Trust funds not just for the wealthy

People often associate trust funds only with the wealthy. But a trust fund

actually can be an effective financial tool for many people in many circumstances.

A trust is a separate legal entity that holds property or assets of some

kind for the benefit of a specific person, group of people or organization — beneficiaries. The person creating a trust is called the grantor, donor

or settlor.

When a trust is established, an individual or corporate entity is designated

to oversee or manage the assets in the trust. This individual or entity

is called a trustee. A trustee can be a professional with financial knowledge,

a relative or loyal friend or a corporation.

There are pluses and minuses to each type of trustee. An individual trustee

may provide a more personal touch, but may die or move away. A corporate

trustee may be less personal but provides experience, investment skills,

permanence and impartiality. More than one trustee can be named by the grantor

if he or she wishes.

Benefits of establishing a trust

Whether it makes sense to establish a trust depends on your individual circumstances.

Some common reasons for setting up a trust include:

* To provide for children or family members who lack financial experience

or who are unable to manage their assets.

* To provide for management of your assets should you become unable to oversee

them yourself.

* To avoid probate and transfer your assets immediately to your beneficiaries

upon death.

* To reduce estate taxes or provide liquid assets to help pay for them.

Types of trusts

There are two basic forms of trusts:

* An after-death (or testamentary) trust will come into existence, usually

by virtue of a will, after a person's death. The assets to fund these trusts

must usually go through the probate process. In certain states, they may

be court-supervised even after the estate is closed. An example of an after-death

trust would be a mother leaving land to a trust benefiting a young son in

her will. The will establishes the trust to which the land is transferred,

to be administered by a trustee until the boy reaches a stated age, at which

point the land is transferred to the son outright.

* A living trust (or inter vivos) is a trust made while the person establishing

the trust is still alive. In this case, a mother could establish a trust

for her son during her lifetime, designating herself as trustee and her

son as beneficiary. As the beneficiary, her son does not own the property

but can receive income derived from it.

Living trusts can be revocable or irrevocable. The most popular type of

trust is the revocable living trust, which allows the individual to make

changes to the trust during his or her life. Revocable living trusts avoid

the often lengthy probate process but, by themselves, don't provide shelter

for assets from federal or state estate taxes.

When an irrevocable living trust is set up, custody of the assets is turned

over to the trustee. The trust becomes, for tax purposes, a separate entity,

and the assets cannot be removed, nor can changes be made by the grantor.

That type of trust is often used by individuals with large estates to reduce

estate taxes and avoid probate.

Specific-use trusts

Before you set up a trust, ask yourself what you are trying to accomplish.

Here are just a few of the many special uses for trusts:

* A charitable trust is used to make donations and realize tax savings for

an estate. Typically, there is a transfer of property such as art or real

estate to a trust that continues to hold the asset until it is transferred

to the charity, usually after your death. The donor can continue to enjoy

the use of the property, then the charitable gift may be deductible for

estate tax purposes.

* A bypass trust allows a married couple, in certain cases, to shelter more

of their estate from estate taxes. The first spouse to die can leave assets

in a trust which can provide income to the surviving spouse for the rest

of his or her life, taking advantage of the unified credit provided under

Federal Gift and Estate Tax law. Upon the death of the second spouse, the

assets in the trust pass directly to the children or other beneficiaries,

without being taxed at the second spouse's death.

* A spendthrift trust can be a good idea if your beneficiary is too young

or does not have the mental capacity to handle money. The trust can be established

so that the beneficiary receives small amounts of money at specified intervals.

It is designed to prevent that person from squandering money or losing the

principal in a bad investment.

* A life insurance trust is often used to give your estate liquidity. In

this case, the proceeds are payable to the trust and the trustee is empowered

to lend money to or purchase assets from the estate.

—Zall, Bureaucratus columnist and a retired federal employee, is a freelance

writer based in Silver Spring, Md. He specializes in taxes, investing, business

and government workplace issues. He is a certified internal auditor and

a registered investment adviser. He can be reached at [email protected]


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