What Is a Trust Fund?

A trust fund is an independent legal entity and commonly used as an estate planning tool to control the distribution of someone’s assets after they die or become incapacitated. A trust can hold property, money, and investments, among other assets. Notably, trust funds provide tax benefits and avoid the probate waiting period. Continue reading to learn what trust funds are and how they work. If you have further questions, speak with an Orange County trust attorney.

How Trust Funds Work

At least three parties are fundamental for the creation of a trust: a grantor, a beneficiary, and a trustee. The grantor establishes the trust and populates it with their assets. The beneficiary(s) is chosen by the grantor to receive the trust fund. Finally, the trustee is the person or an organization, appointed by the grantor, to be in charge of the trust management.

Trust Fund Benefits

There are numerous benefits for adding a trust to your estate planning portfolio, such as: 1) Avoiding probate; 2) Reducing estate taxes; 3) Conferring assets protection; 4) Protecting the beneficiaries; 5) Allowing flexibility (for revocable trusts); 6) Reducing family disputes.

Types of Trust Funds

The grantor can establish the type of trust that best fit for his/her purpose. The most common types of trust are: 1) revocable trust; 2) irrevocable trust; 3) special needs trust; and 4) charitable trust.

Revocable Trust Funds vs. Irrevocable Trust Funds

A revocable trust, also known as a living trust, allows the grantor to place assets in the trust during his/her lifetime. The advantage of a revocable trust is that the grantor can easily change the trust or revoke it during his/her lifetime. After the grantor’s death, the trust becomes irrevocable. On the other hand, as the name suggests, an irrevocable trust, generally cannot be changed. Its terms cannot be modified, amended, or terminated without the permission of the grantor’s beneficiary or beneficiaries.

Funding Your Trust

Funding a trust means that you are transferring your assets into your trust’s name. The funding can be made during your lifetime or after you die (through a “pour-over will”). The advantage of funding your trust during your lifetime is that you can ensure the process is handled according to your wishes. On the other hand, you can opt to populate your trust after your death through a “pour-over will.” A pour-over will is a legal document that ensures an individual’s remaining assets will automatically transfer to a previously established trust upon their death. In other words, all property that passes through the will at your death is transferred to (poured into) your trust in order to be distributed to your beneficiaries. The downside to pour-over wills is that the property that passes through them must go to probate.

Distributing Trust Assets to Beneficiaries

There are three main ways for a beneficiary to receive an inheritance from a trust: 1) outright distributions; 2) staggered distributions; 3) discretionary distributions. An outright distribution distributes your assets upon your death. A staggered distribution allows the assets to be distributed over time, at predetermined ages, dates, or triggering event. Finally, a discretionary distribution allows the trustee to have full discretion to pay the beneficiary as much of the trust income as the trustee believes appropriate.

How Evolution Tax and Legal Can Help You Start a Trust Fund

If you are wondering to add a trust into your estate planning portfolio, you can always come in for a consultation to discuss your situation. Our team can help guide you through an estate planning that best fits your needs. Please contact us if you’d like to understand the next steps beforehand.

April 22, 2022

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