What is a Trust Fund and Do You Need One?

Photo by Ronda Dorsey via Unsplash

What is a trust fund and do you need one? Maybe you’ve asked yourself this question. In this article, we’ll discuss everything you need to know, including how they work and why they can be helpful. We’ll also talk about the different types of trusts available, what might qualify as an asset for a trust, and more!

What is a trust?

A trust fund is a financial product that allows you to legally separate money from your estate. You can place the money in a trustee account and then have them manage it for you or any beneficiaries. This is why it’s important to leave instructions. For example, what specific investments to make or how much money should they withdraw from the account each month. The funds are usually not taxable until a beneficiary receives them.

A trust fund does not require any ongoing fees, but it does require legal paperwork for establishment and maintenance. This can vary by state.

What is a trustee?

A trustee is a person who is responsible for managing the trust. The trustee must follow the instructions of the trust document, and cannot benefit from it personally. They should be trustworthy and financially stable. The trustee should also be able to handle any potential conflicts of interest or complications that may arise. You can choose one or more trustees for your trust.

A trustee can be an individual or a company. These aren’t only just banks and financial institutions, although these usually offer trustee services.

What is a beneficiary of a trust?

A beneficiary is the person or organization who benefits from the trust. The beneficiary can be a child, grandchild, charity, parent or grandparent. It could also be a friend of yours.

The purpose of a trust is to ensure that there will be enough income for beneficiaries after their parents pass away. On top of that, it makes sure that there are no disputes among family members over inheritance matters. This is especially important when parents pass away unexpectedly before setting up any estate plans.

Trust fund for your children

It is very common for parents or guardians to set up trusts for their children. This way they provide them with access to the trust funds when they get older. The benefit of this type of fund is that it allows them to have access to your money. At the same time, it’s also protecting their inheritance from creditors or ex-spouses. This way you protect your children’s funds from people who might try to take it away from them after they inherit it.

There are a couple of ways that you can set up a child’s trust fund:

  • With a third party – A bank or other financial institution will oversee the money for your child until they reach adulthood (usually age 18). This way is more costly than doing it yourself. After all, you’ll pay fees for administration services and income taxes that the trust generates.

  • Directly – You could arrange everything yourself without using any outside sources such as banks or investment firms. However, doing so could put strain on you. You can often set up a trust for you children through your last will (testamentary trust).

Setting age restrictions

You can also set age restrictions for each fund. That’s especially useful if you’re really worried about your kids blowing through their inheritance too quickly. If you want to ensure they wait until age 35 before they start using the money, you can clarify that. Some people even set up two or three distribution ages.

Setting an upper limit on how much can be withdrawn from a trust fund at once is another option. This feature is especially useful for people with children who are addicted to drugs or alcohol. Or have other destructive habits that might make managing any extra cash difficult for them. This way the parent can help their child while also protecting them.

Benefits of a trust

There are some benefits to having a trust, but it’s important to note that these benefits will be different for everyone. It’s important to do your research before deciding on the right estate plan for you.

  • Trusts can help your children avoid probate. If you have minor children, they may not be able to access their inheritance while they’re still minors. They’ll need approval from someone in the role of managing trustee until they reach adulthood.

  • Trusts can help you plan for the future. In addition to this, they’re helping ensure that your assets are distributed according to your wishes. Trusts also allow you some flexibility when it comes time for distribution. For example, in case one child needs money sooner than others because of an emergency situation (like medical expenses).

  • Trusts often protect assets from creditors and lawsuits by keeping them separate from other sources of income. This protects individuals from losing all their hard-earned savings due to an unexpected lawsuit.

Limitations of a trust

A trust fund can be revoked by the person who made the trust at any time. In that case, the beneficiary will have no control over what happens to their inheritance. If you have a trust fund and want it to stay intact, you’ll need to appoint a trustee who can manage your funds on your behalf.

Trustees cannot use money from a trust for personal use. Although laws can be strict, you may have heard of mismanagement of a fund. Especially when a trustee is handling the estate on your children’s behalf. In this sense, if you choose the wrong trustee you may irreversibly jeopardize your children’s future.

So do I need a trust then?

There are many good reasons to establish a trust, but not all of them are necessary for everyone. Let’s say you have children, relatives and friends who may depend on the income from your estate after you die. Then creating a trust can help ensure that they will be fine.

If you have substantial assets in your estate then establishing a trust is wise because it allows those assets to remain out of probate. It’s also still ensuring that heirs get what a share while avoiding probate delays and expenses.

Finally, let’s look at the possibility that certain relatives or heir may contest assets in an estate. Establishing then a trust ensures that those assets won’t end up as collateral for such claims against creditors or certain heirs.

Final Thoughts

As you can see, having a trust fund is a good idea for many people. It helps keep your money safe by separating it from your personal accounts and assets. It also allows you to have more control over how your heirs will spend it. This protects them from irresponsible spending choices later in life, like buying a sports car instead of saving up for college!

Myend offers the perfect estate and end-of-life planning for all! Regardless of whether you need a will or a trust for your children, we have just the document for you. Have a look here to learn more. And if you’re ready for action, sign up today for your free account! The estate planning of the future is here today.

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Myend is not a law firm, it does not engage in the practice of law, and it does not render any official legal advice. Therefore, you are hereby advised to seek your own legal counsel regarding any legal issues. Myend’s articles are meant to be taken as suggestions and therefore Myend carries no responsibility for the user’s actions.