection for the assets within the trust. The property in the trust typically doesn't go through the costly and time-consuming probate process. Also, depending on the type of trust you set up, the assets you place in your trust may be protected from your creditors.

Learn more >> How Living Trusts Can Safeguard Your Assets

How to Set Up a Trust Fund

To set up a trust fund, you'll make some key decisions about the type of trust, trustees and beneficiaries you want, then prepare trust documents and fund the trust. Working with an estate planning or trust attorney can be invaluable here. Although it's possible to set up a simple living trust with the help of a guidebook or dedicated software, an attorney can help you decide which type of trust works best for you, create trust documents that fit your needs and walk you through the process of moving assets into it.

To get started, answer these questions:

• What is the purpose of your trust? You may want to provide for a beneficiary, avoid probate, minimize taxes, protect your assets or donate to charity.
• Who are your beneficiaries? Depending on the type of trust, your beneficiaries may be your heirs or an organization such as a favorite charity.
• Who will be the trustee? In some cases, you can serve as trustee yourself; in others, you may want to appoint a close friend, family member or advisor to manage your trust, or to step in as a successor trustee in the event of death or incapacity. An attorney, trust company or the trust department of your bank or credit union may be able to serve as a trustee or co-trustee as well.

Use your answers to prepare trust documents, which typically need to be signed and notarized. Once your trust documents are completed, you'll move ownership of your key assets to the trust. Because this process can be complicated, working with an attorney can be key. A qualified attorney can answer your questions, make sure your trust meets legal requirements and guide you through the transfer of assets.

Types of Trust Funds

There are many types of trusts, each designed to meet a different set of needs. Although this is far from a comprehensive list, here are some commonly used types of trusts.

• Revocable trust: This type of trust allows the grantor to continue to control the assets during their lifetime. It's also often called a living trust, and the grantor can make changes to or revoke the trust at will.
• Irrevocable trust: Once assets are placed in an irrevocable trust, the grantor no longer has control over them, and it can be difficult to make changes or revoke the trust. Because the grantor no longer owns the assets personally, they are protected from the grantor's creditors.
• Blind trust: In a blind trust, neither the grantor nor the beneficiary sees what assets are held in the trust. Blind trusts are often created to help politicians, corporate leaders or other major public figures avoid the appearance of conflicts of interest.
• Charitable remainder trust: A charitable remainder trust is an irrevocable trust that pays income to a beneficiary for a limited term or for life, then donates the remaining assets to one or more designated charities.
• Special needs trust: Families may set up a special needs trust for a family member who is eligible for government disability benefits. A special needs trust provides for an individual with special needs but doesn't disqualify them from receiving Supplemental Security Income (SSI).
• Generation-skipping trust: With a generation-skipping trust, assets pass directly to the grantor's grandchildren. Skipping a generation helps bypass estate taxes that might apply if assets passed to the grantor's children.

Learn more >> A Guide to the Different Types of Trust Funds

Revocable vs. Irrevocable Trust Funds

Choosing between revocable and irrevocable trust funds can be confusing. Both types allow you to pass assets to your heirs privately without going through the probate process, but they differ in their structures and the benefits they provide. Here's a quick comparison between revocable versus irrevocable trusts.

Revocable Living Trusts

A revocable living trust is easier to modify than an irrevocable trust. With a revocable trust, the grantor can amend the terms of the trust at any time and manage the trust fund as its trustee. A revocable living trust may offer more flexibility by allowing the grantor to:

• Name a different (or additional) trustee
• Change beneficiaries
• Pull assets out of the trust

Irrevocable Trusts

Irrevocable trusts aren't as easily amended as revocable trusts. In an irrevocable trust, the grantor relinquishes ownership of any assets they place in the trust. A grantor may name themselves the trustee of an irrevocable trust, but it's generally not recommended (largely for tax reasons). Because the assets in an irrevocable trust no longer belong to the grantor, they may have additional protections.

• Assets in an irrevocable trust may be protected from creditors.
• Trust fund assets may pass to heirs without being counted toward the federal estate tax exclusion ($13.61 million in 2024), or taxed under the federal estate tax if the exclusion is exceeded. Similar benefits may apply to state and local estate taxes.
• Holding assets in an irrevocable trust may help you qualify for certain wealth-qualified government benefits, such as Medicaid.

Which is better, a revocable trust or irrevocable trust? An estate or trust attorney can help you decide based on your individual needs and concerns.

5 Benefits of Trust Funds

There are many reasons to set up a trust fund, and you don't have to pick just one. Among the many benefits of establishing a trust, here are five to consider.

1. Avoiding Probate

When you die, your will goes through a probate process in court and becomes a public document for anyone to view. Court costs can add up, and a typical probate may take months to complete. A trust allows your plans to remain private and helps you avoid probate altogether.

2. Minimizing Taxes

In addition to federal estate taxes, state or local jurisdictions may also impose some form of inheritance or estate tax. An irrevocable trust can protect certain assets from these taxes. Note, however, that income and capital gains from a trust fund may be taxable. Grantors may want to consult with a tax advisor for more information.

3. Controlling the Distribution of Assets

As grantor of a trust, you can stipulate exactly how the assets in the trust should be managed, accumulated and distributed.

4. Protecting Assets From Creditors

In some cases, transferring ownership of your assets into an irrevocable trust may help to protect them from creditors. This may be helpful to preserve the amount you're able to pass down to your heirs if, for example, you leave debt after you die or if you declare bankruptcy after you've created the trust.

Learn more >> What Happens to Debt When You Die?

5. Helping a Family Member Manage Finances

A trust can provide a framework for offering needed financial help and guidance for a family member or friend. Setting up a trust for the benefit of a child or grandchild, or stepping in as a successor trustee when an aging loved one becomes incapacitated, are two meaningful ways trusts can help.

The Bottom Line

Not everyone needs a trust fund. But if you're concerned about distributing assets to your loved ones—while you're alive or after you've passed—a trust fund may help ease the process, minimize taxes and other expenses, and provide some protection against creditors. If you want to learn more but aren't sure where to start, consider finding a local estate planner or trust attorney to answer your questions and suggest a trust that will suit your individual needs.