What is a Trust Fund

A trust fund is a discretionary fund which is usually income-producing assets (typically a sum of money or certain property). It’s held by a trustee to serve many different purposes for the exclusive benefit of the beneficiaries. Most of us aren’t aware of the fact that there are actually several different types of trust funds. Of course we all know about those trusts that are set up for children or grandchildren to be used for specific purposes such as college at some later time, but there are other types of trust funds that at first glance don’t appear to fit the bill. Even so, there are a number of common elements that all of these types share or they couldn’t be considered to be a trust fund.

Four Common Elements Shared by Trust Funds
The first common element shared by all trust funds is the fact that there must be someone who creates the trust, called a ‘grantor’ or ‘donor.’ Secondly, someone else, an entity or person called a trustee, needs to agree that they will hold the property/money for someone else’s benefit. The third common element to all trust funds is that there must be something of value (property and/or money) held in trust for someone else’s benefit and this money/property is called the principal of the trust fund. Finally, and perhaps most importantly, someone else needs to benefit from that trust. The person or persons who benefit by the trust are called the ‘beneficiary’ or ‘beneficiaries.’

Revocable vs. Irrevocable Trust Funds
A revocable trust fund can be changed by the grantor at his or her discretion and it can even be dissolved if that is what the grantor desires. On the other hand, an irrevocable trust fund in theory cannot be revoked or changed and that’s exactly what most people will tell you. However, there are certain times in which the grantor can obtain the consent of both the trustee and the beneficiaries to amend the trust which then must get the court’s approval.

Simple vs. Complex Trust Funds
Actually trust funds can be categorized as either simple or complex. A simple trust fund is most often set up so that the beneficiary can receive proceeds from the interest but cannot touch the principle until a prespecified time, usually the death of the grantor. This is one of the common types of trust funds that parents or grandparents set up for their children/grandchildren. Conversely, it is possible to draw from the principle as well as the interest in a complex trust fund under specific prespecified conditions in the deed.

Living Trust Funds
In recent years one of the most common types of trust funds is a living trust fund that is effective can help the grantor to retain control of the fund during his or her lifetime. Assets within the fund are afforded protection from estate taxes and since the fund is subject to change at the will of the grantor it falls within a category called ‘revocable.’ In other words, the trust fund is in effect during the lifetime of the grantor.

Testamentary Trust Funds
A testamentary fund is never effective during the lifetime of the grantor because it is set up within a Last Will and Testament. It obviously cannot become effective until the death of the grantor because that is when the conditional event (the death of the grantor) occurs. However, even then the trust doesn’t go into effect until the deed (testamentary document) is entered into probate court.

All types of trust funds are classified by purpose which is to be clearly defined within the deed and it is best to obtain the services of a qualified attorney when establishing the fund. Keep in mind that laws vary from state to state so it is imperative to get legal counsel in the state where the grantor lives.

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