When a person has a lot of wealth, in cash and assets, they invariably will turn to an estate planner to help with the task of organizing those assets. Though the term estate planning calls to mind great wealth, it is important for everybody because it is the process by which to take care of the people and things that matter. Part of the estate planning process may be developing a trust fund.
A trust fund is but one of the tools of estate planning and one could think of it like obtaining a credit card when going off to college. It provides for you when you need it. A major difference is that with a credit card you must develop requisite management skills, lest you develop bad credit habits that could lead to a poor credit score. With a trust fund, you aren't borrowing money with interest from a lending firm. In this scenario, the money has been bequeathed to you.
What, Exactly, Is Estate Planning?
Estate planning is basically the process of generating the proper documents that will allow the assets of the estate to be dispersed upon death. It is the process by which a family or individual arranges the transfer of assets in preparation for death. The process determines how an individual's assets will be managed and how their property will be distributed upon their death.
The elements that fall under the estate planning umbrella include personal property, investments, bank accounts, artwork, real estate and even debt. Wills and trust funds are the most popular and widely used estate planning tools because of the clarity that they apply to a situation.
What Is a Trust Fund?
A trust fund is a tool that establishes a legal entity to hold property or assets for a person or organization. Depending on the circumstances, they can hold a variety of assets, including real estate, stocks and bonds, money or a business. It could include a combination of different types of properties or assets.
Trust funds offer tax benefits, as well as financial protections and support for those involved. This is a legal process, in which three parties are required to establish a trust fund: the granter, the beneficiary and the trustee. Each has a specific role.
The grantor is the engine that drives the process. It is the grantor who sets up the trust fund and populates it with their assets. The beneficiary is the person for whom the assets are managed. It should be noted that often there is more than one beneficiary in these scenarios and unless things are made perfectly clear through the paperwork, parties could find themselves arguing about the assets. The trustee is the appointed fiduciary responsible for carrying out the wishes of the grantor.
How Does a Trust Fund Work?
Trust funds are logistic necessities because they take any and all guesswork out of parsing out the details of a person's assets. They are an estate planning tool that is used for managing the assets that will be distributed. The grantor creates the arrangement that lays out all of the logistics involved in managing assets, which will go into effect when they no longer have the mental capacity to make such decisions, or when they are deceased.
The trustee’s duties can include allocating living expenses or even educational expenses for the beneficiary. If, for instance, a grandparent wants to leave a sum of money that can be used exclusively for higher education, they can set up a trust that details exactly the parameters by which the trust may be utilized. On the other hand, there are scenarios, where a lump sum is paid directly to the beneficiary, which comes without any conditions for relatives to use.
What Is Probate Court?
Probate is the term that describes the official proving or validating of a will. When the assets in a trust are in dispute, parties may end up in probate court. A probate court is a type of court that deals with the property and debts of a person who has died. It is a means of helping ensure that assets are distributed in the spirit of the granter. This speaks to how precise the language must be when drawing up the paperwork involved in estate planning.
Probate courts oversee the execution of wills and the handling of estates, conservatorships and guardianships. The court usually must approve the activities of the executor appointed to handle matters. When a will is contested, the court is responsible for establishing the authenticity of the document and the cognitive ability of the person who signed it. If there is no will, it is the court that decides who will receive the decedent's assets.
What are Types of Trust Funds?
There are three common types of trusts: revocable, irrevocable and asset protection trusts. There are more subcategories, each speaking to a range of terms and potential benefits.
What Are the Benefits of a Trust Fund?
There are many reasons to consider a trust fund when going about the business of estate planning. Some of the most common include tax advantages and privacy. Concerning taxes, certain types of funds allow for the transfer of assets outside of the estate, which can reduce estate taxes. Concerning privacy, trust funds do not become part of the public record. Other benefits include:
- Establish children as beneficiaries
- Bypass probate
- Control of assets
- Protecting assets from creditors
A Trust Fund Is a Step Toward Financial Security
A trust fund is significant for several reasons. It ensures protection when the worst kind of emergencies occur. It also speaks to the idea of employing money and assets as protective entities, which, one might argue, is exactly the point. Beyond comfort and luxury, money provides the financial security that keeps the proverbial wolf from the door. In this way, it's very much like higher education. By educating yourself, theoretically about all things that affect your future, such as money or developing a trade or skill, you're taking steps to ensure your own security.
