What a Trust Fund is and What the Benefits of Having One Are

We've all heard the term "trust fund baby" thrown around and know that that person is living off a trust fund, but how many really know what a trust fund is? A trust fund is something that is set up for individuals or even organizations and charities that allow the person making the trust to set provisions on the money and other assets inside the trust.

When I was a stock broker, I managed quite a few trust funds that were set up by parents for their children in order to take care of them in the case of something happening to the parents. While this can also be accomplished by setting up a will, a trust fund allows for more control of the funds that are left behind.

A trust fund can contain cash, stocks, bonds, and any other type of financial instrument and when set up there will be a beneficiary and a trustee. The beneficiary will be the person or organization that will be entitled to the assets in the trust and the trustee will be the person or persons who will be charged with making sure that the guidelines of the trust are followed.

Depending on the provisions of the trust the beneficiary can withdraw money in order to pay for the essentials and will generally have access to most of or all of the trust fund assets at a certain point in time which is dependent on the limitations or provisions of the trust. For example, the beneficiary may only be able to withdraw money for rent, food, clothing, and schooling costs until the age of 25. Even then, the beneficiary may be limited to what they can take out again depending on the limitations set forth in the trust. However, once they reach the age where they can take more out they can also petition for total control of the assets.

The main benefit of a trust is the ability to set such limitations. In the case of a parent setting up a trust for a child, they can set provisions so that the child has time to mature before they receive the bulk of the assets. This is better than simply leaving child a lump sum of money in a will as this can lead to the entire inheritance to be spent in a reckless way due to the child not being mature enough.

If you have children and want to be sure that they are provided for when you are gone talk to your financial advisor about whether or not a trust is in your family's best interest. Once you make the decision to do so, your financial advisor can help you through the rest of the process.

Source: Tim Parker, Trust Fund Basics - Setting Up a Family Trust, Tehsmarterwallet.com