Surprising Uses for Trust Funds

Despite the costs, a trust fund can be a useful way to manage money when certain factors come into play, or when a specific sequence of events occurs. You may be surprised to learn it can serve a purpose beyond funding the lifestyle of a young heir. Here are five situations where a trust fund may make sense.

Key Takeaways

• Trust funds can manage money for minor children or family members with disabilities.
• A trust can collect funds from more than one person.
• As the population ages, care management trusts and living trusts can simplify the care of older family members as well as the transfer of their estates to beneficiaries.

1. A Special Needs Trust 

If you have a family member with a disability, you might consider setting up a special needs trust to provide for their care. Benefits from a special needs trust may be used for expenses not covered under public benefits programs, as long as they’re paid directly to the service provider. This allows the public benefits to continue without being reduced since a regular cash gift could potentially disqualify them for Supplemental Security Income (SSI) or Medicaid. Since each state has specific guidelines for how these trusts can be spent, be sure to verify your state’s individual regulations.

2. A Care Management Trust 

Care management trusts are becoming more common as aging baby boomers and their children recognize the benefit of detailing exactly how they wish to be cared for in their final years. A care management trust, with the older adult as the beneficiary, can be used to appoint a person (a trustee) to make decisions for the older adult once they become less able to take care of themself. The older adult may address anything they see as important to their future care, such as their wishes about receiving at-home care or moving into an assisted living or long-term care facility. Setting up a care management trust before it is actually needed prevents family members from having to make stressful decisions at what may be an emotional time.

3. To Benefit Minor Children or Grandchildren 

Sometimes a parent, grandparent, or other family member dies and leaves minor children as beneficiaries of their estate. In these cases, a trust fund is a good option to manage the inheritance since many children can’t yet make wise financial decisions. Trust funds for minor children may be set up as part of your estate planning and could include details such as how the money should be used. 

Some examples of situations where a minor child trust fund makes sense include children becoming orphaned and receiving insurance funds, donations, or an inheritance that must be managed and then distributed among several minor children. In these cases, aunts, uncles, or grandparents may use a trust fund to manage money for the children.

Trust funds can be set up to collect donations from the public.

4. To Collect Funds from More than One Person

A trust fund may even be thought of as a legally-structured way to accumulate crowdfunding, especially when it comes to collecting funds from the public in order to benefit a child or a cause. For example, a trust could benefit children whose parents have been killed accidentally or in the line of duty, or who must undergo expensive medical treatments due to accident or illness.

5. To Avoid Probate 

Some individuals may consider a living trust to avoid the often complicated process of probate when they die. This type of trust fund is set up by an individual while they are still alive, who then names themselves as the trustee. Their property is transferred to the trust, though they retain ownership of the property, simply as the trustee.

Within the trust, you may name who you would like to inherit the property after your death, called the “successor trustee(s).” This transaction of property after your death is frequently far quicker and less complicated than probate. A living trust is particularly useful for people who own real estate (including vacation property) across the country, as probate of estates, including multi-state real-estate, can be a complex and expensive endeavor. 

What Is a Trust Fund?

A trust fund is a legal entity that can hold various assets, including cash, stocks, and other investments. These assets provide an income stream to benefit named individuals or organizations (beneficiaries). A trust fund may continue to pay out to beneficiaries long after it’s been set up, outliving the original contributor (grantor).

An attorney is required to set up a trust fund, so expect to pay legal fees.

What Is a Living Trust?

Trust funds created during the grantor’s lifetime are called living trusts. 

Can a Trust Hold an Individual Retirement Account (IRA)?

No. A trust cannot hold individual retirement accounts (IRAs), but it can be named the beneficiary of an IRA and of a life insurance policy. However, naming the trust a beneficiary could cause some unwanted tax consequences.

The Bottom Line

Despite their reputation as a tool for wealthy families and investors, trust funds can make sense in a variety of situations. If you have questions about setting up a trust, seek out a qualified estate planning professional, such as an attorney.