Many people hear the term “trust fund” and immediately picture enormous inherited wealth or families with significant financial assets. In reality, trust funds are estate planning tools that can benefit a wide range of individuals and families. Understanding what a trust fund is — and how it differs from a trust itself — can help people make more informed estate planning decisions.
A trust is a legal arrangement that allows one party, known as the trustee, to manage assets on behalf of another person or group of people called beneficiaries. The person creating the trust is often referred to as the grantor or settlor. Trusts may hold many types of property, including cash, real estate, investments, business interests and personal property.
A trust fund, by comparison, generally refers to the actual assets placed inside the trust. In simple terms, the trust is the legal structure or container, while the trust fund is the money or property held within it. People often use the two terms interchangeably, but they technically describe different aspects of the estate planning arrangement.
Trusts vs. trust funds
Trusts can serve many purposes beyond simply transferring wealth. Some trusts help families avoid probate, maintain privacy or provide long-term financial management for children or vulnerable beneficiaries. Others may help reduce estate taxes, protect assets from creditors or establish charitable giving goals.
To this end, trust funds may include instructions regarding how and when beneficiaries receive distributions. For example, parents may create a trust fund for minor children and direct their designated trustee to distribute money for education, healthcare or living expenses. The trust may delay full access to larger sums until the beneficiaries reach certain ages or milestones. As such, a properly structured trust fund may help provide financial stability for future generations while reducing the risk of disputes among heirs.
Estate planning is a highly personal endeavor, and the right approach for individuals depends on each family’s goals, financial situation and long-term concerns. Speaking with an experienced estate planning legal team can help individuals to better understand whether a trust and/or other estate planning tools may help to better protect their loved ones and preserve assets for the future.