What is a Trust Fund?

Published by Thomas Herold in Banking, Investments, Retirement

'Trust Fund' is explained in detail and with examples in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A trust fund proves to be a specific kind of legal entity. It contains property or cash which it holds to benefit another group, individual, or organization. Numerous different kinds of trusts exist. They are governed by almost as many provisions that determine how they work. Every trust fund involves three critical parties. These are the grantor, the beneficiary, and the trustee.

A grantor is the individual responsible for creating the trust fund. Grantors can do this with a variety of assets. They might give stocks, bonds, cash, mutual funds, real estate, private businesses, art, or other items of value to the fund. They also determine the terms by which the trustee will manage the fund.

Beneficiaries are the individuals who receive the benefit of the fund. The grantor sets it up on their behalf. The assets the grantor places inside of the trust fund are not the property of the beneficiary. The trustee oversees them so that the financial gain benefits this individual according to the rules laid out by the grantor at the time he or she establishes it.

Trustees are the managers of these funds. They could be an institution like a the trust department of a bank, an individual, or a number of trusted advisors. Their job is to make sure that the fund fulfills its duties spelled out by the governing law in the trust documents. Trustees typically receive small management fees. The trustee could manage the assets directly if the trust specifies this. In other cases, trustees have to pick out investment advisors who are qualified to manage money.

Trust funds come to life under the rules of the state legislature where the trust originates. Different states offer advantages to certain types of trusts. This depends on what the grantor wants to do by establishing the fund. This is why attorneys help to draft the trust documents to make sure they are correct and most advantageous. As an example, there are states which allow perpetual trusts that can continue forever. Other states make these illegal because they do now want to enfranchise a class of future generations who receive substantial wealth for which they did not work.

Special clauses may be inserted into these trusts. Among the most heavily used is the spendthrift provision. This keeps the beneficiary from accessing the fund assets to pay debts. It also allows parents to ensure that any irresponsible children they have do not find themselves destitute or homeless despite poor decisions they may make.

Trust funds provide a large number of benefits. They receive special protection from creditors. They ensure that family members follow wills after the grantor passes away. These trusts also help estates to avoid as many estate taxes as possible so that wealth can reach a greater number of generations.

Trusts can be an ideal way to ensure the continuity of a business. Sometimes business owners wish to protect a company and their employees after they die. They might still wish for the profits to benefit their heirs. In this case, the trustee would oversee the management of the business while the heirs reaped the financial rewards but could not break up or ruin the company through mismanagement.

Trusts can also be used with life insurance to transfer significant amounts of money which will benefit the heirs. A small trust could purchase a grantor life insurance. When the grantor dies, the insurance money funds the trust. The trustee will then buy investments and give the rents, interest, and dividends to the beneficiaries.

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The term 'Trust Fund' is included in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.