Trust funds are legal entities you create to determine how your estate is distributed to beneficiaries. They offer more flexibility than wills. You can plan for them to go into effect during your lifetime or at death, and you can also control how the beneficiary uses the funds and any behavior that would impede inheritance.
Picking the best trust fund requires that you set clear goals. Determining why you are creating the trust and who the beneficiaries are is essential. Other factors to consider are how permanent your decision is and whether the beneficiary is a child, a grandchild, a firm, or a charitable organization.
What Is a Trust Fund and How Does It Work?
A trust fund is a legal arrangement used to hold and manage money or property for one or more beneficiaries.
It can be created to provide an inheritance, pay for education or living expenses, or manage assets for a child or another beneficiary.
The person creating the trust sets its terms and appoints a trustee to manage the assets.
The trustee must follow those instructions when investing, managing, or distributing the property. The trust can also set conditions for when and how beneficiaries receive the assets.
Key Terminology: Grantor, Trustee, and Beneficiary
Understanding the main roles in a trust makes it easier to see how the arrangement works. The three key parties are the grantor, trustee, and beneficiary.
| Term | Definition |
|---|---|
| Grantor | The person or entity that creates and funds the trust. They choose the beneficiaries, appoint the trustee, and set the trust’s terms. |
| Trustee | The person or entity that manages the trust assets and follows its instructions. They must act in the beneficiaries’ best interests. |
| Beneficiary | The person or entity that receives benefits or assets from the trust according to its terms. |
How Are Trust Funds Classified?
A trust can be revocable or irrevocable, as well as living or testamentary, depending on the terms and when the grantor sets it up.
Revocable trusts
Assets in a revocable trust continue in the grantor's control as long as they are alive. As with all trusts, the grantor places assets into a trust for a beneficiary. However, the grantor can amend or end it at any time. The funds in a revocable trust are available to a grantor's creditors.
Many people use revocable trusts to skip the public, costly, and sometimes lengthy probate process when they die. This type of trust fund also offers flexibility in case your priorities change.
Irrevocable trusts
Irrevocable trusts are so named because grantors cannot amend or revoke them once set up. The funds remain in the trustee's control until it is time for the beneficiary to access them. The grantor's creditors cannot access the funds because they are no longer their property.
Depending on how the trust is structured, an irrevocable trust may offer several benefits:
| Benefit | How it can help |
|---|---|
| 1. Estate and tax planning | Certain trusts can reduce estate exposure or provide gift and estate tax advantages. |
| 2. Asset protection | Assets may receive protection from some creditor claims, depending on state law and trust terms. |
| 3. Government benefit planning | Some trusts may help preserve eligibility for means-tested benefits, subject to strict program rules. |
For bank deposits held in most irrevocable trusts, FDIC coverage is governed by 12 C.F.R. § 330.10.
Eligible trust deposits at an FDIC-insured bank may receive coverage based on the number of eligible beneficiaries. This is subject to applicable limits.
Living trusts
A grantor can set up living trusts that are either revocable or irrevocable. For a trust to qualify as living, you must set it up and fund it in your lifetime.
Testamentary trusts
The conditions in a deceased person's will may trigger the formation of a trust. For example, a parent may state in their last will that a firm they own is trusted to cater to their son's needs. They may include conditions under which the son can access the funds; for example, they would have to keep a job.
Trusts only exist after you fund them. Therefore, a testamentary trust is nonexistent until the grantor dies, their will goes through probate, and assets go into the trust. The executor of the will would require a letter of testamentary to oversee the estate distribution.
As the next section explains, the type of trust fund you set up depends on why you need it and who the beneficiaries are.
Other Types of Trust Funds
You may set up a trust fund to benefit anyone—a child, a grandchild, or an organization. You may also use them to reduce or avoid excessive tax obligations. The following are types of trust funds that benefit different groups of people.
Special needs trust fund
You can place assets in a special needs trust to support a loved one living with special needs. The assets you put into the trust can help care for them long after you are gone. A special needs trust does not impede a person's right to receive disability benefits.
Generation-skipping trust
This trust transfers the contributed assets to grandchildren rather than the grantor's children. A person may also set up this type of trust to pass assets to a non-relative who is at least 37.5 years younger.
Before 1976, generation-skipping transfers did not face the additional estate taxes they would if the grantor had left the assets to their children. The government introduced GST —Generation-Skipping Transfer—taxes on these trusts to prevent abuse by wealthy families.
According to the American Taxpayers Relief Act of 2012 [1], however, there is a permanent $5 million exemption—meaning only assets in the trust above $5 million are taxable. Additionally, on December 22, 2017, then-President Donald Trump signed the Tax Cuts and Jobs Act that doubled tax exemptions through December 2025. The high threshold means most consumers may never pay taxes on these trusts.
A-B trusts (bypass trusts) for married couples
Married couples set up A-B joint trusts (or AB joint trusts) to protect their children's inheritance. Also known as credit shelter trusts or bypass trusts, they can be used as part of an estate tax planning strategy.
The assets remain in a single trust while both parents are alive. However, if one spouse dies, the trust splits into two: the A and B trusts.
The A trust receives the surviving spouse's assets, while B (bypass trust) receives the deceased's assets, which go to the couple's children.
The surviving spouse may receive income or use certain assets from the bypass trust without owning them outright, depending on its terms. Common assets can include:
- Cash
- Real estate
- Life insurance
- Annuities
- Business interests
The assets in the bypass trust are not subject to taxes. The surviving spouse must not overly benefit from them. Still, the remaining spouse can legally use the funds to generate income.
At the death of the remaining spouse, the assets in the bypass trust go to the children without a probate process. Bypass trusts are irrevocable.
They may also help reduce estate tax exposure. This depends on the size of the estate and the tax regulations governing this in your state.
Charitable trusts
These trusts allow grantors to keep giving to a charitable organization whose cause they support. You may set it up as a Charitable Lead Annuity Trust (CLAT) or a Charitable Remainder Annuity Trust (CRAT).
CLATs direct that funds from the trust go to the charitable organization for a designated time, after which the remainder goes to a beneficiary. A CRAT orders that a beneficiary receives income for a time. At the end of the set period, the remainder goes to the charitable organization. Placing your donations in a trust can result in tax deductions.
Spendthrift trusts
Grantors use spendthrift trusts to transfer money to loved ones with money management issues. In the trust's conditions, they may limit how much and often beneficiaries receive funds.
For example, the grantor may direct that a daughter gets only enough money every month for their needs. They may also require that the funds not be used to pay debts, thus limiting the beneficiary's access to unnecessary credit. State laws determine how long trusts should last.
Trust funds for children
Parents or grandparents often use trust funds to set aside money or property for a child. They can explicitly decide when and how the assets should be used.
The grantor leaves instructions to a trustee, who manages the trust.
The trust may help pay for things such as:
- Education
- Living expenses
- A future home
It can also delay access until the child reaches a certain age or meets specific conditions.
Advantages and Disadvantages of Trust Funds
The table below summarizes the advantages and disadvantages of trust funds.
| Advantages of Trust Funds | Disadvantages of Trust Funds |
|---|---|
| Can help avoid the probate process. | It may be costly to set up and pay a trustee. |
| They can provide greater privacy. | Depending on the type, you may lose control of trust assets. |
| They can help protect a beneficiary’s inheritance. | Real estate and other property may need to be retitled. |
| They may provide tax-deferred growth in assets in certain situations. | Some trusts lack flexibility to make changes without court involvement. |
| Certain trusts may offer protection against creditors. | Social Security benefits are subject to separate federal rules and may affect trust planning. |
Important: Tax treatment, creditor protection, and the effect of a trust on Social Security or other benefits depend on the type of trust, applicable law, and individual circumstances. Consider consulting a tax professional in your state. They can explain how the trust may affect your taxes.
How to Start a Trust Fund
To star ta trust fund, you will probably need to meet with an attorney and decide on:
- How the money will be managed
- Who the trustee of the fund will be (the person legally responsible for the investment and should also know how to manage money effectively)
- Who will inherit the assets in the fund,
You should also consider some other factors like how often distributions can be made to heirs and what those heirs must do to receive them.
They will meet with you to develop your plan and write a will, trust and possibly other legal documents.
Word choice is crucial when setting up trusts. You can use a free living trust form to create your document. You can also generate a certificate of trust to prove the trust's existence.
Finally, you need to fund the trust fund. That means transferring ownership of your assets into the name of the trust so that it owns them instead of you. This can be done by transferring property deeds or titles, changing retirement plan beneficiaries, and so on [2].
You may also want to work with an estate planning attorney to draft up documents defining who, exactly, receives what portion of your assets when you die.
Once these decisions are made, you'll want to find some investments that fall in line with your goals and risk tolerance. This could be stocks or bonds from companies or government entities, real estate properties, or other assets.
Helpful Resources
Trust funds are legal entities you create to determine how your estate is distributed to beneficiaries. They offer more flexibility than wills. You can plan for them to go into effect during your lifetime or at death, and you can also control how the beneficiary uses the funds and any behavior that would impede inheritance.
Picking the best trust fund requires that you set clear goals. Determining why you are creating the trust and who the beneficiaries are is essential. Other factors to consider are how permanent your decision is and whether the beneficiary is a child, a grandchild, a firm, or a charitable organization.
What Is a Trust Fund and How Does It Work?
A trust fund is a legal arrangement used to hold and manage money or property for one or more beneficiaries.
It can be created to provide an inheritance, pay for education or living expenses, or manage assets for a child or another beneficiary.
The person creating the trust sets its terms and appoints a trustee to manage the assets.
The trustee must follow those instructions when investing, managing, or distributing the property. The trust can also set conditions for when and how beneficiaries receive the assets.
Key Terminology: Grantor, Trustee, and Beneficiary
Understanding the main roles in a trust makes it easier to see how the arrangement works. The three key parties are the grantor, trustee, and beneficiary.
| Term | Definition |
|---|---|
| Grantor | The person or entity that creates and funds the trust. They choose the beneficiaries, appoint the trustee, and set the trust’s terms. |
| Trustee | The person or entity that manages the trust assets and follows its instructions. They must act in the beneficiaries’ best interests. |
| Beneficiary | The person or entity that receives benefits or assets from the trust according to its terms. |
How Are Trust Funds Classified?
A trust can be revocable or irrevocable, as well as living or testamentary, depending on the terms and when the grantor sets it up.
Revocable trusts
Assets in a revocable trust continue in the grantor's control as long as they are alive. As with all trusts, the grantor places assets into a trust for a beneficiary. However, the grantor can amend or end it at any time. The funds in a revocable trust are available to a grantor's creditors.
Many people use revocable trusts to skip the public, costly, and sometimes lengthy probate process when they die. This type of trust fund also offers flexibility in case your priorities change.
Irrevocable trusts
Irrevocable trusts are so named because grantors cannot amend or revoke them once set up. The funds remain in the trustee's control until it is time for the beneficiary to access them. The grantor's creditors cannot access the funds because they are no longer their property.
Depending on how the trust is structured, an irrevocable trust may offer several benefits:
| Benefit | How it can help |
|---|---|
| 1. Estate and tax planning | Certain trusts can reduce estate exposure or provide gift and estate tax advantages. |
| 2. Asset protection | Assets may receive protection from some creditor claims, depending on state law and trust terms. |
| 3. Government benefit planning | Some trusts may help preserve eligibility for means-tested benefits, subject to strict program rules. |
For bank deposits held in most irrevocable trusts, FDIC coverage is governed by 12 C.F.R. § 330.10.
Eligible trust deposits at an FDIC-insured bank may receive coverage based on the number of eligible beneficiaries. This is subject to applicable limits.
Living trusts
A grantor can set up living trusts that are either revocable or irrevocable. For a trust to qualify as living, you must set it up and fund it in your lifetime.
Testamentary trusts
The conditions in a deceased person's will may trigger the formation of a trust. For example, a parent may state in their last will that a firm they own is trusted to cater to their son's needs. They may include conditions under which the son can access the funds; for example, they would have to keep a job.
Trusts only exist after you fund them. Therefore, a testamentary trust is nonexistent until the grantor dies, their will goes through probate, and assets go into the trust. The executor of the will would require a letter of testamentary to oversee the estate distribution.
As the next section explains, the type of trust fund you set up depends on why you need it and who the beneficiaries are.
Other Types of Trust Funds
You may set up a trust fund to benefit anyone—a child, a grandchild, or an organization. You may also use them to reduce or avoid excessive tax obligations. The following are types of trust funds that benefit different groups of people.
Special needs trust fund
You can place assets in a special needs trust to support a loved one living with special needs. The assets you put into the trust can help care for them long after you are gone. A special needs trust does not impede a person's right to receive disability benefits.
Generation-skipping trust
This trust transfers the contributed assets to grandchildren rather than the grantor's children. A person may also set up this type of trust to pass assets to a non-relative who is at least 37.5 years younger.
Before 1976, generation-skipping transfers did not face the additional estate taxes they would if the grantor had left the assets to their children. The government introduced GST —Generation-Skipping Transfer—taxes on these trusts to prevent abuse by wealthy families.
According to the American Taxpayers Relief Act of 2012 [1], however, there is a permanent $5 million exemption—meaning only assets in the trust above $5 million are taxable. Additionally, on December 22, 2017, then-President Donald Trump signed the Tax Cuts and Jobs Act that doubled tax exemptions through December 2025. The high threshold means most consumers may never pay taxes on these trusts.
A-B trusts (bypass trusts) for married couples
Married couples set up A-B joint trusts (or AB joint trusts) to protect their children's inheritance. Also known as credit shelter trusts or bypass trusts, they can be used as part of an estate tax planning strategy.
The assets remain in a single trust while both parents are alive. However, if one spouse dies, the trust splits into two: the A and B trusts.
The A trust receives the surviving spouse's assets, while B (bypass trust) receives the deceased's assets, which go to the couple's children.
The surviving spouse may receive income or use certain assets from the bypass trust without owning them outright, depending on its terms. Common assets can include:
- Cash
- Real estate
- Life insurance
- Annuities
- Business interests
The assets in the bypass trust are not subject to taxes. The surviving spouse must not overly benefit from them. Still, the remaining spouse can legally use the funds to generate income.
At the death of the remaining spouse, the assets in the bypass trust go to the children without a probate process. Bypass trusts are irrevocable.
They may also help reduce estate tax exposure. This depends on the size of the estate and the tax regulations governing this in your state.
Charitable trusts
These trusts allow grantors to keep giving to a charitable organization whose cause they support. You may set it up as a Charitable Lead Annuity Trust (CLAT) or a Charitable Remainder Annuity Trust (CRAT).
CLATs direct that funds from the trust go to the charitable organization for a designated time, after which the remainder goes to a beneficiary. A CRAT orders that a beneficiary receives income for a time. At the end of the set period, the remainder goes to the charitable organization. Placing your donations in a trust can result in tax deductions.
Spendthrift trusts
Grantors use spendthrift trusts to transfer money to loved ones with money management issues. In the trust's conditions, they may limit how much and often beneficiaries receive funds.
For example, the grantor may direct that a daughter gets only enough money every month for their needs. They may also require that the funds not be used to pay debts, thus limiting the beneficiary's access to unnecessary credit. State laws determine how long trusts should last.
Trust funds for children
Parents or grandparents often use trust funds to set aside money or property for a child. They can explicitly decide when and how the assets should be used.
The grantor leaves instructions to a trustee, who manages the trust.
The trust may help pay for things such as:
- Education
- Living expenses
- A future home
It can also delay access until the child reaches a certain age or meets specific conditions.
Advantages and Disadvantages of Trust Funds
The table below summarizes the advantages and disadvantages of trust funds.
| Advantages of Trust Funds | Disadvantages of Trust Funds |
|---|---|
| Can help avoid the probate process. | It may be costly to set up and pay a trustee. |
| They can provide greater privacy. | Depending on the type, you may lose control of trust assets. |
| They can help protect a beneficiary’s inheritance. | Real estate and other property may need to be retitled. |
| They may provide tax-deferred growth in assets in certain situations. | Some trusts lack flexibility to make changes without court involvement. |
| Certain trusts may offer protection against creditors. | Social Security benefits are subject to separate federal rules and may affect trust planning. |
Important: Tax treatment, creditor protection, and the effect of a trust on Social Security or other benefits depend on the type of trust, applicable law, and individual circumstances. Consider consulting a tax professional in your state. They can explain how the trust may affect your taxes.
How to Start a Trust Fund
To star ta trust fund, you will probably need to meet with an attorney and decide on:
- How the money will be managed
- Who the trustee of the fund will be (the person legally responsible for the investment and should also know how to manage money effectively)
- Who will inherit the assets in the fund,
You should also consider some other factors like how often distributions can be made to heirs and what those heirs must do to receive them.
They will meet with you to develop your plan and write a will, trust and possibly other legal documents.
Word choice is crucial when setting up trusts. You can use a free living trust form to create your document. You can also generate a certificate of trust to prove the trust's existence.
Finally, you need to fund the trust fund. That means transferring ownership of your assets into the name of the trust so that it owns them instead of you. This can be done by transferring property deeds or titles, changing retirement plan beneficiaries, and so on [2].
You may also want to work with an estate planning attorney to draft up documents defining who, exactly, receives what portion of your assets when you die.
Once these decisions are made, you'll want to find some investments that fall in line with your goals and risk tolerance. This could be stocks or bonds from companies or government entities, real estate properties, or other assets.
Helpful Resources
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