With all the talks and news about investments, there is one that many don’t focus on: a trust fund. As some people become intimidated by the sound of this fund, many don’t understand exactly how a trust fund works or what it is. It’s important to understand the details of the account and weigh your costs and benefits to take your future finances into consideration.
What is a Trust Fund?
A trust fund is an account that you set up in hopes of helping another person financially. A trust fund can be created for educational expenses, home expenses, or simply to pass your money down to someone once you are gone. The point is that your money has somewhere to go, rather than allowing the government to just take it away. There are three basic definitions you should know when setting up a trust. The first is a grantor. A grantor is someone who creates and contributes to a trust. This person gets to decide who the money goes to and how it is disbursed. Next, we have a trustee. A trustee is basically the middleman between the grantor and the person who receives the funds. Typically a trustee is a financial institution who will manage the trust. Last we have a beneficiary. A beneficiary is someone who receives the trust money.
Benefits
Establishing a trust fund can be very simple and easy. It’s also the best way to ensure that your money is handled in good care and will get where it needs to be. Although it isn’t required, most people hire an attorney to write and represent their trust. An attorney is able to advise the grantor through professional knowledge. Many people believe that they need to have a lot of cash flow in order to establish a fund, however this is not true. A person with a lot of money will save on taxes and fees, by establishing a trust, but a person who doesn’t make a lot of money can still contribute to a fund with a minimal amount. These cases typically occur in educational or home trust funds.
Disadvantages
As with most investments, there are few disadvantages to keep in mind. The most common is the attorney fees and costs of creating a trust fund. Many believe that it is too expensive to open a trust, however, when you lay out the ground work, a trust can help you save on taxes, fees, and the hassle of worrying about finances in the long run. The reason these costs are so expensive is simply for the fact that your money is being protected. Another thing to consider is as soon as a grantor contributes money to the trust account, it is no longer their money, so they can not take it out again. It will be under management by the trustee until the date (that the grantor decides) comes and then the beneficiary will officially have access to the account. Again, as the grantor, you decide how this money will be distributed, whether it is full access, monthly payments, or for a specific thing, such as education or home buying.