A trust fund is an estate planning tool that holds assets for a beneficiary, typically paying them an income for many years. Depending on how it’s set up, a trust fund can help shield those assets from estate taxes and probate when you pass away.
What is a trust fund and is it different from a trust?
The terms trust fund and trust are often used interchangeably. However, there is a slight difference. A trust is a broader term that refers to any arrangement in which one party holds property for the benefit of another. A trust can take many forms and have different purposes, such as estate planning, asset protection, tax planning, charitable giving, or special-needs planning. A trust fund, on the other hand, usually refers to a type of trust that is created to provide financial support to a beneficiary over a long period of time. This article will cover some of the basics of trust funds. For more information about trusts in general and how to create one, read what is a trust?
How does a trust fund work?
A trust fund works by separating the legal ownership and the beneficial ownership of the assets held within. Those assets can be a wide range of options, including bank accounts, investments, real estate, business interests, retirement accounts, and even things like intellectual property. The grantor is the person who creates the trust and puts assets into it. The trustee of the trust fund oversees how it is followed and is the legal owner of the assets. The beneficiaries are the beneficial owners and receive the income or assets from the trust fund. The trustee has a fiduciary duty to act in the best interest of the beneficiary and follow the instructions of the grantor.
Who controls a trust fund?
That depends on whether it is an irrevocable or revocable trust. When a revocable trust is set up, the person who created the trust (the grantor) can change anything in the agreement if they want to. If the trust is irrevocable, they cannot change anything without first getting consent from the beneficiaries.
How does a trust fund pay out?
How the trust operates, including disbursem*nts (or payments), is defined in the trust agreement, a document that is created when the trust is set up. There is a near infinite number of ways a trust fund can pay out. This is a key benefit of trusts: the grantor has greater control over how the assets are distributed when compared with a will. For example, the grantor can decide:
- When the beneficiary receives the payments, such as at a certain age, upon a certain event, or periodically.
- How much the beneficiary receives, such as a fixed amount, a percentage, or the entire balance.
- What the beneficiary can use the payments for, such as education, health care, or living expenses.
Average trust fund amount
Many think that trust funds are only for the very wealthy, but trust funds can vary widely in size and complexity. While some may hold millions of dollars, based on data from the Federal Reserve, the median size of a trust fund is around $285,000.1 That’s certainly not “set for life” money, but it can play a large role in helping families of all means transfer and protect wealth. There is no minimum for a trust fund, but since there are both monetary and time costs to setting one up, the benefits should outweigh those costs before you start.
Related: At what net worth do I need a trust?
Paying taxes on a trust fund
One of the main benefits of a trust is the opportunity to limit your tax liability in estate planning. Since different types of trust funds vary as to how tax law applies to them, we can’t go into the details here. Your best option is to talk to a tax or estate planning professionalto discuss your particular needs and options.
Starting a trust fund
A trust fund is created when the trust document is notarized, and assets are put into it. In order to create one, you’ll need to designate a trustee, choose your beneficiaries, and create asset-distribution instructions. To be safe, it’s advisable to rely on the help of a legal or estate planning professional to ensure the trust fund is set up correctly. Laws may differ depending on the type of trust and which state you reside in, and it’s important to get it right. Learn more about the steps of setting up a trust.
1“Survey of Consumer Finances (SCF),” U.S. Federal Reserve, Nov 2023.
This article is for your general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
FAQs
A trust fund is a legal entity that holds property or assets on behalf of another person, group, or organization. It is an estate planning tool that keeps your assets in a trust managed by a neutral third party or trustee. A trust fund can include money, property, stock, a business, or a combination of these.
How much money is usually in a trust fund? ›
While some may hold millions of dollars, based on data from the Federal Reserve, the median size of a trust fund is around $285,000. That's certainly not “set for life” money, but it can play a large role in helping families of all means transfer and protect wealth.
Can you spend money from a trust fund? ›
Ultimately, trustees can only withdraw money from a trust account for specific expenses within certain limitations. Their duties require them to comply with the grantor's wishes. If they breach their fiduciary duties, they will be removed as the trustee and face a surcharge for compensatory damages.
Is your money safe in a trust fund? ›
However, assets held in trust are legally protected. This will be important if, after setting up targeted savings or investment accounts for your children, you are forced to file bankruptcy, or you experience business failure.
Can you live off a trust fund? ›
It's all too easy to live exclusively on your trust income. As alluring as it might seem to spend it all, doing so makes you vulnerable to eventually running short of money or worse yet, falling into debt. The smart move is to establish a budget that includes using your income to build secondary income sources.
Who puts money in a trust fund? ›
Trusts involve: the 'settlor' - the person who puts assets into a trust. the 'trustee' - the person who manages the trust.
What is the disadvantage of a trust fund? ›
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
Who controls the money in a trust? ›
They're managed by the trustee who has a fiduciary duty to act in the best interests of the grantor and beneficiaries. Trust funds can take many forms and they can be established with different stipulations. They can be revocable or irrevocable.
Does money grow in a trust fund? ›
If you are wondering do trust funds gain interest, the answer is “yes, it is possible.” However, they must hold assets that produce income.
Can I cash out my trust fund? ›
Another possible way to get money out of a trust fund is to request a cash withdrawal. This would require putting the request in writing and sending it to the trustee. The trustee might agree. However, that individual or entity must also fulfill their fiduciary obligations.
A trust is subject to tax in California “if the fiduciary or beneficiary (other than a beneficiary whose interest in such trust is contingent) is a resident, regardless of the residence of the settlor.” See Cal. Rev.
How do trust funds pay out after death? ›
The grantor can set up the trust, so the money is distributed directly to the beneficiaries free and clear of limitations. The trustee can transfer real estate to the beneficiary by having a new deed written up or selling the property and giving them the money, writing them a check or giving them cash.
Can the IRS go after a trust? ›
This rule generally prohibits the IRS from levying any assets that you placed into an irrevocable trust because you have relinquished control of them. It is critical to your financial health that you consider the tax and legal obligations associated with trusts before committing your assets to a trust.
Why would someone use a trust? ›
A trust allows you to be very specific about how, when and to whom your assets are distributed. On top of that, there are dozens of special-use trusts that could be established to meet various estate planning goals, such as charitable giving, tax reduction, and more.
Why do rich people put their homes in a trust? ›
Rich people frequently place their homes and other financial assets in trusts to reduce taxes and give their wealth to their beneficiaries. They may also do this to protect their property from divorce proceedings and frivolous lawsuits.
What does a trust fund protect you from? ›
They can also streamline the property distribution process after your death. Establishing a trust account makes it easier to transfer belongings to the people or organizations you choose, while reducing the tax burden they might face. Some trusts also shield your assets from probate, lawsuits, and the IRS.
Can a beneficiary withdraw money from a trust? ›
Some trusts allow beneficiaries to receive regular distributions or access funds under certain conditions, such as reaching a specific age or achieving a milestone. Others may require the trustee to approve withdrawals based on the beneficiary's needs.
