Trust Fund Investment: A Guide To Getting Started

Trust funds are a popular tool for estate planning, allowing individuals to place assets in a special account to benefit another person or entity. They can be used to control who receives your assets, lower estate taxes, and avoid probate. Setting up a trust fund involves multiple parties: the grantor, the beneficiary or beneficiaries, and the trustee.

Trust funds can hold a variety of assets such as money, real estate, stocks, bonds, businesses, or a combination of asset types. The grantor sets the terms for how the assets are to be held, gathered, and distributed. The trustee manages the fund's assets and executes the grantor's directives, while the beneficiary receives the assets or other benefits from the fund.

There are different types of trust funds, including testamentary trusts, living trusts, revocable trusts, and irrevocable trusts. The type of trust fund chosen depends on the individual's specific needs and goals.

Funding a trust involves transferring ownership of your assets into the trust so that they can be managed and distributed according to your estate plan. This process typically includes choosing the type of trust, inventorying your assets, gathering documentation, and opening a trust account.

Investing money held in trust can be done in various ways, depending on the trustee's legal obligations, the terms and conditions of the trust, and basic principles of sensible investing. Trustees have a legal responsibility to review investments and obtain proper advice when managing trust funds.

Understanding the different types of trusts

Living Trusts vs. Testamentary Trusts

Living Trusts, also known as inter vivos trusts, are created while the grantor (the individual setting up the trust) is still alive. Testamentary Trusts, on the other hand, are created after the death of the grantor according to their last will and testament. The terms of a Testamentary Trust can be altered before the grantor passes away as they are established in the will.

Revocable Trusts vs. Irrevocable Trusts

All trusts are either revocable or irrevocable. Revocable Trusts, also known as living trusts, can be altered or even dissolved by the grantor at any time. Assets in a revocable trust can be transferred to beneficiaries during or after the grantor's lifetime. Irrevocable Trusts, on the other hand, cannot be amended or revoked by the grantor once they are created. The grantor permanently gives up control and ownership of the assets, although they set the terms for the beneficiaries.

Within these two basic structures, there are several types of trusts that serve specific purposes. Here are some examples:

• Asset Protection Trusts are designed to protect a person's assets from future creditor claims. These are typically irrevocable trusts.
• Blind Trusts are used to remove any potential conflict of interest. The grantor and beneficiaries have no knowledge of how the holdings are managed, and the trustee has total control.
• Charitable Trusts benefit a charitable organization and can include Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs).
• Generation-Skipping Trusts are designed to transfer assets to grandchildren or beneficiaries at least 37.5 years younger than the grantor, providing tax benefits.
• Grantor Retained Annuity Trusts (GRATs) allow the grantor to minimize taxes on large financial gifts to beneficiaries.
• Qualified Personal Residence Trusts (QPRTs) allow an individual to transfer their primary residence to the trust for a specific period, after which it is transferred to the beneficiaries without probate.
• Special Needs Trusts provide financial support to individuals with disabilities without jeopardizing their eligibility for government benefits.
• Spendthrift Trusts limit beneficiaries' access to assets, safeguarding against reckless spending and creditor claims.

How to set up a trust fund

Setting up a trust fund is a powerful way to ensure that your estate is handled according to your wishes. Here is a step-by-step guide on how to set up a trust fund:

Identify the purpose of the trust fund

Firstly, you need to identify why you want to set up a trust fund. This could be to control who receives your assets, to provide for a family member's education, to help with the purchase of a first home, or to lower your estate taxes.

Choose the type of trust

There are four main types of trust: revocable, irrevocable, living, and testamentary. A revocable trust can be altered or terminated at any time, whereas an irrevocable trust is permanent and offers greater protection and tax benefits. A living trust can be revocable or irrevocable and is set up during the grantor's lifetime, whereas a testamentary trust is created as part of a will and only comes into effect after the grantor's death.

Choose the trustee and beneficiaries

The trustee is responsible for managing the trust and distributing the assets according to the grantor's wishes. You can appoint yourself or a third party such as a bank as the trustee. When selecting beneficiaries, consider their financial situation and how the dynamics between the trustee and beneficiaries might work.

Choose the assets

Trust funds can consist of a range of assets, including cash, real estate, stocks, bonds, artwork, vehicles, and collectibles. You can place these assets into the trust all at once or over time.

Prepare the trust documents

The final step is to prepare the trust document, which should reflect your intentions and comply with legal requirements. You can seek assistance from an estate planning attorney or use online services. The document should then be executed in the presence of a notary public to make it legally binding.

Fund the trust

Funding the trust means transferring ownership of your assets to the trust. This could include updating the deed to reflect the trust as the new owner of real estate, retitling bank accounts, or drafting a document listing personal belongings and stating that they are now owned by the trust.

Ongoing management

Once the trust is established, ongoing management and administration are essential to ensure the trust assets are preserved and distributed according to your wishes. Trustees are responsible for overseeing the trust assets, managing expenses, accounting and reporting on trust assets, and preparing tax and regulatory filings.

How to fund a trust fund

Setting up a trust fund is a powerful way to ensure that your estate is handled according to your wishes. However, simply creating a trust is not enough—you need to fund it. Here are the steps to fund a trust:

• Create a Trust-Based Estate Plan: The first step is to set up a proper trust as part of your estate plan. This involves choosing the type of trust that suits your needs (e.g., revocable or irrevocable trust) and legally documenting it with an attorney's help.
• Inventory Your Assets: Make a list of all your assets, including real estate, bank accounts, retirement funds, investments, and personal belongings. This step helps you identify what you own and facilitates the transfer of ownership to the trust.
• Gather Documentation: For each asset you plan to transfer, gather the necessary documents. This includes deeds, account statements, stock certificates, and titles. These documents are required when transferring ownership to the trust.
• Open a Trust Account: For liquid assets like cash or investments, open a bank account in the trust's name. This account holds funds and manages the trust's financial assets. Ensure the account is registered under the trust's name, not your personal name.
• Transfer Ownership: Finally, transfer ownership of each asset to the trust. For real estate, update the deed. For bank accounts, contact your financial institution to retitle the account. For personal property, draft a document listing the items and stating they are now owned by the trust.

Remember, funding a trust means transferring ownership of your assets to the trust so they can be managed and distributed according to your estate plan. By following these steps, you can ensure your trust is properly funded and your wishes are carried out.

Investing money in a trust

Understanding Trusts

Firstly, it's important to understand what a trust is and how it works. A trust is a legal arrangement where a person, known as the grantor or settlor, places their assets in the care of a trustee, who manages and distributes those assets for the benefit of a beneficiary or beneficiaries. Trusts can be used for various purposes, such as estate planning, protecting assets, or providing financial support for family members.

Choosing the Right Type of Trust

There are different types of trusts to choose from, each with its own advantages and considerations. The most common types are revocable and irrevocable trusts. Revocable trusts can be altered or cancelled by the grantor at any time, while irrevocable trusts become permanent once the grantor dies. Other types include testamentary trusts (based on a will), living trusts, and special needs trusts.

Selecting a Trustee

The trustee plays a crucial role in managing the trust's assets and ensuring they are used for the intended purposes. When choosing a trustee, consider appointing someone you trust, such as an attorney or a trusted relative. The trustee should have the necessary skills and knowledge to manage the assets effectively and act in the best interests of the beneficiaries.

Funding the Trust

To fund a trust, you need to transfer ownership of your assets to the trust. This includes real estate, bank accounts, investments, and personal belongings. You will need to gather the appropriate documentation, such as deeds, account statements, and titles. For liquid assets like cash or investments, you will need to open a bank account in the name of the trust.

Investing the Trust's Assets

Trustees have a legal obligation to invest the trust's funds wisely. They should consider their legal obligations, the terms and conditions of the trust, and basic investing principles. It's important to diversify the trust's assets to minimise risks and ensure the investments align with the trust's goals and the beneficiaries' needs.

Complying with Tax Requirements

Trusts must report income from investments and pay taxes on any qualified dividends or capital gains. Trustees are responsible for declaring income and gains to the relevant tax authorities and paying any taxes due. It's important to seek professional advice to ensure compliance with tax regulations and minimise tax liabilities.

By following these steps and seeking legal and financial advice where needed, you can effectively invest money in a trust, ensuring that your assets are managed and distributed according to your wishes.

Tax implications of a trust fund

Trust funds are taxed differently depending on their structure. The IRS permits trusts to claim a tax deduction for income distributed to beneficiaries, and the beneficiary pays the income tax on the taxable amount rather than the trust.

There are two main types of trusts: revocable and irrevocable. All revocable trusts are grantor trusts, but not all grantor trusts are revocable. In a grantor trust, the grantor controls the trust's assets and is responsible for reporting and paying taxes on the trust's income. The income is reported on the grantor's tax return instead of the trust's. Many wealthy people favor grantor trusts because their income tax rates are generally lower than trust tax rates.

In a non-grantor trust, the grantor is not responsible for reporting income or paying taxes for the trust. The trust, operating as a separate tax entity, is responsible for reporting and paying taxes on income. Beneficiaries must report and pay taxes on income distributions. In return, the trust claims a tax deduction for the amount distributed. Non-grantor trusts are either simple or complex. All earned income in a simple trust must be distributed annually to a beneficiary or beneficiaries. However, no distributions from the principal are allowed, and distributions cannot be made as charitable donations.

In the case of a simple non-grantor trust, the beneficiaries are responsible for paying the income taxes on the income generated by trust assets, while the trust will pay the taxes on capital gains. For complex non-grantor trusts, the tax may be paid by the beneficiaries, the trust itself, or a combination of both, depending on the circumstances in any given year.

Trusts are taxed more aggressively than individuals. For example, in the 2024 tax year, a trust is subject to the top marginal tax rate of 37% after reaching $15,200 of income. In comparison, a single filer would only be taxed at this rate after earning $609,350.

Trust funds can be an effective tool for managing and protecting your assets and may reduce or even eliminate costs related to wealth transfer, such as probate fees and gift and estate taxes. However, it is important to carefully consider a trust's potential tax liability when establishing and transferring assets to one.

Frequently asked questions