The presence of a trust usually does not impact the ability to collect Social Security. However, based on the way the trust is set up, it may have tax implications.
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What is a trust fund?
A trust fund is an estate planning tool that holds assets for a beneficiary, typically paying them an income for many years. Depending on how it’s set up, a trust fund can help shield those assets from estate taxes and probate when you pass away.
What is a trust fund and is it different from a trust?
The terms trust fund and trust are often used interchangeably. However, there is a slight difference. A trust is a broader term that refers to any arrangement in which one party holds property for the benefit of another. A trust can take many forms and have different purposes, such as estate planning, asset protection, tax planning, charitable giving, or special-needs planning. A trust fund, on the other hand, usually refers to a type of trust that is created to provide financial support to a beneficiary over a long period of time. This article will cover some of the basics of trust funds. For more information about trusts in general and how to create one, read what is a trust?
How does a trust fund work?
A trust fund works by separating the legal ownership and the beneficial ownership of the assets held within. Those assets can be a wide range of options, including bank accounts, investments, real estate, business interests, retirement accounts, and even things like intellectual property. The grantor is the person who creates the trust and puts assets into it. The trustee of the trust fund oversees how it is followed and is the legal owner of the assets. The beneficiaries are the beneficial owners and receive the income or assets from the trust fund. The trustee has a fiduciary duty to act in the best interest of the beneficiary and follow the instructions of the grantor.
Who controls a trust fund?
That depends on whether it is an irrevocable or revocable trust. When a revocable trust is set up, the person who created the trust (the grantor) can change anything in the agreement if they want to. If the trust is irrevocable, they cannot change anything without first getting consent from the beneficiaries.
How does a trust fund pay out?
How the trust operates, including disbursements (or payments), is defined in the trust agreement, a document that is created when the trust is set up. There is a near infinite number of ways a trust fund can pay out. This is a key benefit of trusts: the grantor has greater control over how the assets are distributed when compared with a will. For example, the grantor can decide:
- When the beneficiary receives the payments, such as at a certain age, upon a certain event, or periodically.
- How much the beneficiary receives, such as a fixed amount, a percentage, or the entire balance.
- What the beneficiary can use the payments for, such as education, health care, or living expenses.
Average trust fund amount
Many think that trust funds are only for the very wealthy, but trust funds can vary widely in size and complexity. While some may hold millions of dollars, based on data from the Federal Reserve, the median size of a trust fund is around $285,000.1 That’s certainly not “set for life” money, but it can play a large role in helping families of all means transfer and protect wealth. There is no minimum for a trust fund, but since there are both monetary and time costs to setting one up, the benefits should outweigh those costs before you start.
Related: At what net worth do I need a trust?
Paying taxes on a trust fund
One of the main benefits of a trust is the opportunity to limit your tax liability in estate planning. Since different types of trust funds vary as to how tax law applies to them, we can’t go into the details here. Your best option is to talk to a tax or estate planning professional to discuss your particular needs and options.
Starting a trust fund
A trust fund is created when the trust document is notarized, and assets are put into it. In order to create one, you’ll need to designate a trustee, choose your beneficiaries, and create asset-distribution instructions. To be safe, it’s advisable to rely on the help of a legal or estate planning professional to ensure the trust fund is set up correctly. Laws may differ depending on the type of trust and which state you reside in, and it’s important to get it right. Learn more about the steps of setting up a trust.
Trust fund FAQs
That will depend on your situation. Many children can benefit from a trust fund. When it comes to financial planning for children with special needs, it is particularly important.
There is no minimum required to set up a trust fund. However, there are some costs associated with creating one.
Anyone can initiate the process of setting up a trust fund, although creating one generally requires the help of an estate planning professional and/or attorney to ensure it is legally sound.
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Consider a trust as part of your estate planning strategy.
Our financial professionals can coordinate with your legal and tax advisors as you create your plan, help answer questions and put financial tools in place to help you protect and share your wealth.
1“Survey of Consumer Finances (SCF),” U.S. Federal Reserve, Nov 2023.
This article is for your general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.