Everything you need to know about trust funds

1 min readLast updated November 10, 2023by Rachel Carey

Trust funds allow you to set aside key assets and funds in the name of a beneficiary. But how are certain trust funds different from others? And how exactly do you set one up?

What is a trust fund? 

A trust fund is a legal entity that holds assets on behalf of an individual who intends for someone else to inherit them eventually. These assets can be anything from property, cash, stocks, bonds, or other financial assets. In short, trust funds offer individuals a safe and secure means of setting aside assets for a beneficiary. 

Anyone can set up a trust fund, providing they take the necessary steps. There are many types of trust funds, so knowing which is right for you is an important stage in setting one up.  

How does a trust fund work? 

To set up a trust fund, there must be three main parties:  

  • a grantor who creates the fund and deposits assets 

  • a trustee who manages and keeps track of the assets 

  • a beneficiary who will eventually inherit the assets. 

The grantor gets full control over how the assets within the trust fund are distributed. This includes setting up protections over when you can access the trust or, in some cases, what you can use the assets for.  

How do I set up a trust fund?  

If you’re looking to set up a fund, you will need to work out which assets you want to deposit, who the key parties are, and what type of fund you want to create.  

Different fund providers will each manage their funds slightly differently, with minor details that could affect your planning. Be sure to compare the options of various providers before coming to a final decision.  

Revocable trust funds vs. irrevocable trust funds  

There are two main types of trust funds: Revocable and irrevocable. While similar in some ways, they have some significant differences that it’s important to be aware of. 

Irrevocable trust funds 

Irrevocable trust funds prevent you from editing the terms and contents after agreeing to them. This means that the assets in a trust fund cannot be altered or accessed by the grantor or the beneficiary until the terms are met. However, there are benefits to this. 

As the trust fund is unchangeable, the assets and terms are secure from any financial problems of the grantor. This means that even if the grantor has unpaid debts, the fund's contents cannot be used by creditors to settle outstanding costs – they are permanently secured.  

Furthermore, as the grantor has no access to the assets in the trust fund, they are no longer considered part of their estate and are, therefore, exempt from certain taxes. 

Revocable trust funds 

On the other hand, the assets and terms of a revocable trust fund can be altered at any point up to the end of the trust’s terms, giving grantors more flexibility to manage their assets as needed. This can be useful if, for example, your grandchild delays going to college; you can extend the terms so they receive the money when they enroll.  

Although a revocable trust fund gives you more flexibility, it does mean less security over the assets if the grantor faces financial challenges, such as debts or other bills, as well as legal action.  

What are the different types of trust funds? 

There are many different types of trust funds. Whether you are looking to pass on land or money, donate to charity, or support a loved one or a relative after graduating college, there is a trust fund to suit your specific needs.  

Some of the most common types of trust funds are: 

  • Testamentary trust – this fund is set up in a will and can be used to pass on the deceased's assets to someone else easily. 

  • Blind trust fund – this type of fund allows individuals to donate assets anonymously to a beneficiary without revealing the grantor’s identity. You may use this if you want a relative to receive funds when they reach a milestone in their life, such as a birthday or finishing college. 

  • Land trust – this deals with real estate property, such as the family home or family land. Land trusts can provide privacy and security to real estate investments and avoid probate. 

  • Charitable remainder trust this allows grantors to list a specific charity as their beneficiary. This type of trust will enable grantors to pass on assets while minimizing tax. 

  • Spendthrift trusts – these distribute assets in small, supervised amounts to the beneficiary. This gives greater control over the distribution of the funds by the trustee and grantor. 

How to take money out of a trust fund 

As a beneficiary, you can only take money out according to the grantor's terms. This means withdrawing funds or assets from a trust will depend on the specific terms of each one.  

Some funds may only be used for certain purposes – such as buying a car – or may only be withdrawn at a certain date, so be sure to check the terms of each trust. In any case, you will need the trustees' agreement if you want to gain access to the fund early.  

Certain conditions also apply to specific trusts. For example, if the trust fund is a spendthrift trust, the beneficiary has less control over how much they can take out at any given time. The withdrawal timeline should already have been determined, and it may be difficult to withdraw any other assets around this schedule.   

Trust funds are a great way to set aside assets with a specific beneficiary. By setting out the terms of your trust, you can outline how your assets are used and how they can help your loved ones. Speak to a financial advisor today and find out what your options are. Find your next advisor on Unbiased.

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.