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A trust fund is a financial arrangement in which a trustee manages assets on behalf of a beneficiary or beneficiaries. It is typically used to protect assets and provide financial security for future generations. Trust funds are often established by wealthy individuals who wish to leave an inheritance for their children or grandchildren. Still, they can also be used for other purposes, such as supporting specific charitable causes or philanthropy.
Types of Trust Funds
There are several types of trust funds, each with its own unique set of advantages and drawbacks. The most common types of trust funds comprise:
- Irrevocable Trusts: Irrevocable trusts cannot be changed or canceled once established. They are usually used for tax planning, as assets in an irrevocable trust are exempt from estate taxes.
- Revocable Trusts: Revocable trusts are flexible and can be changed or canceled at any time by the grantor. They are often used to avoid probate and to provide for the grantor's care in the event of incapacity.
- Spendthrift Trusts: Spendthrift trusts are created to safeguard assets from creditors and heirs who may be financially reckless. The trustee is given discretion over when and how much money is allocated to the beneficiary.
- Charitable Trusts: Charitable trusts support a distinctive charitable cause or organization. They offer tax benefits for the grantor and can also provide a source of ongoing income for the charity.
How to Set Up a Trust Fund
Setting up a trust fund involves several steps that are as follows:
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Determine the Purpose and Goals of the Trust Fund
Before setting up a trust fund, it is essential to define the objective and goals of the trust. It comprises determining the trust heirs, the assets to be transferred into the trust, and the detailed instructions for managing and allocating those assets. Some common objectives for trust funds include:
- Safeguarding and preserving wealth for future generations
- Providing for the financial demands of kids, elderly family members, or other dependents
- Supporting charitable causes or organizations
- Handling assets for people who are unable to manage their affairs due to disability or inability
- Avoiding or minimizing estate taxes
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Pick a Trustee
The trustee is accountable for overseeing the assets in the trust and carrying out the instructions in the trust agreement. When selecting a trustee, picking someone trustworthy, competent, and capable of managing the assets following the trust's goals and purposes is important. Some common choices for trustees include:
- Financial advisors or attorneys
- Family members or friends
- Corporate trustees, such as banks or trust corporations
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Make a Trust Agreement
The trust agreement is a legal paper that summarizes the terms and conditions of the trust. It defines the objective and purposes of the trust, the heirs, the assets to be shared into the trust, and the instructions for handling and distributing those assets. The trust agreement should also define the powers and responsibilities of the trustee and any restrictions or limitations on those powers.
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Move Assets into the Trust
Once the trust contract has been made and signed, the assets to be moved into the trust must be recognized and transferred. It may comprise stocks, cash, real estate, or other property types. Additional legal or tax considerations may apply depending on the transferred asset type. Working with a lawyer or financial advisor is necessary to guarantee the transfer is done properly and according to applicable statutes and regulations.
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Oversee and Distribute Trust Assets
Once the assets have been moved into the trust, the trustee is liable for handling those assets and carrying out the instructions in the trust agreement. It may comprise investing the assets, distributing them to heirs, and managing tax obligations. The trustee should keep accurate records of all transactions and provide regular reports to the beneficiaries.
Advantages of Setting Up a Trust Fund
Trust funds offer several advantages, including:
- Asset Protection: Trust funds can protect assets from lawsuits, creditors, and other potential threats. It is especially necessary for high net-worth people who litigious parties may target.
- Tax Planning: Trust funds can be used for tax planning objectives, as assets in a trust are generally exempt from estate taxes.
- Avoiding Probate: Trust funds can help avoid probate, which can be lengthy and costly.
- Control Over Assets: Trust funds allow the grantor to retain control over assets even after they have been transferred to the trust.
Drawbacks of Trust Funds
Despite their advantages, trust funds also have some drawbacks, including:
- Expense: Establishing and maintaining a trust fund can be expensive, particularly for complex trusts that require professional management.
- Lack of Flexibility: Irrevocable trusts are inflexible and cannot be changed once established. It can be problematic if circumstances change and the grantor wishes to modify the trust.
- Loss of Control: The grantor loses control once assets are transferred to a trust. It can be a challenging decision for some individuals to make.
Key Terms for Trust Funds
- Beneficiary: The individual or group who will eventually receive the benefits of the trust fund, such as the income it generates or the assets it holds.
- Principal: The initial money or assets placed into the trust fund.
- Income: The money generated by the assets in the trust fund, such as dividends or interest.
- Trust Instrument: The legal document establishes the trust fund and outlines its terms and conditions.
- Irrevocable Trust: A trust fund that the settlor cannot change or revoke once established.
- Revocable Trust: A trust fund that can be changed or revoked by the settlor at any time.
Final Thoughts on Trust Funds
Trust funds can be useful for people who wish to safeguard their assets and provide financial protection for future generations. Nevertheless, they are inappropriate for everyone and require careful consideration before establishing them. Thus, working with a qualified professional is necessary to ensure that a trust fund is right for your situation.
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Lauren W.
Accident and injury attorney. Prior to going to law school I was a paralegal for 12+ years primarily in personal injury. I also worked for a local school district as the Risk Manager and a Buyer in Procurement where I facilitated solicitations and managed all the contracts for the district.
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Creative, results driven business & technology executive with 24 years of experience (15+ as a business/corporate lawyer). A problem solver with a passion for business, technology, and law. I bring a thorough understanding of the intersection of the law and business needs to any endeavor, having founded multiple startups myself with successful exits. I provide professional business and legal consulting. Throughout my career I've represented a number large corporations (including some of the top Fortune 500 companies) but the vast majority of my clients these days are startups and small businesses. Having represented hundreds of successful crowdfunded startups, I'm one of the most well known attorneys for startups seeking CF funds. I hold a Juris Doctor degree with a focus on Business/Corporate Law, a Master of Business Administration degree in Entrepreneurship, A Master of Education degree and dual Bachelor of Science degrees. I look forward to working with any parties that have a need for my skill sets.
Max N.
Oklahoma attorney focused on real estate transactions, quiet title lawsuits, estate planning, probates, business formations, and all contract matters.
Roman V.
I'm an experienced trademark attorney and enjoy helping clients protect and grow their brand names through trademark registration and enforcement. I've worked with a wide variety of clients in different industries, including e-commerce, software as a service (SaaS), and consumer goods, to register trademarks for product names, logos, and slogans, both in the US and abroad.
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Drew is an entrepreneurial business attorney with over twenty years of corporate, compliance and litigation experience. Drew currently has his own firm where he focuses on providing outsourced general counsel and compliance services (including mergers & acquisitions, collections, capital raising, real estate, business litigation, commercial contracts and employment matters). Drew has deep experience counseling clients in healthcare, medical device, pharmaceuticals, information technology, manufacturing, and services.
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Daniel R.
Daniel is an experienced corporate attorney and works closely with corporations, privately held companies, high-net worth individuals, family offices, start-ups and entrepreneurs. Daniel graduated from the Gonzaga University School of Law and is licensed to practice law in Illinois.
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