If you’ve heard of a trust fund but have no idea what it is, you’re not alone. Most people only know one thing about trust funds—they’re set up by the very rich in order to give hundreds of thousands of dollars to charities, family members or friends.
Trust funds aren’t only for multimillionaires, though. If you have assets you want to make sure are used the way you want after you die, a trust can be an ideal solution.
What is a Trust?
A trust fund is a legal entity, similar to a corporation. Its purpose is to hold assets intended for the benefit of another entity, which can be an organization, group or person. Generally, three parties are involved in a trust fund.
The first party is the Grantor. They’re the person who establishes the trust fund. They’re also the one who will put assets into the fund and decide the fund’s terms. The grantor can put almost any kind of asset into the fund, including stocks, bonds cash, real estate and even valuable art.
The second party is the Beneficiary. This is the person, group or organization for whom the trust fund was established. Even though the beneficiary gets the benefit of the trust fund’s assets, they don’t actually own the assets in the trust.
The final party involved in the trust fund is the Trustee. This can be a single person, multiple people or even an institution, such as trust department of a financial institution. They are responsible for overseeing the trust fund and making sure its assets are used according to the grantor’s wishes as laid out in the trust documents. They are usually paid a management fee to perform their duties.
How can a Trust Help You?
Let’s say you’re at a point in your life where you’ve worked hard, invested and saved your money. As a result, you’ve got about $40,000 in savings. You’d like to use that money to help out your granddaughter, who is planning on going to college and could use some help paying tuition.
You could just give your granddaughter the $40,000 outright, or leave it to her in your will. The problem is that your granddaughter is only 17 right now.
Forty thousand dollars is pretty tempting to the average teenager, to say nothing of her parents who might like to use that $40,000 to pay off some more immediate expenses. How do you make sure that money will only be used for her college tuition? The answer is to set up a trust fund that can only be used to pay your granddaughter’s college tuition.
This is a trust fund’s biggest advantage—you can specify the way you want the assets in it to be used. Once you’ve written down those rules, they’re set in stone. They can be altered, but only to the amount you’ve specified in your original instructions.
This can work with almost any type of asset. If you’ve got a cottage, for instance, you can set the property in a trust so your children can split it equally after you’re gone. You can also set aside money you’ve invested, and use the dividends of that money specifically for upkeep and taxes on the property, thus ensuring that your children, and even your grandchildren, will be able to enjoy it.
If you’re considering setting up a trust fund, you should be aware that you will have to pay more to have one set up than you would to simply distribute the assets in your will or gift them to the beneficiary. You’ll also have to pay a fee for the trust fund manager. This isn’t a step you’ll want to skip—a trust fund has to be drawn up with an extraordinary amount of detail, and only an attorney with some very specialized financial and legal knowledge will be able to make your trust fund effective and tax-efficient.
Get Started Investing with First Alliance
A trust fund is one of several ways you can manage your assets. To find out which options can help you the most, contact Member Services at First Alliance Credit Union. Our expert team of advisors will help you understand the investment options at your disposal and select the ones that are right for you.