Christmas is around the corner, and that means that Santa is on his way. This year, consider getting your kids a gift that will truly make a long-lasting impact: a trust fund. In this article, we will discuss what a trust fund is and how it works, dispelling any misconceptions you may have about this important financial tool.
What Is A Trust Fund?
You might know of the term “trust fund,” though you have likely heard it used in a derogatory fashion. Trust funds have a reputation of being only for the uber-wealthy, but that couldn’t be further from the truth. This estate planning tool allows you to put aside money and, if you want, assets that will be distributed to the beneficiaries you name on the trust. The distribution will take place at a later date of your choosing. Basically, a trust fund is created to house money and assets on behalf of another person.
A trust fund is usually executed and managed by a licensed estate planning attorney. The trust fund requires a grantor (you, in this example), trustee, and beneficiary. The grantor sets the terms for how he or she wants the money gathered, held, and distributed, and the trustee executes the grantor’s directives. The beneficiary, as the name suggests, receives the cash and assets from the fund at a predetermined time.
What Happens to Money In A Trust Fund?
Trust funds can contain a large number of different assets, including bank accounts and money, businesses, heirlooms, and other types of investments. The assets remain in the trust fund until certain circumstances are fulfilled. Once these terms are met, the trust fund’s proceeds are distributed to beneficiaries.
How To Set Up A Trust Fund
There are a few main steps to setting up a trust fund. Everyone’s financial situation is different, but these general steps apply to most people. Here are the steps:
- Set Goals. Be clear about why you’re setting up the trust, as well as what terms and assets you want to include. Make sure that your children get what you want them to get. Clarity is very important when setting up this type of document, hence why legal counsel is a must-have.
- Choose What Type of Trust. Your attorney will help you determine the type of trust that is best for you. For example, a revocable trust, one of the most common types, is flexible, allowing you as the grantor to make changes in certain circumstances.
- Determine the Terms. Name your trustee, as well as who will get what. Determine distributions and provisions, as well as any other details that will help you achieve your “Step 1” goals.
- Create The Trust Documents. After making all your decisions and getting your information together, you will set up your trust fund, with legal counsel, abiding by Florida law.
- Fund the Trust. You can fund your trust through real estate, bank accounts, life insurance policies, and more. The trust will not function as intended until you fill it with assets.
Advantages And Disadvantages Of A Trust Fund
As with anything, a trust fund has its pros and cons. While a trust fund is far more wide-ranging than you might have thought before reading this article, this financial tool is still not for everyone.
Advantages of a trust include:
- You can avoid probate.
- There may be tax benefits involved (legally).
- You can customize and control the way in which your wealth is distributed.
- You can provide for your beneficiaries’ financial future.
Disadvantages of a trust include:
- The structure can be complex.
- A trust can be expensive to both maintain and establish.
- Trustees’ powers are restricted by the trust deed.
Hopefully, this article has opened your eyes to what a trust fund can do for you and your family. It isn’t just a tool for the wealthy—it is great way for families of all economic backgrounds to ensure their kids have a stable future. Contact us if you have questions and to get started.