Setting Up a Trust Fund

A trust is a legal entity, established by an individual or an organization, that grants fiduciary control to the trustee, who is responsible for holding and managing assets, on behalf of the beneficiaries. The individual or the organization, that sets up the trust, is known as the donor or the grantor. One may also refer to the donor as the settlor. The assets, that are held in trust, are commonly referred to as a trust fund.

Setting Up a Trust Fund
In order to establish a trust, the grantor would have to present a document specifying his/her wishes, list the beneficiaries, name trustees and determine their rights and obligations. The procedure for setting up a trust varies from state to state. Trusts may be set up in one of the following ways.

Living Trust: A living trust is a popular alternative to a will. Unlike a will, that comes into force after the death of a person, a living trust is a means of managing property both before and after death. A living trust is established by a grantor while he/she is still alive. The grantor can be designated as the trustee, however, it would be sensible to name a successor to ensure that in event of the grantor's demise, the management of the assets can be passed on to the trustee. Living trusts can be revocable or irrevocable.

Revocable/Irrevocable Trust: A revocable trust is one that can be modified or terminated by the grantor at will. An irrevocable trust, on the other hand, results in the grantor losing the authority to modify the provisions of the trust. Any modification of the trust is subject to the beneficiary's approval. Living trusts are generally revocable although they may be set up as irrevocable trusts.

After Death Trust: After death trusts come into existence by virtue of a will. Hence, the assets to fund these trusts go through the probate process in case the property has not been transferred by the grantor, to the trustee, during the lifetime of the settlor.

Blind Trust: A blind trust is one wherein the beneficiaries have absolutely no knowledge of the assets that are held in trust. The assets are manged as per the trustee's discretion. The beneficiary is only entitled to the income from the assets.

Specific-Use Trust: A specific-use trust is one that allows the grantor to accomplish the stated objectives. Charitable trusts, bypass trusts, child trusts and life insurance trusts are a few popular examples of specific-use trusts.

Purpose of Setting Up a Trust Fund
The reasons for setting up a trust can range from providing income to beneficiaries to tax considerations. For a better understanding of the workings of a trust fund, one may refer to the article, "How Does a Trust Fund Work".

Tax Benefits: An irrevocable trust is set up to avoid paying taxes by removing assets from the settlor's taxable estate and transferring it to an irrevocable trust. The grantor is thus no longer liable to pay taxes on the income generated by the assets. Such a trust is meant for wealthy individuals who are trying to reduce their tax liability. An exemption trust, that can reduce or eliminate federal estate taxes for a married couple, is a good example of an irrevocable trust.

Avoiding Probate: A living trust can be an alternative to a will since the former is not subject to probate, moreover, the court does not address the grievances of the beneficiaries or the creditors. Again, a will is a public record while a living trust ensures privacy. Tax savings are the same in case of wills and living trusts. These provisions make a living trust an attractive alternative.

Peace of Mind: People may create an after-death trust to ensure that their wards are provided for, in the event of their untimely death. People, who are suffering from debilitating illness, may create a revocable living trust to ensure proper asset management.

It's evident that a trust fund can be set up to accomplish a number of objectives. One must consult a lawyer to determine the prudence of setting up a trust fund before embarking on the same.