Trust Fund

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A trust is an estate planning device created by an individual to manage his assets, and to specify how those assets are to be distributed after his death. This individual, called a “Trustor,” transfers ownership of as much of his real and personal property, as well as financial assets, as he desires into the trust to be managed by a Trustee for the benefit of his beneficiaries. The term trust fund refers to all of these assets held in the trust for the benefit of the Trustor’s heirs and beneficiaries. To explore this concept, consider the following trust fund definition.

Definition of Trust Fund

Noun

  1. Money, property or other assets that belong to one individual, but are legally held or managed by another person in a trust.

Origin

1780     British English

What is a Trust Fund

Many people use the term trust fund to refer to a financial fund set aside for a child, to which the child has no access until a certain age, or a certain life event milestone is reached. Until that time, a Trustee manages the assets for the child’s, or other beneficiary’s benefit, according to the instruction of the Trustor. The fact is, however, that a trust fund simply refers to the actual assets within a trust, and there are many types of trust that can be created to manage assets in a wide variety of ways.

Trusts commonly list the Trustor’s children as beneficiaries, though others may be named, such as a spouse, an incapacitated relative, and even charities or other organizations. An individual may even create a trust meant to ensure his own needs are taken care of should a future need arise, where he is unable to care for himself.

Children’s Trust Fund

Commonly, trust funds are set up for children by their parents or grandparents, for the purpose of ensuring kids are taken care of financially after they turn of legal age. Estate planning through the use of a children’s trust fund not only helps preserve family wealth for those children’s benefit, it can help decrease the amount of taxes that are associated with inheritances, gifts, and estates. A children’s trust fund can be constructed as a revocable or irrevocable trust, allowing the maker to decide whether he wants to be able to make changes during his lifetime.

Additionally, it is up to the Trustor to decide when, and under what circumstances, the child beneficiaries of the trust can access the money. It is common for children’s trust funds to be inaccessible until the child reaches a specified age, usually 18 or 21 years, or until a life event occurs, such as getting married, or graduating from college. The trust may also give the Trustee authority to pay out money from the trust fund for certain important needs of the beneficiaries until they reach the age of majority.

For example:

Helena creates a trust fund for her grandchildren, Thomas and Tyler. She places $500,000 in cash and other financial assets into the irrevocable trust, and names a close family friend as Trustee. While Helena has specified in the trust that the children are each to receive 30 percent of their portion of the trust fund at age 21, and the remaining balance at age 25, she has made sure the Trustee has the authority to release funds needed for the children’s upbringing, and schooling.

Setting Up a Trust Fund

Trust fund documents often include complex language necessary to ensuring the Trustor’s wishes are adequately defined. Many people hire an attorney to take care of setting up a trust fund, and to help them fund it properly. Important things to consider in creating a trust is what assets the individual intends to put into the trust, who will benefit from the trust’s assets, and who will manage the trust, both during the trustee’s lifetime, and after his death. In many situations, the creator of the trust, the “Trustor,” can choose to manage the trust as “Trustee,” until his death or incapacitation. A successor trustee should be named within the document, who will take over duties of the Trustee once the Trustor can no longer serve.

When setting up a trust fund, the Trustor must specifically spell out how the assets in the trust are to be managed, and to whom they are to be distributed upon his death. Additionally, assets of the trust may be distributed by the Trustee while the Trustor is still living, if so instructed in the trust document.

Funding the Trust

Once the trust document has been created and signed before a notary public, the Trustor must “fund” the trust, transferring ownership of certain specified assets to the trust. This may include real property, personal property, cash, bank and investment accounts, business interests, and other assets. Until this is accomplished, the trust really has no value.

Advantages of Using a Trust Fund

Trust funds are flexible, allowing the Trustor to personalize the trust to his specific needs. Unlike a will, which becomes a matter of public record when filed with the probate court, a trust remains private. Assets of a trust fund can be distributed to the named beneficiaries immediately upon death of the Trustor. All assets under a will must go through the probate process before determining how they should be distributed, which can take weeks or even months.

Social Security Trust Fund

The Social Security Administration collects payroll taxes which are used to pay two types of benefits: Old-Age and Survivors benefits, and Disability Insurance benefits. The money collected for these programs is held in two separate trust funds, where it is managed for the benefit of those eligible for these special programs. Each year, these two Social Security trust funds hold distinct interest-bearing federal government securities, which generate interest to increase the trust fund balance, benefiting beneficiaries.

Every year since 1984, Social Security has had a surplus, meaning it has brought in more funds that it has paid out to beneficiaries, and that is expected to continue until around 2020. The interest earned by investing these surplus funds during this time will enable the trust funds to pay out full benefits until around 2033. After this time, the combined Social Security trust funds are expected to be depleted, and the amount of Social Security benefits might be lowered. As of 2013, the Social Security trust funds had amassed nearly $2.8 trillion with an average interest rate of 3.8 percent.

Related Legal Terms and Issues

  • Asset – Anything owned or controlled by a person or company that is expected to have value.
  • Beneficiary – A person named in a will or trust as the intended recipient of assets or property.
  • Grantor – A person that creates a will or trust, or who transfers interest in real property to another.
  • Jurisdiction – The legal authority to hear legal cases and make judgments; the geographical region of authority to enforce justice.
  • Personal Property – Any item that is moveable and not fixed to real property.
  • Probate Court – The division of the judicial system that deals with matters relating to wills, trusts, estates, guardianships, and conservatorships.
  • Real Property – Land and property attached or fixed directly to the land, including buildings and structures.
  • Trustee – A person given control of property according to a trust.