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When it comes to estate planning, one of the most important decisions you will make is what to do with your money and assets after you die. One option for preserving your wealth is setting up a trust fund. But what is the trust fund definition, exactly? How does it work? And what are the benefits? In this article, we will answer your questions about trust funds!
A trust fund is a legal arrangement that allows a third party, known as a trustee, to manage assets on behalf of a beneficiary or multiple beneficiaries. Trust funds can be set up to protect and grow assets, minimize taxes, and provide funds for future generations. It is an essential tool in estate planning and can ensure that the beneficiary’s financial needs are taken care of. But why?
Trust funds are essential for estate planning because they provide a secure way to transfer assets to beneficiaries without the burden of probate. Trust funds also help to minimize taxes, protect assets from creditors, and provide financial security for future generations. Additionally, trust funds can be customized to meet the beneficiary’s specific needs, making them an ideal choice for those who want to ensure their money is used for the intended purpose.
The main purpose of a trust is to preserve your wealth. When someone says they transferred assets to a trust, what they really mean is that they transferred “title” of the assets to the trustee, not full ownership. Therefore, the trustee holds the legal title of the asset for the benefit of the beneficiary. Still confused? It can be helpful to think of it like this…
There are three parties required to set up a trust fund:
Now you know the three key roles. So, generally, when someone thinks about “ownership” of an asset, they are thinking of both legal ownership (ownership of title) and beneficial ownership (ability to do what you want with the asset and ability to benefit from it). These things combined equal ownership in its highest form, also known as fee simple ownership.
“Fee simple” is a legal phrase that barely anyone uses outside of law school, but it’s helpful here as an example. If you have fee simple ownership of a car you hold the title of the car (legal ownership), you can put flame decals on the car because it pleases you (ability to do what you want with the asset), and when you sell the car you can do whatever you want with the proceeds (ability to benefit from the asset). And with a trust fund, it works the same way!
The first step is for the trustor (the person setting up the trust) to transfer assets to the trustee. The trustor must also decide how the trust fund will be managed and how the assets will be distributed. The trustee must then manage the trust according to the trustor’s instructions. This includes investing in the support, monitoring the trust’s performance, and distributing funds according to the trustor’s instructions.
Here are the three main types of trust you should consider before setting up a trust fund:
There are tons of different variations of these. So we covered an extensive list of all types of trust in our trust 101 guide.
A trust fund baby is someone whose family saved up money or assets in a trust fund with the purpose of providing for him or her in the future. This money can be used for things like education, healthcare, or housing, among other investments. However, sometimes, the family will set up specific rules for the trust fund baby (or beneficiary), on how the money should be used for.
Trust funds are versatile agreements. You can structure them as you want, as long as it’s not illegal or a violation of public policy. This flexibility makes trusts a valuable tool with many different uses. Maybe for tax planning, asset protection, privacy reasons, or to replace wills. It’s up to your goals what type of trust you choose and how you do it.
Access more of our glossary terms to know more!
We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder), and others. Valur makes it simple and seamless for our customers to utilize the tax-advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.