A trust fund is an excellent way to create wealth for future generations. However, many novice investors aren’t very confident with setting up one because the general belief is that only the rich can set up trust funds.
The average person of color finds the idea of setting up a trust fund intimidating, and they do not consider it as a wealth-building option at all.
However, if you read some articles online about “What are trusts for dummies?” you will realize that a trust fund can make a lot of sense, even if you aren’t a wealthy businessperson or from a blue blood family. For example, grandparents can set up trust funds for their grandchildren’s education.
Here, we take a look at what a Trust Fund is, how it works, and why EVERY family of color needs one.
What Is a Trust Fund?
It is a specific kind of legal entity in which property can be held for the benefit of some person, organization, or group.
There are a variety of trust funds and provisions which define how these financial vehicles work. Typically, three parties are involved in trust funds of all kinds:
- The Grantor- This is the individual who creates the trust fund and donates to it, property such as stocks, cash, mutual funds, a private business, art, real estate, or anything else that carries some value. They will decide what the terms of the trust fund are and how it will be managed.
- The Beneficiary– Is the individual for whom that trust fund has been established. The assets in the trust fund do not technically belong to the beneficiary. But it is intended that these assets will be managed in a manner that will benefit them. The management of funds would be as per the specific rules and instructions that the grantor had laid out when they created the trust fund.
- The Trustee: This can be an individual, multiple trusted advisers, or an institution (like a bank trust department that will appoint one of its staff). The entity will be responsible for ensuring the trust fund sticks to its duties as per the rules and guidelines set in the documents as well as in line with the applicable trust law.
Often, the trustee will be paid a small fee for managing the trust fund. Some trust also handover the responsibility for managing the trust’s assets to this trustee. But others require that the trustee select some investment advisers that are qualified to handle all the money.
How Does a Trust Fund Work?
The best way to understand how a trust fund works and what is trust in business?-is through an example.
You aren’t born into money but have worked very hard all your life to set aside substantial savings. You know that when you pass away, you want all your savings to reach people you love and care for or causes/charities you believe in.
But you may also have some people you care for that aren’t as financially savvy as you are. You might not be comfortable with leaving behind a significant gift because they may squander it away or use it irresponsibly. Aside from this, you may want to see your hard-earned savings carried over for future generations too.
If this is what you want, then you should consider setting up what’s called a living irrevocable trust fund. In this type of trust, the funds can be dispersed when specific conditions are met.
As the fund name indicates, you can be alive when the process begins.
How to Set Up a Trust Fund
To set up a trust fund, you would have to meet with your attorney, set all the stipulations, and decide who the beneficiaries will be. You can place stocks, real estate, other valuable assets, or cash in your trust, decide at what intervals you want the payments to be disbursed or the purpose/s they can be used for.
For example, you can set the fund up in a way that the beneficiary receives a monthly payment or state that the funds can be used only for educational purposes, to buy a home, or for expenses due to disability/injury, etc. Since it’s your money, you get to decide all these things.
Although the trust fund is permanent, the money/assets aren’t the property of the individual receiving them. So a child who is applying for any financial aid wouldn’t need to claim the funds as assets.
It also means that their eligibility for their needs-based financial assets won’t be affected in any way. As a trustor, you can establish a fund for future generations too.
This means the trust fund becomes an indefinite legacy for all your future generations. It is an excellent option for people of color that want to create a solid financial base for their loved ones.
It’s essential to know that an irrevocable trust fund cannot be dissolved at any point in time. Once you create the trust and place any assets in it, they are under the trustee’s care and no longer belong to you.
What to Do Next?
Now that you have the answer to- What is a trust account?
Get advice from an experienced attorney and properly plan the fund so that the assets will all be exempt from the gift as well as estate taxes.
When you set up an irrevocable trust fund, you can remove all the included assets from your net worth. This proves to be beneficial to you as you fall in a much lower tax bracket.
Whether setting up a trust fund is right for your situation will depend entirely on your specific circumstances, the things you want to accomplish, as well as the laws of your state. It would be best if you discussed all your needs and ideas with a qualified and experienced trust attorney.
They will give you detailed information about the trust’s economics, so you get into it with your eyes open. You would need to discuss your plans with your accountant and registered investment advisors as well.