Setting Up a Trust Fund

Aparna Iyer Jan 25, 2019
Tap to Read ➤
In addition to helping the grantor provide for the beneficiaries, a trust fund can be an attractive tax-saving mechanism, or a means of averting a time-consuming and costly probate process.
A trust is a legal entity, established by an individual or an organization that grants fiduciary control to the trustee, who is responsible for holding and managing assets on behalf of the beneficiaries.
The individual or the organization that sets up the trust, is known as the donor or the grantor. One may also refer to the donor as the settler. The assets that are held in trust, are commonly referred to as a trust fund.

Establishing a Trust Fund

In order to establish a trust, the grantor would have to present a document specifying his/her wishes, list the beneficiaries, name trustees, and determine their rights and obligations. The procedure for setting up a trust varies from state to state. Trusts may be set up in one of the given ways:

Living Trust

A living trust is a popular alternative to a will. Unlike a will that comes into force after the death of a person, a living trust is a means of managing property both before, and after death. A living trust is established by a grantor, while he/she is still alive.
The grantor can be designated as the trustee; however, it would be sensible to name a successor to ensure that in event of the grantor's demise, the management of the assets can be passed on to the trustee. Living trusts can be revocable, or irrevocable.

Revocable/Irrevocable Trust

A revocable trust is one that can be modified or terminated by the grantor at will. An irrevocable trust results in the grantor losing the authority to modify the provisions of the trust. Any modification of the trust is subject to the beneficiary's approval. Living trusts, generally, are revocable, although they may be set up as irrevocable trusts.

After-Death Trust

After-Death trusts come into existence by virtue of a will. Hence, the assets to fund these trusts go through the probate process in case the property has not been transferred by the grantor to the trustee, during the lifetime of the settler.

Blind Trust

A blind trust is one, wherein the beneficiaries have absolutely no knowledge of the assets that are held in trust. The assets are managed as per the trustee's discretion. The beneficiary is only entitled to the income from the assets.

Specific-use Trust

A specific-use trust is one that allows the grantor to accomplish the stated objectives. Charitable trusts, bypass trusts, child trusts, and life insurance trusts are a few popular examples of specific-use trusts.

The Purpose

Tax Benefits

An irrevocable trust is set up to avoid paying taxes by removing assets from the settler's taxable estate and transferring it to an irrevocable trust. The grantor, thus, is no longer liable to pay taxes on the income generated by the assets.
Such a trust is meant for wealthy individuals, who are trying to reduce their tax liability. An exemption trust that can reduce or eliminate federal estate taxes for a married couple, is a good example of an irrevocable trust.

Avoiding Probate

A living trust can be an alternative to a will, since the former is not subject to probate; moreover, the court does not address the grievances of the beneficiaries or the creditors. A will is a public record while a living trust ensures privacy. Tax savings are the same in case of wills and living trusts which make a living trust an attractive alternative.

Saving for Children's Education

You may set up a trust fund to facilitate your children's education. Annual fees for educational institutes are forever rising. It is sapient to make arrangements for their future, so that their future aspirations are not compromised.

A Form of Guardianship

Life is uncertain, and it, precisely, is due to this reason that a financial buffer system is readied for your children, lest something unfortunate happens to parents.
A trust fund may be set up to take care of your children and save them from enduring any financial upheavals in the future. People, who are suffering from debilitating illness, may create a revocable living trust to ensure proper asset management.
Consider This: Setting up a trust fund has its own share of benefits to offer; however, it would be prudent of you to consider the trust fund as a secondary source of monetary investment. Dissuasion, certainly, is not the motto; cautioning, sure, is. Don't consider a trust fund a financial crutch. 
Eventualities may not be forecasted; they turn up without notice. It is safer to prepare yourself and tab the situation that currently exists. If you are footloose with your spending and don't believe in a healthy practice of maintaining an account of the same, you, inadvertently, are inviting trouble.
The purpose of a trust fund is to provide secondary financial support and not a source of primary income.

It's evident that a trust fund can be set up to accomplish a number of objectives. Besides, one must consult a lawyer to determine the prudence of setting up a trust fund before embarking on the same.