Most people assume that a trust fund is something that only wealthy people will use. This is not actually true and anyone can open a trust fund if they need to. Trust funds are actually powerful tools which serve a number of different purposes. It is important that you know what a trust fund is, the different types available and how you can set one up.
What Is A Trust Fund?
Before you can look any further into trust funds, you need to know what they are. A trust fund is an intangible asset which is often described as a relationship between property and people. It is actually best to consider a trust to be a small corporation.
The trust will exist in a legal sense and be seen by the law as a separate legal entity which is different to the people who create them, manage them and work for them. A trust fund will not have a physical existence, but will still be able to do a number of things that individuals are not able to. Trusts are able to own property and unlike individuals, will continue to own the property long after the person who created the trust has passed away.
The simple definition of a trust fund will be a small and narrowly focused corporation that people can use to provide options that would not be otherwise available. An example of this will be a trust fund that allows you to control what happens to the property you have after you pass on. There are some trusts that lessen taxes and others that allow you or a loved one to receive government benefits that you would otherwise be disqualified for.
The People In The Trust
When it comes to understanding a trust, you need to know the people that make up the trust. There are 3 entities that you need to be aware of and each will have different abilities and restrictions. Once you understand the people in the trust, you will better understand how the trust works.
The first entity is the trustor or the grantor and this is the person who creates the trust. These people will be in charge of determining why the trust is being created as well as the property that will be transferred to the trust. A grantor who creates a trust as part of their will is also known as a testator or a decedent. It is possible for anyone to be a trustor as long as they are over the age of 18 and deemed mentally sound.
The second entity is the trustee and this is the person who takes on the management of the trust’s property. The trustee will not own the property that is transferred to the trust, but will be able to manage the property according to the term and limitations that the trustor sets out. There are some trusts that have a single trustee while others will have multiple trustees. The trustee can be a willing and capable adult or an organization such as a law firm or a trust company.
The last entity that you need to know about is the beneficiary who is the only person with the legal ability to use the property owned by the trust. It is important to note that a beneficiary does not own the trust property and will not be able to do whatever they want with it. However, they do have the right to benefit from the property in the trust as allowed by the creator of the trust. An example of this will be real estate owned by a trust which the beneficiary will be able to live in, renovate and use as they see fit, but they will not be able to rent it to others or sell it to benefit themselves.
The Types Of Trusts
There are many different types of trusts that can be created and they will each have their own benefits and drawbacks. To understand the different types of trusts, you should look at the different categories. These categories will include the reason for creation, the abilities they have and the purposes they serve.
When The Trust Is Created
When looking at the categorization by creation of the trust, you will be looking at when they are created and when they take effect. There are 2 primary types of trusts which fall into this categorization. They are the living trust and the testamentary trust.
The living trust will take effect as soon as they are created. These trusts are also known as the inter vivos trusts. A living trust can be used for a range of reasons from asset protection to tax mitigation.
The testamentary trust is the trust that you create as part of your last will and testament. The trust will only take effect after your death as the probate court will take the will as a valid expression of your wishes and create the trust at this time. This type of trust will generally be used to control what happens to an inheritance.
Trusts By Amenability
Another category to consider when looking at trusts is the amenability. The trusts in this category will be determined based on whether or not the trustor can change it. When a trust is created, the rules and limitations are laid out as well as the ability of the trustor to change the terms or revoke the trust completely at a later date.
The first trust in this category will be the revocable trust. As the name suggests, this trust can be revoked by the trustor or amended at a later date. It is important to note that all revocable trusts will also be living trusts, but this does not mean that all living trusts are revocable.
The other trust in this category will be the irrevocable trust which cannot be changed. Once the trust has been created the terms cannot be changed and the trust as a whole cannot be revoked. It is important to note that all testamentary trusts will be revocable trusts and there are some livings trusts that are as well.
The Purpose Of The Trust
The purpose of the trust will also help you determine the type of trust you are looking at. All trusts will serve a specific purpose, but there are some trusts for certain purposes that are more common than others. It is important that you know what they are if you need to create one.
The first is the tax trusts which are used to delay, eliminate or reduce the taxes faced by people. An example of a tax trust will be one that applies to the property of a deceased person. When the estate is in probate, the federal estate tax will be determined and this will include the payment provided by any life insurance policies. To reduce the size of the estate and the tax payable on it, a trust can be created to receive the life insurance. When this occurs, the estate will not be the owner of the policy payment and it will not be included in the calculation of federal estate tax.
Another common trust will be an inheritance trust which is used for the transfer of an inheritance. This will generally be used by people who have children under a certain age as their inheritance will be held by the trust until they are old enough to receive it. The age of the beneficiary will be determined by the trustor and the trust will only distribute the inheritance once the beneficiary reaches that age.
A privacy trust is another type that you can use because a trust is a private document. This means that when the trustor dies the trust will not become part of a probate case. This is due to the fact that the probate process is a matter of public record. If you value your privacy, using a trust will help you stay out of the public eye.
An incapacitation trust will be used when the trustor loses the capacity to handle their own affairs. The trustor will be able to name themselves as the trustee and will have a successor trustee as well. If the trustee is incapacitated, the successor can step in and take over the management of the trust. This will eliminate the need to go to court to name a person to manage the original trustor’s property.
The last of the commonly used purpose trusts is the asset protection trust. This trust is often used by people who are nervous that creditors might seize their assets. When property is placed in a domestic asset protection trust, it will be safe from the trustor’s creditors as it is not owned by the trustor and will generally be managed by an independent trustee.
Creating A Trust
Knowing about the different types of trusts is important as it helps you determine which type you will want to open. However, you also need to know how to create a trust. There are a number of steps that you have to take in order to accomplish this.
The first step is to draft the trust instrument. The trust instrument is a document which contains the terms of the trust as set out by the trustor. It will also include a deed of trust and in the case of a testamentary trust, the document is included in the trustor’s last will and testament.
The information in the trust instrument will include the name of the trustor and the name of the trust. It will also include a description of the trust which is being created and the reason for the creation. The name of the trustee as well as the beneficiaries will also have to be included. The duties and abilities of the trust will then have to be detailed. The last item in the document will be the property which the trust owns.
The next step will be to fund the trust. This is the process of taking all of the property owned by the trustor and transferring it to the trust so that the trust is the owner. This is an essential step and your trust will be useless without completing this.
There are a number of ways to fund a trust with the first being assignment. Assignments are generally a piece of paper which includes the details of the property, the name of the trust and the name and signature of the trustor. This method will generally be used to transfer non-titled property such as works of art and intellectual property rights.
You can also use a transfer of title which is ideal for property such as real estate and vehicles. A transfer of ownership can also be used when you are looking at assets such as investment accounts and bank accounts. The transfer of ownership will generally require specific steps to be taken as detailed by the financial institution that the asset is with.
You can also look at funding the trust through a beneficiary designation. There are certain assets such as certain investment accounts and insurance policies that allow the owner to name a transfer on death beneficiary. Naming the trust as the beneficiary will require you to comply with the procedures set out by the company providing the asset.
If you are going to be setting up a trust, it is recommended that you contact an attorney regarding this. They will be able to determine the best type of trust fund for you and will be able to help you with the trust instruction and funding. Working with a professional also provides you with an option for a reliable and legally knowledgeable trustee for the trust.
Trust funds are not something that only the wealthy will be able to use and anyone can set up a trust fund. There are many different types of trust funds and ways of funding the trust. This is why it is recommended that you work with an attorney to create your trust fund.