Trust funds are legal entities that provide financial, tax, and legal protection to individuals. They require a grantor, who establishes it, one or more beneficiaries, who receive the assets when the grantor dies, and the trustee, who administers and distributes the assets at a later date. The amount of money in a trust fund will vary depending on the trust creator, the type of trust, and the growth of the account since its creation. In most cases, any interest earned on money within a Trust Fund will also be distributed to the beneficiary.
A trust fund basically transfers ownership of the assets you place in it to the trust itself. When you create a trust, you are the grantor and often the first trustee, and you set the rules for how the trust assets may eventually be distributed. The rules vary by state as to how long a trust fund can remain open, but many enforce the rule against perpetuity, which says a trust must not expire more than 21 years after the death of a potential beneficiary. Some states allow dynasty trusts, which can last for many years and are a tool to avoid estate and generational taxes. A trust fund is a type of account that contains a variety of assets for its beneficiaries. Some assets, such as a savings account, generate interest, while others don't.
Who pays taxes on your trust income depends on the type of trust you created. Due to the complexities of this topic, we recommend that you discuss the strategy with your financial advisor and tax professional to create a coherent plan that meets your objectives. Trust funds can generally be revocable or irrevocable, affecting how they can be updated after their initial creation. Alternatively, you can withdraw funds directly from the trust account if the grantor wrote it in the trust document. For example, you may want your trust fund to cover the education of a family member or to help you with the purchase of a first home.
For example, if you decide that you want to help pay for a grandchild's college expenses, an educational trust would be recommended. Yes, all money deposited in a trust account is invested and generates interest or returns, or both. This will help address one of the main disadvantages of a revocable trust: you may have certain assets that you don't deposit in a trust before you die. For example, a trust may allow a beneficiary to live in a home owned by that trust, but not rent or sell it. A trust fund is an estate planning tool that anyone can use to ensure that their assets are passed on as they wish, to friends, family, or a charity. This is because the trustee has a fiduciary responsibility, which means that they are obligated to act in the best financial interest of the beneficiary and must follow the rules and terms of the trust agreement. When planning to set aside funds for future college expenses, it is important to evaluate additional vehicles and strategies that may provide equal or greater tax benefits for parents or grandparents, and consider the potentially adverse impact of trusts and other resources on student eligibility for scholarships and loans.
For example, if you establish an irrevocable trust, a will may not be necessary. Therefore, when deciding whether to establish a trust, it is important to consider its costs in relation to anticipated benefits and the availability of alternative arrangements that could cost less.