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What Is a Trust Fund Account?

Grandparents often establish trust funds to provide for their grandchildren.
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  • Written By: Shannon Philpott
  • Edited By: J.T. Gale
  • Last Modified Date: 24 September 2014
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A trust fund account is a fund management account that includes a variety of assets, such as cash, property or estates, and stocks and bonds. Trust funds are typically established to preserve a person’s wealth or to ensure that loved ones are financially stable in future years. Parents, grandparents, and family members establish these types of accounts to protect assets for the intended recipients. They are often classified as a gift, which helps maximize tax benefits for the person establishing the account.

Trust fund accounts are created by a grantor for a designated beneficiary and then managed by a trustee. In some instances, parents serve as the trustee, however, most individuals appoint a trustee from a financial firm or law office to oversee the account. This ensures that the beneficiary does not squander property or violate the terms of the fund. In most cases, a trust fund imposes strict guidelines for distribution of assets, including age requirements, time lines for reimbursement. and caps on distribution amounts — especially for a child trust fund.

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In certain cases, the courts may appoint a trustee to oversee the trust. The trustee is the legal owner of the assets of the trust fund. As the chief administrator of the account, the trustee must ensure that the trust’s assets are preserved, accounted for, and reported to the grantor and the beneficiary. The trustee is also responsible for filing required tax returns for the trust, compile financial reports for the grantor and beneficiary, and approving funds for the beneficiary.

Grantors can open various types of trust fund accounts. Some of the most common types include a retirement trust fund, estate or educational trust fund, charitable trust fund, and income and child trust fund. Many times, parents and grandparents create a child trust fund to monitor spending for a minor. Such an account could also be established to protect the privacy of a wealthy individual since wills are public documents and trusts are private.

Establishing a trust fund account offers financial benefits for both the beneficiary and the grantor. By protecting assets in a trust, a grantor guarantees that property, cash, or stocks are designated to a specified beneficiary following his or her death or divorce. Tax benefits also prompt the need for this type of account. Federal and state governments generally offer estate, gift, and income tax advantages for trust fund account grantors.

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Logicfest
Post 3

@Markerrag -- What's wrong with taxing large estates heavily? We're talking about assets that have already been taxed once, so why tax them again?

Here's what I mean. Let's say that Joe passes away with an estate valued at $10 million. The cash was already taxed as income and property taxes were paid on everything else. In that instance, is it right for the government to show up and tax everything again?

There is no doubt that the feds are hard up for cash. That's not the fault of people receiving inheritances. Why should they be penalized because the federal government can't figure out how to spend less than it collects?

Markerrag
Post 2

@Terrificli -- You have to pass on a heck of an estate before that estate tax even kicks in. In the United States, an individual can transfer $5.34 million before having to worry about estate taxes. That's a nice chunk of change.

And if someone has more than that, what's wrong with taxing the heck out of it? The nation is having some pretty severe financial problems right now, so why not levy taxes against people who are receiving a heck of a lot of money and didn't do a thing to earn it?

Terrificli
Post 1

For people with serious assets a trust fund may be the only way to fly. The tax consequences when assets pass through a will can be murder. An attorney will charge quite a bit more to set up a trust than write a will, but the ultimate tax savings are more than worth it to some people.

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