A trust fund is a legal entity designed to hold and manage assets on someone else's behalf. A popular way for families to pass on wealth and assets to their next generation, the trust fund can hold property or money on behalf of them. The person who ultimately receives the money or property is called the beneficiary.
The person creating a trust fund is called the grantor, or trust maker. Trust funds are often managed and entrusted to a neutral third-party (called a trustee) until the beneficiary inheriting the money or property turns of majority age (18) but in some states, the beneficiary would not be able to receive the full funds until he or she reaches the age of 21.
The grantor can choose the rules governing the trust fund and decide the type of assets the trust will own. Trust funds can hold various kinds of assets — from cash and investments to real estate or even artwork. Basically anything valuable and transferable can go in a trust fund.
But before one decides to create a trust fund, it is important to understand what the pros and cons of trust funds are.
Pros of trust funds
The grantor can designate exactly who should receive their wealth. The grantor can even choose to skip a generation; like all assets go directly to future grandchildren
Unlike a will, which leaves public records, trusts are more private
Although legally the beneficiary has access to the money or property at 18, the grantor can choose to raise the age limit if don’t think the beneficiary will be mature enough at such a young age
The grantor can explicitly specify how the assets can be used. For example, the money may only be withdrawn to pay for college tuition.
The trust fund can be set up to pay out at intervals instead of allowing the beneficiary to withdraw or spend it all at once
The grantor can designate a trust manager if the family has a history of Alzheimer’s or dementia if the beneficiary were to become incapable of handling the assets in a proper manner
Different types of trust funds come with their own tax benefits. For example, Grantor Retained Annuity Trust (GRAT) can be established to help to avoid gift taxes.
Cons of trust funds
Cost of creating a trust can be prohibitive for some families
Administering the trust fund may get more complicated than simply transferring assets to a beneficiary after death. Especially if a trustee may need to make regular checks to keep track of certain milestones.
Beneficiaries may encounter problems when borrowing against property due to additional complexities of loan structures
A trust in no way replaces a will. A will is the only way a senior can name an executor and legal guardians for their children.
Depending on type of trust fund, the structures can get complex
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