What is a Trust Fund and How Does It Work?

When you hear the word trust fund, you most likely imagine a wealthy family passing down their assets to their children for generations. However, this is a common misconception about trust funds. You do not have to be wealthy to have one. What is a Trust Fund and How Does It Work?

What is a Trust Fund?

A trust fund is a legal entity that can hold property on behalf of a person or a group. If you are the person who’s creating a trust fund, you’re called the grantor, trustor, settlor or trust maker. If you set up a trust through your will, you may also be called the testator or decedent. 

As a grantor, you decide the rules behind the trust and choose what property the trust will own (by transferring assets into the trust’s name). The person you want to receive your money or property is your beneficiary

If you are a beneficiary of a trust, gaining property doesn’t necessarily mean that you have the right to do anything you want with it. Depending on the rules set forth, there may be restrictions on what you are able to do with the property – such as renting or selling. There may also be an age restriction on the property stating that it can’t be inherited or used until the beneficiary is of a certain age.

Related Article: Types of Trusts: Choosing the Right One

How Does a Trust Fund Work?

A trust is a legal entity that can hold most assets such as real estate, bank accounts, investment accounts, business interests, and life insurance policies. Depending on the type of trust chosen and the rules the grantor sets forth, it will determine who the assets will be distributed to and how their annual income, money, or property will be transferred to their heirs or charity.

A trust is created when the trustor lays out the terms of the trust in writing. The document that contains the terms is typically known as the trust instrument, declaration of trust, or deed of trust. In a testamentary trust, the trust terms are included in the trustor’s last will and testament. On the other hand, a living trust usually requires its own trust instrument.

According to MoneyCrashers, the type of information in a trust differs slightly depending on the type of trust being created and the trustor’s specific wishes, but there are some details that all trust instruments need to include:

  • Name of the Trustor and Name of the Trust 
  • Trust Description
  • Trustee and Beneficiary
  • Trustee Duties and Abilities
  • Death or Incapacitation
  • Trust Property

Related Article: How Can I Help My Parents Set Up a Living Trust?

Do you have more questions about trust funds? Let us know!

Marcia L. Campbell, CPA is committed to helping each client plan for the personal and financial decisions that need to be made for the future. Marcia’s team has a genuine interest in your well-being and a well-established list of services to help guide you through this process.

If you need help, please contact us by filling out a Contact Form or giving our office a call at +1(951)686-3608. 

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