People often associate trust funds only with the wealthy. But a
trust fund ("trust") actually can be an effective financial tool for many
people in many circumstances.
A trust is a separate legal entity that holds property
or assets of some kind for the benefit of a specific person, group of people
or organization known as the beneficiary (beneficiaries).
The person creating a trust is called the grantor,
or settlor. When a trust is established, an individual or corporate
entity is designated to oversee or manage the assets in the trust. This
individual or entity is called a trustee. A trustee can be a
professional with financial knowledge, a relative or loyal friend or a
corporation. There are pluses and minuses to each type of trustee. An
individual trustee may provide a more personal touch, but may die or move
away. A corporate trustee may be less personal but provides experience,
investment skills, permanence and impartiality. More than one trustee can be
named by the grantor if he or she wishes.
The assets in a trust
remain under the supervision of a trustee for whatever
length of time that you deem necessary. People of all
income brackets can benefit from transferring property to a
Benefits of Establishing a Trust
Whether it makes sense to establish a trust depends on your
individual circumstances. Some common reasons for setting up a trust
To give your children access to their inheritance as they
become mature enough to handle it responsibly
To provide for a disabled child or family member who needs
long-term financial care
To provide for management of your assets should you become
unable to oversee them yourself
To avoid probate and transfer your assets immediately to
your beneficiaries upon death
To reduce estate taxes or provide liquid assets to help pay
Keep in mind that you may not need to establish a trust to
accomplish these and other financial goals. A well-written will may
distribute your assets appropriately. Check with a lawyer before deciding if
a trust is right for you.
Types of Trusts
There are two basic forms of trusts:
testamentary) and living.
after-death trust will come into existence, usually by
virtue of a will, after a person's death. The assets to fund these trusts
must usually go through the probate process. In certain states they may be
court-supervised even after the estate is closed. An example of an
after-death trust would be a mother leaving land to a trust benefiting a
young son in her will. The will establishes the trust to which the land is
transferred, to be administered by a trustee until the boy reaches a stated
age, at which point the land is transferred to the son outright.
living trust, on the other hand, is a trust made while the
person establishing the trust is still alive and becomes effective
immediately. In this case, a mother could
establish a trust for her son during her lifetime, designating herself as
trustee and her son as beneficiary. As the beneficiary, her son does not own
the property but can receive income derived from it.
Living trusts can be
The most popular type of trust is the revocable living trust, which allows
the individual to make changes to the trust during his or her life.
Revocable living trusts avoid the often lengthy probate process but, by
themselves, don't provide shelter for assets from federal or state estate
When an irrevocable living trust is set up, ownership of the
assets is turned over to the trustee. The trust becomes, for tax purposes, a
separate entity, and the assets cannot be removed, nor can changes be made
by the grantor. This type of trust often is used by individuals with large
estates to reduce estate taxes and avoid probate. However, if the grantor
names himself or herself as trustee or is entitled to trust income, the tax
benefits would generally be lost.
Before you set up a trust, ask yourself what you are trying to
accomplish. Here are just a few of the many special uses for trusts:
A charitable trust is used to make donations and
realize tax savings for an estate. Typically, there is a transfer of
property such as art or real estate to a trust which continues to hold the
asset until it is transferred to the charity, usually after your death.
The donor can continue to enjoy the use of the property, then the
charitable gift may be deductible for estate tax purposes.
A bypass trust (also known as a credit
shelter or exemption trust) allows a married couple, in certain
cases, to shelter more of their estate from estate taxes. The first spouse
to die can leave assets in a trust which can provide income to the
surviving spouse for the rest of his or her life, taking advantage of the
unified credit provided under Federal Gift and Estate Tax law. Upon the
death of the second spouse, the assets in the trust pass directly to the
children or other beneficiaries, without being taxed at the second
A spendthrift trust can be a good idea if your
beneficiary is too young or does not have the mental capacity to handle
money. The trust can be established so that the beneficiary receives small
amounts of money at specified intervals. It is designed to prevent that
person from squandering money or losing the principal in a bad investment.
A life insurance trust is often used to give your
estate liquidity. In this case, the proceeds are payable to the trust and
the trustee is empowered to lend money to or purchase assets from the
A qualified terminable interest property (QTIP)
trust is often used to complement a bypass trust. The QTIP has
the potential to eliminate all estate taxes upon the death of the first
Establishing a Trust
Establishing a trust requires a document that specifies your wishes, lists
beneficiaries, names a trustee or trustees to manage the assets and describes
what the trustee or trustees may do. For a living trust, you can name yourself
as trustee but, if you do, you should also name a successor trustee to take over
if you should become disabled or when you die. Once the document is completed,
you must transfer the assets to the trust. Keep in mind that, in the case of
certain assets, such as real estate, you may incur fees and transfer taxes.
Some states require you to file a trust document with the
state. To find out about your state's laws regarding trusts, talk with an
attorney who specializes in estate planning.
The Role of the Trustee
The person who manages a trust, the trustee, has a legal duty
to manage the trust's assets in the best interests of the beneficiary or
beneficiaries. This might include managing rental properties, investing
funds or paying income to the beneficiary.
How much a trustee is required to do and how much access he or
she has to the funds should be specified in the trust. A simple or mandatory
trust requires the trustee to distribute income to the beneficiary. A
complex or discretionary trust may afford the trustee discretion over the
principal and income to be distributed.
Generally, trustees are paid for their services because of the
amount of work involved in managing a trust and the threat of potential
liability if assets are mismanaged. Institutions such as banks or trust
companies usually charge a percentage of the trust’s value to handle the
management (accounting, investing, distributions, etc.) of the trust. The
percentage will vary depending upon the size and complexity of the trust.
Individual trustees often receive a flat fee or hourly rate. No matter how a
trustee is to be paid, it should be agreed upon in advance.
If you want to name someone as a trustee, talk with that
individual or entity about the trust. Be sure they agree to serve as trustee
and can comply with the terms of the trust. Because there is generally such
a high standard of duty and liability imposed on trustees, an individual or
entity cannot be forced into becoming a trustee just because he or she is
named in a trust document or will. If your designated trustee is unable or
unwilling to perform, the court will appoint a trustee for you, unless a
successor trustee, such as a corporate trustee, is designated.
Providing Peace of Mind
It's possible that a trust may be the answer to your estate
planning needs. Take the time to evaluate carefully what you are trying to
accomplish, then consult an attorney experienced in estate planning. A
well-written trust can help to provide peace of mind for you and your