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What are the Different Types of Trust Funds?

What are the Different Types of Trust Funds?

A trust fund is an entity, within which assets are held by one group for the benefit of the other group. The Buzzle article below will explain to you the different types of trust funds.
Buzzle Staff
Quick Fact
A state trust fund in North Carolina paid USD 1.2 million to buy 670 acres along the Waccamaw river to preserve it since the area was polluted due to the dumping of hog waste by the Freedman Farms Company.
Trust funds are a way by means of which one's property can be safe in trustworthy hands. They function differently according to different provisions in the law. Quite contrary to the common notion that they are meant only for the rich, trusts can be created and maintained by every individual, though this notion prevents eager investors from investing in the same. Yes, the term certainly has a long-standing association with the upper, blue blood strata, however, it does not mean that the common man cannot/should not invest in trusts for a noteworthy reason (children's education, secure future, etc.) when he has the required capital. In the paragraphs outlined below, you will understand how many types of trust funds there are and how they function.
An Overview
  • As mentioned before, a trust fund is a legal arrangement wherein property is held by one group to benefit the other.
  • There are three important parties involved in a trust fund - the person who forms the trust, the person who is legally responsible for its management, and the person who receives the benefit of the trust.
  • The person who establishes the fund is called 'the grantor'. He is the one who holds the property (cash, bonds, real estate), who decides whom to donate it to, who will manage it, etc.
  • The person who is responsible for the fund management could be any qualified individual or a bank or a consortium of legal institutions (for large amounts). He is called 'the trustee'.
  • He is responsible for knowing, maintaining, and managing all the details of the trust.
  • The person who will receive the benefits of the trust is called, aptly, 'the beneficiary'.
  • The structure of trust funds varies as per state laws.
  • Different clauses are introduced in certain states, to prevent mismanagement of the fund.
Types of Trust Funds
There are many types of trusts, a few important ones are summarized below.
Revocable Trust
  • It is a sub-type of a 'living' trust.
  • It allows one to revoke, amend, or change the trust any time.
  • The grantor can retain control, unless of course, he is not in the right mental frame to do so.
  • These trusts are becoming a quick substitute for wills these days, in order that the person's affairs remain in order and the assets be centrally distributed upon his death.
Irrevocable Trust
  • It is also a sub-type of the 'living trust'.
  • In this case, the trust cannot be altered or amended until its purpose has been completed.
  • Under unexpected circumstances, the terms of the trust may be revoked by the court.
Constructive Trust
  • It is different from the regular trusts in the sense that the agreement is not forged between the grantor and the trustee.
  • It is legally imposed in cases where something wrong occurs, and the accused who is supposed to benefit from the trust, loses the right to the same.
QTIP Trust
  • QTIP (Qualified Terminal Interest Property) is a kind of trust that allows the grantor to safeguard his assets (after his death) from the 2nd spouse of his spouse.
  • In other words, it refers to marital gift exclusion from tax.
Dynasty Trust
  • It is also called 'generation-skipping' trust.
  • It allows you to transfer a good amount of money (tax-free) to your descendants (at least skipping 2 generations).
  • This kind of trust is created by grandparents for their grandchildren so that they have sufficient money for their studies, jobs, business, and a secure future.
  • The main advantage of this trust is that it allows the grantor to avoid the taxes on his property if it had been transferred to the second generation.
Express Trust
  • It is the most common type of trust, more like a will, wherein the grantor deliberately wishes to establish a trust to protect his assets.
  • The need for creating the trust must be properly expressed and there must be a certainty to the property.
Fixed Trust
  • The grantor has a complete say in deciding what the beneficiary must be entitled to. The trustee's opinion may hold little value.
  • These trusts include life incomes and minor trusts.
Discretionary Trust
  • In this case, a person has to fulfill certain criteria in order to be graded as a beneficiary.
  • It is only after the fulfillment of this condition that the person can claim right over the property.
  • Also, this fulfillment establishes the certainty of the property.
Charitable Trust
  • Also called a 'public' trust, its beneficiaries mostly include charitable organizations.
  • This trust needs to establish purposes, i.e., contributing to some religious event, providing education, eliminating poverty, providing health care, etc.
  • This trust has special considerations under the law.
Testamentary Trust
  • It is the trust that is created in the person's will.
  • It is generally created following the grantor's death.
Directed Trust
  • The word 'directed' here, implies that the trustee is directed to follow a number of pre-decided commands related to how the trust must be executed.
  • The commands are given by the participants of the trust, and may include financial advisors and distribution committees.
  • The trustee has to follow the given commands, establish inter-coordination, hold the trust title, etc.
Simple Trust
  • One of the recognized meanings of this trust under the Federal Income Tax law states that all the income must be distributed yearly (under the stated terms of the trust).
  • The second interpretation of this trust, under the US legal system itself, states that at whatever discussed and documented time in the future, the trustee has to entrust the property to the beneficiary. He has no responsibility beyond this.
Hybrid Trust
  • It is a combination of the fixed and discretionary trusts.
  • A fixed amount is supposed to be given to each beneficiary.
  • If any amount remains in the trust after this, the trustee has the authority to decide how to handle the distribution of the same.
Unit Trust
  • Here, every beneficiary holds a certain unit of money.
  • According to the number of units they hold individually, they can inform the trustee to pay them out.
Grantor Retained Annuity Trust (GRAT)
  • This trust is mainly used for transferring a large sum of money (as a gift) and not getting subjected to gift tax.
  • Here, the grantor's financial assets are transferred to the trust, and he receives a yearly amount for a stipulated period.
  • After the period is over, the money is distributed among his beneficiaries.
Offshore Trust
  • Technically, it is valid in offshore financial centers.
  • Nowadays, however, there are a few legislative modifications in order to attract more grantors towards this trust.
Protective Trust
  • Formulated to protect extensive real estate, this trust helps establish the grantor as one of the beneficiaries.
  • By these means, the grantor uses the property until he dies, safe from the creditors, and following his death, the trustee is instructed to transfer the property to the beneficiary.
Implied Trust
  • It is believed to be designed to overcome certain shortcomings of the express trust.
  • The grantor is allowed to be a beneficiary of a part of the equitable title, which was not provided earlier.
Incentive Trust
  • It is used to monitor the behavior of the beneficiary.
  • In other words, if the beneficiary's conduct (or action) is good, he is given an incentive. If not, he is excluded from a particular property distribution.
Personal Injury Trust
  • The trustee holds some of the property to help the beneficiaries who have been injured.
  • The funds are then used for the person's recovery.
Spendthrift Trust
  • This trust is created to protect the assets from a spendthrift beneficiary.
  • The trustee is entitled with complete power to decide how the funds must be distributed for the benefit of the beneficiary.
Secret Trust
  • It is constituted in secret.
  • In other words, it comes into picture only when after the person dies and his will is read.
  • The person to whom the property is bequeathed functions as the trustee to benefit the beneficiaries who have not been mentioned in the will.
Special Power of Appointment Trust (SPA)
  • It is a kind of irrevocable trust and includes, as mentioned, a special power of appointment.
  • This type is generally used for asset protection.
  • It includes 2 entities - the person who is vested with the power, and the person who receives the power.
Resulting Trust
  • It occurs when a trust party completely fails or when unfavorable circumstances occur.
  • If the former occurs, the grantor is entitled to the property.
  • If the latter occurs, a voluntary payment is made (to avoid gifts) that cause the second party to become the resulting beneficiary of the first party.
Vital Points
  • Trust funds help protect precious assets, like your family business, ancestral land, jewelry, property, important investments, etc.
  • It helps transfer large amounts of money to buy a life insurance for the grantor, upon whose death the money can be used to purchase dividends and other policies for the beneficiary.
  • Trust funds are immensely advantageous with regards to tax benefits.
  • Do not confuse a trust with a will; the two concepts are very different. The former can be used in case you do not trust your family to follow the conditions stated in your will.
  • When used sensibly, trusts help maximize your property.
  • They help offer creditor protections.
  • Your trust needs to be kept up-to-date. Contact your attorney every few years for the same.
Broadly speaking, there are over 50 types of trust funds. The main, important ones are outlined in the article above. This concept is considered to be an innovative creation and its prominence is increasing by leaps and bounds, with more and more number of people willing to invest in the same.