Welcome to Money Basics, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important terms involving your money.
A trust fund is a special type of legal entity comprised of various assets and holdings that is designed to benefit another person, group or organization.
Generally, there are three parties involved in a trust fund: the grantor, the beneficiary and the trustee. The grantor starts the fund, donates all the assets in the fund and sets the rules for how the fund is managed. The beneficiary is the person who benefits from the fund per the terms set by the grantor. Lastly, the trustee is the individual or institution that manages the fund. Trustees are usually paid a management fee for their work.
There are many kinds of trusts with different provisions, but the two most common types are revocable and irrevocable trusts. A revocable trust allows the grantor to alter terms of the trust and collect income on the assets while he or she is still alive. An irrevocable trust has a lot less flexibility. The provisions of an irrevocable trust cannot be changed once the agreement is signed. In many cases, a revocable trust will become an irrevocable trust once the grantor dies.
There are a few advantages of setting up a trust over a simple inheritance. Setting up a specific type of trust for charitable contributions can yield tax benefits. Trusts can also help protect family businesses and allow family members without an interest in managing the business to earn a portion of the profits. A trust also allows more control over how your assets are used after you pass. If you don’t believe your family will be responsible with your wealth after you pass, a trust can limit how and when they can spend the money in the fund, ensuring that the money will last longer than it might have in a simple inheritance.