A trust fund is an estate planning tool used to hold assets or property for a beneficiary or beneficiaries. A grantor establishes a trust, and a trustee is in charge of its administration. Trust documents describe the assets in the trust, including bank accounts, property, stocks, businesses, heirlooms, and money, and the conditions under which they will be distributed to the beneficiaries. The grantor writes the trust documents, and the trustee has a fiduciary responsibility to follow these instructions. The grantor and the trustee can be the same person until the grantor dies.

What are the potential benefits of a trust fund?

Talk to your estate attorney about the wide variety of trusts that are available. Grantors can use trusts to protect their assets and ensure that they are distributed according to their plans. Grantors can structure trusts to ensure that ex-spouses of beneficiaries are not entitled to receive trust assets.

Trusts can be used to financially protect minor children and beneficiaries who lack the skills to manage their assets. A grantor can stipulate how trust funds will be disbursed to a beneficiary. Conditions such as reaching a certain age or attaining a milestone, such as graduation, can trigger a disbursement of funds.

Some types of trusts, called irrevocable trusts, can protect grantors’ assets from future potential creditors. Unlike a revocable trust in which a grantor retains control of the trust, with an irrevocable trust, the grantor creates the trust, funds it, and no longer has control over it.

Probate is an expensive and public process. Trusts avoid the need to go through the probate process and, therefore, enhance privacy. Assets are distributed to designated beneficiaries after the grantor’s death.

One of the primary benefits of a trust is that it avoids high estate or gift taxes. Some trust funds can reduce the amount of inheritance and gift taxes a grantor pays. Transferring assets to a trust reduces the size of a grantor’s estate and subsequent taxes. Trust funds are distributed to beneficiaries after these taxes are paid.

What is a living trust?

A grantor creates a living trust, also known as an inter vivos trust, while they are still alive. The grantor transfers assets from their estate to the trust. The trust now legally owns these assets, and the trustee manages them. Unlike with an irrevocable trust, the grantor retains control over the trust and the assets as long as they are alive and as long as they name themselves the trustee. A successor trustee will assume trust management responsibility after the grantor’s death.

After the grantor dies, a living trust becomes an irrevocable trust. Once this change occurs, the trust documents cannot be modified. This means that the trustee must follow the trust instructions as they were written before the grantor died.

Most trusts exist for up to a year after the grantor dies, but they can last up to 21 years. Trusts can last longer if you have a minor child as a beneficiary or a loved one with special needs that you want to continue supporting throughout their lifetime.

Trust funds usually incur annual management fees. Even if you have a beneficiary who acts as a trustee, you may pay them to manage the trust. If trust assets earn income, they are subject to federal income tax. Finally, the longer a trust is in existence, the more potential problems that could develop if beneficiaries do not agree with how a trustee manages the trust.

What are the biggest mistakes parents make when setting up a trust fund?

Parents establish a trust fund to provide for their children and other beneficiaries. However, there are some common mistakes parents can make when setting up a trust fund, including:

• Failing to define the purpose of the trust. Many types of trusts exist, so it is important to understand the benefits and drawbacks of each kind of trust and how they can help you meet your estate planning goals.
• Failing to fund the trust. Assets must be funded or transferred to the trust. Failing to title assets correctly, such as a home, or provide accounts to fund a trust consistently, may defeat the trust goals over time.
• Choosing the wrong trustee. While it seems to make sense to choose a family member to act as a trustee, it does create a conflict of interest. The trustee has a fiduciary responsibility to follow the trust instructions but may knowingly or unknowingly distribute a grantor’s assets in a way that benefits some beneficiaries over others.
• Neglecting to update the trust documents. Deaths, births, and marriages can change a grantor’s financial goals over their lifetime. Grantors should regularly review their trust documents and update them as needed.

Trusts can be complicated to create and may require detailed documentation. Work with an estate planning attorney to develop a personalized and comprehensive estate plan.

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