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Trust funds: Everything you need to know

What is a trust fund? How does a trust fund work?

A trust fund is a legal entity that is used to manage and hold assets or property to benefit another person or entity. It can be used in estate planning to determine how assets will be managed and passed.

A trust can also be established as a part of your retirement plan to benefit you after you retire. There are many different types of trusts, and they are usually comprised of a grantor, trustee, and a designated beneficiary.

The types of trusts that can be established in an estate plan may vary from state to state. You can use a trust fund in your estate plan to make certain that your wishes are followed after you die. Other benefits of setting up a trust include the following:

  • Asset protection
  • Educational expense payments
  • To transfer large amounts of money
  • To benefit from tax advantages

What is a trust fund baby?

This is a phrase that refers to someone whose parents have created a trust account to benefit the child. The trust fund that is created contains enough assets for the beneficiary to be able to live off of. There is a stereotype of a trust fund baby as a spoiled child who does not work. However, the stereotype does not accurately reflect many people who are trust fund babies.

The reality is that a trust fund baby is likely to work and is unlikely to advertise the fact that he or she has inherited money. The funds in the trust account can usually be accessed once the person has reached a certain age or other specified milestone.

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The trustor, the child, or a third party can maintain the funds that are held in the trust. Some famous examples of a trust fund baby include Caroline Kennedy Schlossberg, Peter Buffet, and Paris Hilton. An example of a famous wealthy person who decided against leaving a child a trust fund or who left only a portion of her estate to her child while giving the rest to charity is Gloria Vanderbilt and her son, Anderson Cooper.

Trust funds in the U.S.

In the U.S., trust funds currently generate more than $196 billion in annual income. Trust fund revenue is expected to grow by 3.7% during 2019.

In the U.S., fewer than 2% of people are left with trusts from their parents. The median amount that is passed through trusts is $285,000. The average amount that is held in trusts is $4,062,918.

Understanding the components of a trust

A trust is made up of a grantor, trustee, and the beneficiaries. The grantor is the person who creates the trust. A trustee is a person or entity that is appointed to manage the trust assets and to hold the title to them. The beneficiaries are the people or entities that stand to benefit from the trust because they are specifically named or have met some eligibility requirements. Beneficiaries can benefit from wills, trusts, or life insurance policies that have distribution requirements.

The assets that may be held by a trust include the following:

  • Cash
  • Stocks
  • Mutual funds
  • Bonds
  • Real estate
  • Other valuable property

The terms of a trust determine how the assets that are held by the trust will be invested, managed, or distributed. Some states have requirements for guardian appointments to administer the funds in a trust fund for child beneficiaries.

The trust will last until its property is exhausted. If the trust held stocks or cash, the trust will end when all of the money and the interest that has been generated are paid to the trust beneficiary. If the trust holds real estate, the trust might end if the house is destroyed or if the trust reaches a predetermined end date.

Types of trust funds

There are two main categories of trusts, but there are many different types of trusts that fall into the broader categories. One of the main types of trusts is a revocable trust. These are trusts that are created during the lifetime of the grantors in which the grantors retain the right to modify or add to the terms at any time.

If you include all of your assets in a revocable trust, it will not have to go through the probate process. However, creditors can still reach the assets while you are still alive, and revocable trusts do not provide you with any tax benefits.

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The second broad category of trusts is irrevocable trusts. These are trusts that can be created during your lifetime or after you pass away. Irrevocable trusts take ownership of the assets that are held by them in order to benefit the beneficiaries. An irrevocable trust may be a living or testamentary trust.

Since the grantors no longer have ownership or control over the assets, irrevocable trusts are safe from legal judgments through lawsuits against the grantors. The grantors also will not have any tax liability for income that is generated by the assets in the trusts. However, grantors of irrevocable trusts cannot change or modify the terms unless they have secured the agreement of all of the beneficiaries.

Living trusts are trusts that are created and funded by you during your life. Testamentary trusts are irrevocable. These trusts are created after their creators die through the terms of the creators’ wills. The creators can change or cancel testamentary trusts while they are still alive by making changes to their wills.

Setting up a trust for child beneficiaries: Types of trusts

During the estate planning process, if you decide that you want to set up a trust fund for the benefit of a child, there are several different types of trusts that you should know about. The following types of trusts can be set up for children:

  • 2503(b) trust
  • 2503(c) trust
  • Asset protection trust
  • Crummey trust
  • Family trust
  • IRA trust
  • Spendthrift trust
  • Special needs trust
  • Irrevocable life insurance trust or ILIT
  • Pot trust
  • Totten trust

A 2503(b) trust is a trust fund in which there are annual distributions of income to a child while he or she is still a minor. The money is placed into a custodial account, or the child can be allowed to withdraw at least up to the amount of the yearly gift tax exclusion. This type of trust can be extended past when the child reaches age 21.

A 2503(c) trust is also known as a minor’s trust. It is irrevocable, and all of the income and principal are used to benefit the child until he or she reaches age 21. After the child reaches age 21, the assets that remain in the trust must be distributed to the child unless he or she decides to extend it. Contributions to a 2503(c) trust qualify under the yearly gift tax exclusion. They are also exempt from the tax on generation-skipping transfers.

An asset protection trust lets you secure your assets from the reach of creditors. You will still be able to maintain a degree of control over the assets in the trust. Some states allow you to establish an asset protection trust despite the fact that you do not live in the state. If you establish this type of trust in a state that does not have a state income tax, you can also enjoy some savings on your taxes.

A Crummey trust lets you place restrictions on the ability of the assets will be able to access them. This type of trust lets you transfer assets while restricting when the beneficiaries are able to receive the money. Setting up a Crummey trust also lets you benefit from the gift tax exclusion. When parents are setting up a trust for child beneficiaries, this trust might be used to make lifetime gifts to them.

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Some people who set up a trust fund want to create something that will benefit their families. A family trust can be established to give a trustee the right to hold the legal title to the assets of the family to benefit one or more beneficiaries. This can help you to make certain that your wishes regarding the distribution of your assets will be followed and that any inheritance or estate taxes might be avoided or minimized.

An IRA trust is a revocable trust that is designated as the beneficiary of your IRAs for after you die. The IRA trust will receive and hold the funds from your IRA account to benefit your beneficiaries. You can create different sub-accounts within the agreement that specify the beneficiaries and their terms.

A spendthrift trust offers you a way to protect a loved one who has problems with managing money. He or she will not receive a lump-sum payment of the assets in the spendthrift trust. Instead, distributions will be made based on his or her needs.

A special type of trust fund for child beneficiaries is a special needs trust. This can be established to make certain that children who have special needs will be cared for after you pass away. You can include provisions in the trust document that help to keep other family members from taking the assets away from the trust.

Irrevocable life insurance trusts or ILITs are trusts that are named as the beneficiaries of their creators’ life insurance policies. If you set up one, your life insurance policy proceeds will be paid into the trust after you die. The trustee will manage the life insurance proceeds for the trust beneficiaries. An ILIT can help you to avoid having to pay estate taxes on the proceeds of your life insurance policies.

Another type of trust that you might create during your estate planning process is called a family pot trust. In this type of trust, the trustee will have discretion over how the money should be spent on each of the child beneficiaries based on their individual needs. In estate plans, this type of trust is used when there are multiple child beneficiaries.

Totten trusts are established in order to allow you to place money into an account or a security. When you die, the money that is held in the account or the security will be transferred to the beneficiaries that you have named.

Disclaimer: This is not an exhaustive list of the types of trusts that you can create during the estate planning process. You should seek the assistance of a professional to learn more about the types of trusts that might be beneficial to your family.

Benefits of a trust fund

There are several benefits and limitations in creating a living or testamentary trust during the estate planning process. The benefits of establishing a trust include the ability to help protect your assets and assist your loved ones to avoid the probate process.

If you do not take steps to avoid probate, your estate will go through a process which involves the court distributing your assets according to the terms of your will. If you die intestate, the court will decide how to distribute your assets under the state’s intestacy laws.

The probate process can take many months or years to finish. The time frame will be longer if your estate is complex or if beneficiaries contest your will. The contents of a will become a matter of public record when it is probated. Before the distribution of your assets, fees will be deducted from your estate. The probate process can cost hundreds or thousands of dollars in legal fees and court costs.

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If you have children who are financially unstable or inexperienced, establishing a trust to benefit them can help. You can decide how your children will receive your assets, and the specifics will be kept private. A trust can be customized to fit your individual circumstances, and you can place restrictions on how your assets will be distributed. Finally, a trust can help you to protect your assets.

There are also limitations of trusts. If you set up a trust, there will be expenses that must be paid to maintain it in addition to the costs involved with setting it up. If your estate is complex, you can expect the legal fees to be higher. The trustee will charge maintenance fees to manage your estate. If claims are filed against the trust, you may have unexpected costs because of legal fees. Finally, the laws are in a constant state of flux. This means that you will have to review your trust document and to revise it as the laws change to keep it current and valid.

Steps to setting up a trust fund

If you want to establish a trust as a part of your retirement plan, you should start by figuring out the objectives that you are trying to accomplish. As the person who creates the trust, you will be the grantor. The assets that you choose to include in the trust can include many different types, including the following:

  • Bonds
  • Cash
  • Mutual funds
  • Real estate
  • Stocks
  • Other types of property

If you have young children, it might be a good idea to include long-term investments in your trust.

You will also need to determine who will be the beneficiaries of your trust. The beneficiaries will be the people or entities that you intend to receive distributions, and they must be specifically named or must meet specific distribution requirements.

Choosing a trustee will also be necessary. You can choose a trusted person or an entity to manage your trust. The person or organization that you choose will administer the assets and property in the trust for your beneficiary or beneficiaries. It is important for you to name an alternate trustee in case the person you select either is unavailable or no longer wants to serve in the role.

You will also need to figure out the terms for how your assets will be invested, distributed, and managed. Finally, you will need to set the trust’s time frame and the conditions that will result in its termination.

Termination of a trust

A trust will terminate when a beneficiary reaches a specific age or milestone that is named in the trust terms. In that case, the trustee will then distribute any principal that remains together with the net income that has accumulated to the beneficiary. A trust can also terminate upon the beneficiary’s death. When this happens, the net income and principal of the trust will pass under the beneficiary’s will to his or her heirs.

Setting up a trust fund can help you to ensure that your wishes are followed and that your children and family members are protected. M1 Finance offers trust accounts to simplify the trust process and supports revocable and irrevocable trusts that invest in securities.

How M1 Finance benefits investors

When you are creating your retirement plan or are thinking about establishing a trust, there are several reasons why you should trust M1 Finance. The brokerage is well-regarded for its suite of award-winning tools that help your investments to grow automatically in a tax-efficient manner.

M1 Finance includes built-in tax strategies that help to reduce the taxes that might be owed. The brokerage is highly secure and charges no fees, allowing do-it-yourself investors a simple and free way to invest. With the help of M1 Finance, you will be empowered to take control of your money so that you can increase your earnings.

Open a customized M1 Finance account today

When you open an M1 Finance account, you can pick the securities that will best match your risk tolerance level. If you are unsure of which investments you should choose, you can opt for a portfolio that has already been expertly created to match different risk tolerances, goals, and investment durations.

M1’s sleek, intuitive design makes building and managing your portfolio a breeze. M1 Finance offers a mobile app and an investment platform that help to make investing easily accessible to investors. You can log in at any time to gain access to its strong automation. The platform uses automatic features such as rebalancing of your portfolio and reinvestments to keep everything in line with your financial goals. The investing process is simplified so that you can grow your savings effortlessly. You can also get started today by completing an online account application or call M1 Finance at 888.714.6674 to learn more.