What is a trust fund, and how does one work?

We’ve all heard of trust funds. But how do trust funds actually work, and who can benefit from one?

In this article, we’ll dive into all the details about trust funds and who can make use of them. (Spoiler: it’s not just the wealthy.)

What is a trust fund?

A trust fund is an estate planning tool that allows a person to set up a group of assets on behalf of another person — typically, their children or grandchildren. Trust funds usually include a combination of assets like real estate, stocks, businesses, and cash. A trustee manages these assets and is responsible for carrying out the distribution arrangement set up in the trust fund.

There are three parties involved in a trust fund:

• Grantor: The person who creates the trust fund and provides the assets to be managed
• Beneficiary: The person who will receive the trust fund’s assets in the future
• Trustee: Someone who manages trust fund assets. This might be an independent professional fiduciary, typically a trust bank or an individual. Or it might be the grantor themselves. They can then later use the trust’s terms to specify subsequent beneficiaries (like their spouse, children, or grandchildren) and successor trustees for when the grantor is incapacitated or deceased.

There’s a reason that multiple people are involved in a trust fund: protecting the assets. While the grantor could cut the trustee out of the equation and transfer the assets directly to the beneficiary, this puts the assets at risk of mismanagement by the beneficiary, particularly if they’re very young. Having an independent, fiduciary professional manage the assets can help ensure that they’re in good hands.

Think of it like this: If you give $1,000 to an eight-year-old, they’re likely to spend it on Squishmallows, video games and candy. But what if you want to put that money toward something more valuable, such as tuition or a down payment on a house? At their current age, not only would they struggle to understand the value behind saving up for college or to be a homeowner, but they’d probably have a hard time managing their money for even a short while.

That’s why trust funds can be effective ways of transferring assets to another person while ensuring that they remain safe over time. You can transfer assets to any beneficiary you want while having the peace of mind that they’ll probably be secure.

What are the benefits of creating a trust fund?

In addition to providing a fiduciary professional to manage the assets, trust funds also help grantors avoid many of the challenges that come with asset distribution after their death. “In the realm of estate planning, trusts reign supreme with their unmatched adaptability. With the ability to tailor precise conditions for asset distribution and ensure beneficiaries’ financial security, trusts allow individuals to shape the future of their legacy,” says Mitch Mitchell, associate council at Trust & Will.

If you don’t set up a trust for your assets, your estate will likely have to go to probate court after you’re gone. This process is meant to determine the rightful owners of your assets and can be an incredibly costly and time-consuming process.

But through a trust fund, your assets, including those provided by life insurance, can avoid probate court as they have at least one named beneficiary. This can make the transition much easier for your family members and other loved ones.

Trust funds have the added benefit of being able to stipulate certain conditions for how and when beneficiaries receive assets. For example, assets can remain in a trust fund until the beneficiary turns 21 or graduates from college. In the meantime, the trust fund arrangement can stipulate monthly payouts to the beneficiary — that way, they receive financial support until they are old enough to receive everything provided in the trust fund.

Types of trust funds

While there are many types of trust funds, below are some of the more popular ones.

Blind trust fund

Blind trust funds shield the beneficiary from knowing anything about the trust assets. (The beneficiary is unable to see the specific assets or know the amount of holdings of the trust.) These types of trust funds can be helpful in cases where there may be a potential conflict of interest for the beneficiary.

For example, imagine that a businessperson’s daughter helps manage the company, and they want to grant it to her upon his passing. However, they don’t want her to know that she’ll inherit the business, as this may influence her leadership and decision-making. Using a blind trust fund will eliminate this conflict of interest, as the trustee can make financial decisions without the beneficiary knowing what kind of assets are in the trust fund.

Revocable living trust

A revocable living trust (sometimes known as simply a living trust) is a trust that can be changed or revoked for any reason, at any time, as long as the grantor is still living and mentally competent. This is one of the most commonly used types of trusts, as it can be established anytime during the grantor’s lifetime to carry out their wishes in the event of incapacity or bypass probate for the trust asset at death.

Special needs trust

Special needs trusts are created for the benefit of a person with a physical or mental disability, under the age of 65, who will need life-long care. A special needs trust is a way to provide financially for the person with a disability without jeopardizing their eligibility for means-tested public government benefits (things like Medicaid or SSI).

Frequently asked questions about trust funds

Now that you know the basics of trust funds and how they work, let’s look at some of the most frequently asked questions.

What is a trust fund account?

A trust fund account is where all the assets in the trust fund are placed. Those are the assets that the trustee has control over and may include a combination of cash, stocks, bonds, property, and more. The trustee manages and controls the assets held in the trust until the trust specifies it is time for a distribution. For example, once the beneficiary reaches a stipulated age or milestone, the trustee makes a distribution and the beneficiary now has access to assets previously held in the trust

Who is the trust fund beneficiary?

The trust fund beneficiary is the person who will receive the assets in the trust fund.  Until the assets are distributed to the beneficiary, the trustee manages trust assets for the beneficiary until the trustee distributes assets to the beneficiary.

What is the minimum deposit for a trust fund?

The minimum deposit for a trust fund will vary depending on the financial institution you choose. Although some financial institutions may have low or no minimum deposit requirements, establishing a trust fund comes with significant upfront and ongoing costs. So, it may not be a good idea to set up a trust fund for a modest amount of money or assets. The good news is that there are other affordable investment tools you can use if you want to set up a fund for a beneficiary, including a 529 plan.

Is a trust fund the same as a trust?

A trust is a legal arrangement that establishes which assets will be placed under the management of a trustee. The trust fund refers to the actual assets being managed.

How Haven Life can help you plan for the future

Planning for the future of your children or loved ones can be an exciting endeavor — if you have the right support.

Haven Life makes it easy for you to provide financial protection for those you care about through term life insurance. Eligible Haven Term policyholders also enjoy no-cost trust or will services from the experts at Trust & Will, via the Haven Life Plus bonus rider.

Get started with a free online life insurance quote today.