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Term trusts are closed-end funds that are established with a firm maturity date. Sometimes referred to as a limited term trust, the fund allows for the management of the assets contained in the trust for a fixed amount of time. At the end of this specified period of time, the assets are returned to the settlor. The settlor is then free to make use of the assets in any manner he or she sees fit.
During the life of the term trust, there is usually not any way to make use of the assets other than for a specific purpose named at the time the fund is esablished. That is one reason financial advisors often recommend that only assets which are not projected to be needed for the duration of the trust be included. For example, someone who has amassed a significant amount in a savings account and does not foresee the need to withdraw either the interest or the principle from the account may wish to transfer those funds into a term trust as one way of saving for retirement.
One of the benefits to a term trust is that in the event of some type of legal action, any assets that are in the term trust are exempt from being seized. This can be helpful in the event of a lawsuit or when an individual files bankruptcy. However, a term trust should not be seen as a way to divert assets into some type of secure trust just before entering bankruptcy. The intent of a term trust is to provide protection for funds that are set aside for specific purposes.
Another benefit of a term trust is that the assets in the fund may be used for a purpose specified at the time the trust is established. For example, parents may place assets into the term trust, with an eye toward the funds being used to assist a child or children with college expenses. During the life of the trust, an administrator will issue periodic payments for college tuition and fees, and other college related expenses as outline in the conditions of the term trust. At the date of fixed termination, any funds remaining in the term trust revert to the parents, who at that point may use the resources in any way they choose.