What is a Trust Fund?

When you hear "trust fund," you may immediately think of the phrase "trust fund baby," perhaps imagining someone a whole lot richer than most persons, who will forever be heedlessly plowing his way through inherited millions. While trust funds do provide for wealthy heirs, they have many other functions. They can even provide a trust fund baby with a little structure, precisely so he can't heedlessly run through his inheritance.

A trust fund distributes financial benefits provided by a trustor to an individual or an organization, called the grantee. The trustor may be a wealthy parent but can also be another organization. The grantee may be an heir – that "trust fund baby" – but can be any individual, group of individuals or organizations. These trusts are often organized as either living or revocable trusts, charitable trusts or marital trusts.

Often the largest charitable trusts have a two-part structure: one foundation that manages the assets in the trust and another foundation that distributes those assets. The Bill and Melinda Foundation Trust and the associated Bill and Melinda Gates Foundation are examples of this two-part structure.

Interestingly, trusts set up for their children's benefit by two of the wealthiest families in the world, Bill and Melinda Gates and Warren and Astrid Buffett, are deliberately limited in scope. The billionaire parents explained their reasons in almost the same words: the idea, they agreed, is to leave their children enough to enable them to do something, but not enough to enable to do nothing.

Instead, both the Gates and the Buffetts have already distributed much of their wealth to the Bill and Melinda Gates Foundation Trust, which manages these assets for the Bill and Melinda Gates Foundation, the charitable foundation, which, as you might already know, provides about $4.5 billion dollars annually at a pace designed to spend the assets within a few decades, to maximize their impact, especially in two areas worldwide: poverty and health.

Smaller charitable trusts called _charitable remainder unitrust_s (CRUT) have two purposes: to provide tax benefits during the trustor or donor's lifetime and, after the trustor dies, to serve the charitable purposes described in the charter of the trust.

For example, imagine that an individual with a $500,000 stock portfolio sets up a CRUT. He immediately receives a tax credit for the charitable contribution. The terms of the CRUT include an annual distribution of a certain percentage of the CRUT assets to the trustor. Usually, the percentage distributed would be less than the annual long-term average gain in the stock market, i. e., the assets of the CRUT are not being diminished by the distribution.

Upon the trustor's death, the remaining CRUT assets are distributed to the charity or charities named in the charter of the CRUT, which is then dissolved.

Another trust form is the living or revocable trust, often used by an individual with substantial assets to avoid probate, the process whereby the executor of the estate becomes responsible for distributing the deceased's assets according to the terms of the will and under the authority of the responsible court.

If there is no will and the state appoints an administrator to handle the estate, or, similarly, if it's determined by the heirs that a dispassionate professional should manage and distribute the estate, the probate process can be expensive. In California, for example, the court normally allows a 4 percent executor charge for the first $100,000 of the estate value, with slightly declining percentages for amounts above $100,000. If the will is contested, the executor or administrator can appeal to the court for additional payments for services. Another potentially ruinous practice in California and elsewhere is that the executor's fee is calculated on the gross assets before the estate's liabilities are subtracted. Potentially, this could result in all the assets remaining, after payment of the estate's outstanding debts, going solely to the executor!

Possibly the worst-case example of what can go wrong in the probate process is what has happened in attempts to settle singer James Brown's estate. Executors were replaced, millions were spent paying executor fees, a higher court reversed various decisions of the lower court, the lower court didn't follow the instructions of the higher court, and as a result, years after Brown's death most of his designated beneficiaries had received nothing.

To avoid this, an individual can set up a living trust. Upon the trustor's death, the trustee distributes the assets according to the terms of the trust and, significantly, without court oversight. This almost always results in fewer delays and lower fees than a distribution by an executor of the deceased's estate.

Marital trusts are another means of avoiding probate. When one spouse dies, the trust is automatically funded according to the terms of the marital trust. Income is then distributed to the surviving spouse while also providing for the couple's children, who will receive an inheritance of whatever remains in the trust when the surviving spouse dies.

Trusts like the Bill and Melinda Gates Foundation are as complex as any other multi-billion dollar corporation and are generally the outcome of extensive planning and document preparation that may cost millions of dollars.

But if you want to set up a living trust to expedite the distribution of your assets at a lower cost upon your death, simply search online for "document preparation living trust," to find reputable organizations that will provide you with the forms you'll need, along with helpful explanations, for costs that range between $60 and $300.

If you estate situation is complicated, you may want to consult a lawyer who can prepare a living trust for you, although at a considerably higher cost.