What Is a Trust Fund and How Does It Work?
What Is a Trust Fund and How Does It Work?
By Cari Wira Dineen — Jun 15, 2022
Trust funds often get a bad rep—too often, we assume the people who inherit them are spoiled, entitled and ultra wealthy.
But that’s not actually true (or doesn’t have to be). Sure, trust funds might be a good place to park your cash if you’re a millionaire. But you don’t have to be rich to make a trust fund a part of your financial toolkit. A trust fund can be a useful component of your estate planning, (in addition to writing your last will and testament and picking your children’s guardians). That's especially true if you want to help your money get to your kids without a hitch when you pass away.
How do trust funds work? What is a trust fund, exactly?
We spoke to Alexander Joyce, CEO and president of ReJoyce Financial, a financial and estate planning firm in Indianapolis. He shared how you might go about setting up your kid (and your cash) with a trust.
Read on for the definition of a trust fund, how a trust fund works and whether you might need one.
What Is a Trust Fund?
Trust Fund Definition
A trust fund is an estate planning tool. It’s a legal entity that can hold property on behalf of someone or some group.
If you are the person who’s creating a trust, you’re called the grantor, trustor, settlor or trust maker. If you set up a trust through your will, you could also be called the testator or decedent. This person chooses the rules behind the trust and decides what property the trust will own (by transferring assets into the trust’s name).
The person you ultimately want to receive your money or property is your beneficiary. Being named a beneficiary of a trust is different from owning property, though, because there are generally rules attached. For example, a trust might allow a beneficiary to live in a home owned by that trust, but not rent it out or sell it. Depending on how the trust is set up, beneficiaries often end up inheriting the trust’s assets, according to some trigger like age—for instance, inheriting money when the person turns 21.
The person or entity you want to oversee the money and fulfill the various responsibilities is the trustee. This person doesn’t actually own the property in the trust but rather oversees the distribution of the property to the beneficiaries and makes sure that the stipulations put in place are being followed. Trusts can have multiple or co-trustees, or even institutional trustees (meaning that a company oversees the administration of the trust). Many trusts name successor trustees in case the first-choice trustee becomes unavailable.
In many cases, the trustee receives some sort of compensation for the effort, like a management fee.
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How Does a Trust Fund Work?
A trust fund essentially transfers ownership of the assets you put into it to the trust itself. When you create a trust, you are the grantor and often the first trustee, and you set the rules around how the assets in the trust can eventually be distributed.
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