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How Does a Trust Fund Work?

How Does a Trust Fund Work
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Trust funds are an important estate planning tool. They can protect your assets while you’re alive and help ensure that you leave money to your children or other loved ones after you die.

To maximize the benefits of a trust fund, you’ll need to understand how trusts funds work and how to create a trust fund the right way; advises this recent article from Yahoo! Money titled “How to Start a Trust Fund the Easy Way.” You don’t have to be a millionaire to start a trust fund, by the way. “Regular” people benefit just as much as millionaires from using trusts to protect assets and minimize taxes.

A trust fund is an independent legal entity created to own assets and ensure money and property are used to benefit loved ones. They are commonly used to transfer assets to family members.

Trust funds are created by grantors, the person who sets up the trust and transfers money or assets into it. An experienced estate planning attorney will be essential since creating a trust is not like going to the bank and opening an account. You need the assistance of a professional who can build a trust to reflect your wishes and comply with your state’s laws.

When assets are moved into a trust, the trust becomes the legal owner of the property. Part of creating the trust is naming a trustee who manages the trust and is legally bound to follow the trust’s instructions following the grantor’s wishes. The grantor should always designate a successor trustee if the primary trustee becomes unwilling to serve or dies.

Subject to compliance with specific requirements, assets owned by an irrevocable trust are not countable towards Medicaid if someone in the family needs long-term care and is concerned about qualifying. You must do any transfer at least five years before applying for Medicaid. An elder law attorney can help prepare for this application and ensure eligibility. Medicaid asset protection is a very complex area of law. Do not attempt it alone without the assistance of an elder law attorney.

Trusts can have a long or short life. Some trusts are held for a child until the child reaches age 25. In contrast, others are structured to distribute a portion of the assets throughout the beneficiary’s lifetime or when the beneficiary reaches certain milestones, such as finishing college, starting a family, etc.

A revocable trust allows the grantor to have the most control over the assets in the trust, but at a cost. The grantor may change the revocable trust at any time, and property can be moved in and out of it. However, the assets are available to creditors and are countable towards long-term care because they are in the grantor’s control.

The irrevocable trust requires the grantor to give up control for the benefits the trust provides.

There are as many types of trusts as there are situations for trusts. Charitable Remainder Trusts reduce estate taxes and allow beneficiaries to receive an income stream for a designated period. The remainder of the trust’s assets goes to the charity. Special Needs Trusts are created for disabled persons receiving means-tested government benefits. There are strict rules about SNTs, so speak with an experienced estate planning attorney to ensure that your loved one continues to be eligible if you want them to receive assets from you.

Trusts are often used so assets will pass through the trust and not through the probate process—assets owned by a trust pass directly to beneficiaries. Information about the assets does not become part of the public record, which is part of what occurs during the probate process.

Your estate planning attorney will help ensure your trusts are appropriate for your situation, achieve your specific wishes, and comply with your state’s laws. A boilerplate template could present more problems than it solves. For trusts, the experienced professional is the best option.

Reference: Yahoo! Money (March 18, 2022) “How to Start a Trust Fund the Easy Way”