How Does a Trust Fund Work?

WealthHow Staff Sep 29, 2018
A trust fund is managed by the trustees in accordance with the wishes of the donor, can be a source of financial comfort to the beneficiaries.
A trust is a legal arrangement, whereby the owner of the assets entrusts the responsibility of holding and managing the assets to a person, a corporation, or an association with the intention of providing for the beneficiaries.
The individual, who sets up the trust is known as the grantor, the donor or the settlor, while the entity -- entrusted with the task of overseeing the management of the trust -- is known as the trustee. The beneficiary can be an individual, a group of people, or an organization. Trust fund is the term used to refer to the assets held in a trust.

Setting Up a Trust Fund

To set up a trust, a document, specifying the beneficiaries, the trustees and rights and obligations of the latter, needs to be prepared in accordance with the wishes of the grantor. The assets, then, are transferred to the fund. Transfer fees and taxes may be levied on the assets transferred to the trust. In the US, trusts can be set up in one of the ways:

After-death Trust

As the name suggests, it comes into existence after the demise of the grantor, who leaves a will to this effect. The purpose of this trust is to ensure that the beneficiary is well provided for, in the absence of the grantor.

Living Trust

A living trust is intended to provide for the beneficiaries, while the grantor is still alive. Living trusts can be revocable, or irrevocable. In case of revocable trusts, the grantor and the trustee may be one and the same.
Hence, it is advisable to nominate a successor, who would be in charge of the trust if the grantor, who has the right to modify the terms of the trust, expires. In case of an irrevocable trust, the grantor hands over the control of the assets to the trustee(s).

Working of a Trust Fund

Social Security Trust Fund

The money from the levied taxes is credited to the Old Age and Survivors Insurance (OASI) and the Disability Insurance (DI) and is invested in Treasuries or Government bonds. With regard to the legal substance, the two have distinct identities; however, they are referred to as a whole, and together are contained in the social security trust funds.
Know that all payroll taxes are credited to trust funds. The benefits and expenses are covered and successively paid of the trust funds. This money may be redeemed by the social security to pay off the benefits.
This surplus in the trust fund that is deposited in the treasury bonds, are helpful to pay off the social security benefits, if and when the current financial status of the social security fund is not up to the mark.
For every dollar paid in taxes, 70 cents go to a trust established to meet the financial needs of retirees aged 62 and over, their families and dependents outliving the retirees; 19 cents are diverted to a trust fund catering to the needs of Medicare beneficiaries, while the rest 11 cents meant for the disabled and their dependents, goes to separate fund.

Child Trust Fund (CTF)

This is a savings and investment account, meant to help children embark on their journey as adults. Once children attain the age of 18, they have the right to access the money in the account. Before 18, the CTF account cannot be accessed.
If it is only the child, entitled to access the account after 18 years of age, in the unfortunate event of a child taken seriously ill, or expires prior the maturity period of the fund, the fund may be accessed, with the rules, accordingly, being modified.
Children born between September 1, 2002 and January 2, 2011 (on/before the latter specified date) are entitled to receive a voucher of £250 in order to establish their trust fund account. However, if the annual income of the family is less than £19,000, the government grants a £500, as a premier investment amount in the child's account.
This amount is deposited in the first year when the account is opened as well as, when the child turns seven. The HM Revenue and Customs is responsible for the Child Trust Fund.
There are three types of trust funds for children:
(1) Child trust fund savings account;
(2) Accounts that invest in shares;
(3) Stakeholder accounts.
A child trust fund savings account is meant for risk-averse donors, since the money grows on account of the interest earned.
Stakeholder accounts are well-diversified accounts that invest in the shares of a number of companies in accordance with the government regulations. Accounts that invest in stocks are meant for parents, who are willing to assume above-average risk in order to earn additional returns on their investment.
It is evident that trust funds help the donors provide for the beneficiaries. Beneficiaries can be children, who are unable to support themselves financially, or they may be retirees, who have worked and contributed to a system that pledges to provide for them in recognition of their contribution.