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What is a trust fund?


21st May 2021 Managing your Money

What is a trust fund?

To begin with we will discuss what a trust fund is and what roles the various people involved in a trust fund will play in the process. 

A trust fund is an entity that can hold property for someone or perhaps a group. 

The person who is creating a trust is called the settlor, grantor, trust maker or the trustor. If the trust is being set up through a will, this person is referred to as the decedent or testator. This person will have the role of setting the rules by which the trust will operate and deciding what property the trust owns, by placing assets into the trust.

Then there is the person who will ultimately come to receive the assets held in the trust’s name, this person is the beneficiary. The beneficiary of a trust is not the same as owning property, because there will be rules in place that determine various aspects of the assets included in the trust. For example, the beneficiary may be allowed to live in a property held by the trust but not be allowed to rent or sell this property. Depending on how the trust is established, the beneficiary of the trust will often receive the assets held in the trust after certain qualifications have been met. For example, they may inherit the property held in the trust upon reaching a certain age. 

Then there will be the person or entity that will be overseeing the trust making sure that all rules set therein are properly observed. This person is called the trustee and they do not actually own the trust but are there to ensure that the distribution of property and assets held in the trust are properly followed according to the stipulations established. A single trust can have a single or multiple trustees, even an institutional trustee — like, a company that administers the trust. Many trusts will also have successor trustees who will step in to oversee the trust should the first trustee become unavailable for their responsibilities. Find out more about trusts that are available with Henderson High Income Trust PLC.

In some cases, the trustee will receive a special compensation for their efforts, this is like a management fee. 

How does a trust fund work?

Trust funds can hold many different types of property, including cash, real estate, artwork and anything else of value. A trust can even include an entire business. 

But what does it mean when a trust fund is referred to as an entity when we are trying to understand the way a trust and trust funds operate? 

Placing money or assets into a fund allows you to have a measure of control when passing this property on to someone else. For example, you may say that these funds can’t be used to pay off debts. You can also place other rules and stipulations that dictate how the funds can be used once the beneficiary gains control of the assets. 

 What Are the Advantages of a Trust Fund?

You may consider putting your funds and assets into a fund if you want them to go to a specific person in a specific manner once you pass away. 

Here are some of the more common reasons that a person will choose to create trust funds:

Designate who receives their estate

If a person has gotten remarried but wants their children to receive their estate, as opposed to the children of their new spouse, they may choose to open a trust fund. 

Set an Age Limit for the Beneficiary

Legally, your heir will be eligible to receive your estate at the age of 18. But if you think that this arrangement will not be suitable, you can set a stipulation that doesn’t allow them to be eligible until they reach the age of 21, or 35 or whenever you choose. 

Set rules and guidelines for the use of your estate

You may only allow the estate and funds in your trust to be used for educational purposes. 

Payments in Intervals

You can prevent the entire fortune from being squandered on riotous living by instructing the trustees to make incremental payouts. Perhaps, the beneficiary will receive a portion at the age of 21, then another at the age of 28, and so forth.  

Include a “Spendthrift” Clause

You may include a clause that says the assets in your trust can’t be used to pay off debts. In other words, if your beneficiary managed to accumulate a massive debt, they would not be able to bankrupt themselves by using the trust to pay the debt off. 

Skip a Generation 

If you feel so inclined, you may specify that your funds can only be used by your Grandchildren. 

Appoint a Professional To Manage Affairs

If there is a history of mental illness in your family, you can have a professional step in and take over the management of your affairs. If you were unable to handle these yourself, this professional would step in and ensure your estate was well-managed. 

Protect a business you own

Maybe you own a business and want to ensure that your employees and your work is well cared for. At the same time, you want your kids to reap the benefits of your business. In this case, you could appoint your trustees to oversee the management of your business and ensure your kids receive the profits. 

Protect your privacy

If you were to leave a will, it will be taken to probate court and will then leave public records. On the other hand, a trust is private. There may be some important reasons you do not want the details of your inheritance to be made public. 

For all of the aforementioned reasons, you may choose to set up a trust to have your estate handled as you choose. 

What Are the Disadvantages of a Trust Fund?

By the same measure, there are some reasons setting up a trust fund is not the best idea for you. 

There are many more rules, regulations and stipulations that affect your heirs from receiving your property. 

The cost of a trust fund can be especially high

It can set several inconvenient steps if all you want to do is arrange how your estate will be managed after you are gone. 

Administering a trust fund can be considerably more complex than simply passing your assets to a beneficiary after you pass away. A trustee will have to follow the instructions and stipulations. For example, they may have to make regular distributions and keep track of milestones.

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