A trust fund may hold corporate shares.
A trust fund is a financial tool that holds and manages assets for the benefit of another person or organization, called a beneficiary. The initial assets of the fund are provided by a grantor or donor, and a trustee or team of trustees manages the funds according to that person’s instructions. The beneficiary receives payment from the fund in cash or in periodic installments, according to the terms of the trust. Trust funds are often used to set aside property, investments, or cash assets to support people who cannot manage their finances for themselves, such as children or the sick. People can even set one up for themselves, assuming they won’t be able to manage their personal finances at some point in the future.
types of trusts
There are two main types of trust funds, living and testamentary, which differ primarily in terms of how and when they are set up. The first is constituted in the life of the trustor and can be revocable, that is, the trust can be constituted in such a way that it is altered or dissolved by the trustor. The second, provided for in a will, is always irrevocable, since the grantor has died and, therefore, cannot alter or dissolve the trust.
The funds established to reduce or avoid tax obligations generally cannot be modified either. For example, some jurisdictions limit the amount of assets that can be given as a gift without paying taxes. Individuals can avoid this limit by establishing an irrevocable trust fund by donating the assets to a beneficiary. While this person ends up having to pay estate taxes when they are paid, this can be delayed for a long time. This strategy is also sometimes used to shield life insurance benefits from estate taxes.
The structure and procedure for establishing a trust fund varies greatly depending on the reason for its creation. Some are set up so that the trustee can use the assets to benefit the beneficiary, but the beneficiary cannot access the funds themselves. Others can only be used to benefit a certain group, class, or organization. A mutual fund is created so that various beneficiaries have shares in it, and then they can have the trustee pay them according to the number of shares they own. There are many other different types of trust funds, and each one is structured slightly differently.
Creation of a trust fund
The laws governing trusts vary by jurisdiction, so anyone wishing to create one should consult an attorney. With a living trust, all assets must be transferred before the grantor dies or the trust is terminated, and the government will dispose of the assets according to probate laws. Any assets of the grantor that have not been allocated to the fund can typically only be transferred to the grantor upon death if there is a provision in the person’s will that specifies this. Testamentary trusts are established after the grantor’s death, as specified in the terms of the grantor’s will. In this situation, a probate court will oversee the trustee as they administer the fund and may act as trustee if one is not appointed.
Advantages and disadvantages
Trusts have many advantages in that they are flexible enough to allow the grantor to tailor them to their needs, can be used to defer taxes, and are quite private. They are also generally a safe way to provide for beneficiaries upon the grantor’s death and can spare them the hassles and fees that often result from handling the grantor’s assets. Despite this, they are not the best option for all situations. Grantors can get into trouble if they try to use assets without consulting trustees and beneficiaries, and trustees often charge for their management services, which can be costly. Also, depending on the configuration, the administrator may not have much supervision and may mismanage assets.