Do you have a trust fund as part of your estate plan?
From the days when I knew nothing about finance, I remember hearing the words, “Trust Fund.” Well, it wasn’t until recently that I took the time to learn more about this subject. I bet that if I were to ask 10 people to explain what it is, most wouldn’t really have much to say.
In their lifetime, many people will be recipients of a trust fund. As we all age and family members pass away, it’s important to be aware of what our family has done in terms of estate planning. We should have frank discussions with our loved ones — particularly with those members of our family who are upstanding, mature and able-bodied — about how the family inheritance is structured, and if it so happens that there’s a trust fund in your future, then you should be somewhat familiar with how it works.
Trust Fund Basics and Setting Up A Family Trust
1. A trust fund is simply an arrangement that allows for asset transfers to take place between parties. Often, your fund’s beneficiaries are your children but it could also be a charity or non-profit organization.
2. It can contain all types of investments. We think of these financial vehicles as consisting of only cash, but it can also contain stocks, bonds, or other investment classes.
3. You can set it up to produce cash flow. You can structure it to generate money so that the fund pays out dividends to the recipients, with the principal untouched. For this reason, most trust funds have a manager who is paid either a set annual fee or a percentage of the yearly profits.
4. There are rules and limitations to the fund. It’s important to note that a trust fund normally follows rules and limitations. For example, recipients must typically reach a certain age before collecting benefits. Or you can have fund rules which involve paying out a set amount as living expenses to the recipients. You can also bequeath larger amounts of money as large gifts to certain family members, but this must first be approved by the manager.
5. There is a misconception that trust funds are only for the rich. A trust fund can be established by anybody who has the financial discipline to save. Everything we’ve discussed here can apply to you!
Trust Fund Tips
There is one thing that I think we should address before leaving this topic. I have known more than one person in my life who ended up developing destructive financial habits because they anticipated a trust fund in their future. It’s important to realize that nobody cares about your money as much as you do! If you rely on somebody or something other than your healthy spending and work habits, you are setting yourself up for financial disaster.
It’s not a good idea to be relying solely on your trust fund for financial support. Why? Because the economic downturn could significantly reduce your dividend payments. Or some kind of family fallout can happen that may cause the terms of the trust to be changed in a way that has a negative impact on you. Something unthinkable or unforeseen could happen to the fund. Just ask those who had money invested with Bernie Madoff about this. In short, live your life as if that trust fund doesn’t exist. They work best if you can consider them as a secondary safety net.
It bears repeating: Never rely on anything or anybody other than yourself for financial security!
Contributing Writer: Tim Parker of Elementary Finance