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  #1  
Old 04-19-2004, 05:09 PM
Xavier Xavier is offline
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How do trust funds work?

I mean literally. See I don't really understand how it is that my friend can live a life of luxury (and brag about it) without having to do a cent worth of work. I know that the general concept behind it is:

- His grandparents are rich
- His grandparents spoil him silly
- He gets money

But I don't know exactly what goes on when someone starts one up (a trust fund, that is), or even how one is started up in the first place. I mean does it work the interest off of a fixed amount? What is the minimum amount the generous people in question can pay? And how does it work without them paying any more money?

Please explain to a confused and envious Xavier.
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  #2  
Old 04-19-2004, 06:06 PM
Telemark Telemark is offline
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Imagine if you had a very large bank account. You could live off the interest on that account and never eat into the prinicple, right?

That is essentially what a trust fund (for this purpose) is. With a large enough base amount, you can live off the interest (probably wouldn't be a savings account, you have a fund manager that invests things) as long as your spending doesn't start eating into the principle.

There's no need to pay more money into the trust fund, it is set up to pay off a certain amount (your allowence) each month. If the investments are done correctly your principle can increase and then your allowence could increase as well.

This is how a college endowment works. It's a big sum of money that sits there and earns interest to fund things for the college. As long as you don't spend more than you get the fund keeps increasing.

I don't know the details of setting up a trust fund. A tax attorney or financial advisor can come in now and flesh out the idea.
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Old 04-19-2004, 08:13 PM
Tulipgirl Tulipgirl is offline
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I'm no expert, but I understand the following to be true:

1. Under normal circumstances, you have to have a lot of money to start a trust fund. I've heard that banks generally won't deal with trusts for less than a million. I'm sure that's just for starters.

2. There are "discretionary" and "non-discretionary" trusts. More or less, that reflects who can determine what money is given out and when. With discretionary trusts, the lucky dog who gets the dough decides when and how much they are paid - otherwise it's set up by the person who funds the trust. In other words, your friend is rich, but chances are that grandma and grandpa hold the pursestrings. Small consolation, to be sure.

3. Less interestingly, (and not really related to your question) the US government has allowed a loophole in the Social Security / Medicaid system to allow disabled individuals participate in a trust - a special discretionary trust. Normally, SS only allows those receiving benefits to have $2000 in assets (bank accounts, car, home, etc.) This ensures that those receiving disability benefits basically must live in poverty (sell their home and spend the money on non-durable goods) to continue to receive benefits. The loophole permits parents to leave a home in trust to their disabled child, for example. The trust is specially run by a non-profit corporation chosen by individual states. The details vary for each state, but most now have them.
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Old 04-19-2004, 09:39 PM
SmackFu SmackFu is offline
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Since a trust fund doesn't really have to run in perpuity like an endowment, do they really not dig into the principal?
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  #5  
Old 04-21-2004, 12:31 AM
LordVor LordVor is offline
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Quote:
Originally Posted by Tulipgirl
3. Less interestingly, (and not really related to your question) the US government has allowed a loophole in the Social Security / Medicaid system to allow disabled individuals participate in a trust - a special discretionary trust. Normally, SS only allows those receiving benefits to have $2000 in assets (bank accounts, car, home, etc.)
There's no way that I can parse the sentence "SS only allows those receiving benefits to have $200 in assets" into anything that makes sense. SS retirment benfits only care how old you are and how much you paid into SS, SS disability benefits only care how much money you can earn (cite), not how much you have. Is there some other kind of SS benefit you're talking about?

-lv
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Old 04-21-2004, 07:45 AM
Johnny L.A. Johnny L.A. is offline
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Re Tulipgirl's post.

I don't know if that's a Social Security (i.e., federal) rule, but I know someone who is on State (California) disability who is not allowed to have "excessive" assets. She is allowed to own one house and one car, but is not allowed to have more than a certain amount of money in the bank ($2,000 sounds familiar).

While I understand that the State wants to make sure its money goes to people who really need it, it seems unfair that someone who receives a one-time windfall (i.e., anything, in this case, over two kilobucks) would suddenly become ineligible for Disability.
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  #7  
Old 04-21-2004, 09:20 AM
Mama Zappa Mama Zappa is offline
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Quote:
Originally Posted by Johnny L.A.
Re Tulipgirl's post.

I don't know if that's a Social Security (i.e., federal) rule, but I know someone who is on State (California) disability who is not allowed to have "excessive" assets. She is allowed to own one house and one car, but is not allowed to have more than a certain amount of money in the bank ($2,000 sounds familiar).

While I understand that the State wants to make sure its money goes to people who really need it, it seems unfair that someone who receives a one-time windfall (i.e., anything, in this case, over two kilobucks) would suddenly become ineligible for Disability.
Speaking from the viewpoint of someone who *has* set up a trust fund (Dweezil is autistic, and we were advised to set up a "special needs trust" for him in case he cannot be self-supporting)...

The 2K in assets (I don't recall the exact figure) is something used by various social services agencies in determining eligibility. We were advised to have anyone who gives Dweezil any sort of asset leave it to the Dweezil Zappa Trust instead of directly to him, specifically to preserve his eligibility. The assets of the trust can be used for his benefit - to pay for housing, to own a house, to own a car, to pay for college, or whatever.

We did not have to have a lot of money to set up the trust - all we required was a document (prepared by a lawyer who is experienced in special-needs law) and a trustee (my brother-in-law) who would oversee the money. In fact we did not fund the trust at all at that time. When we did in fact receive a cash gift for the trust - a few years after preparing the paperwork - my BIL had to establish a federal Tax ID number - all income tax returns etc. are filed under that tax ID, rather than under my son's SSN. It's basically a "separate person" for tax purposes, I gather.

The trust was also written with some very specific language that I gather was necessary for special needs use. And it included details on how the trust could eventually be dissolved (and the money released directly to Dweezil) - IIRC, something like "living on his own or with a spouse, and self-supporting, for at least 2 years". I do remember that *we* chose that language, we could have set it up any way we liked including "never dissolve". I believe that even a house / car would have to be owned by the trust, to prevent making the person ineligible for SS/medicaid etc. but don't quote me on that.

Non-special-needs trusts can be written any way the donor prefers. We set one up for Moon Unit at the same time as the other. Hers contains language releasing the funds to her at age 25. I know there were gift tax ramifications if we didn't have some specific language, but I honestly don't recall what those were. There was definitely *not* the "keep it under the SS limit" language.

Rich relatives (of which we have very few) can either leave money to those existing trusts, or directly to the recipient, or they can set up their own separate trusts - they're not bound to use the trusts we've set up for the kids.

I don't know how banks that handle trusts do the job - they may well have larger "balance" requirements, and perhaps they replace the "willing relative" route we chose when naming a trustee.

Regarding "living off a trust fund" (there's little chance my kids' trust funds will have enough assets for them to do that!!) yeah, if there's enough money, then presumably the recipient could do just that. It could be written to release all funds at a certain age, to release funds whenever the recipient demonstrates need, to release them as an "allowance", or whatever the donor wanted at the time.
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Old 04-21-2004, 10:46 AM
yabob yabob is offline
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Quote:
Regarding "living off a trust fund" (there's little chance my kids' trust funds will have enough assets for them to do that!!) yeah, if there's enough money, then presumably the recipient could do just that. It could be written to release all funds at a certain age, to release funds whenever the recipient demonstrates need, to release them as an "allowance", or whatever the donor wanted at the time.
In fact, the small town junior high school I went to had the unusual circumstance of a teacher who was reputed to be a millionaire - at least, he was very rich, and drove fancy cars. The deal was that he was heir to a potload of money, but it had been set up in trust for him. I believe it was his grandfather that drew up the trust. There were ample terms for his education, and so on, but it had a clause that as long as he was able to work, he must be gainfully employed to draw on the trust. It didn't matter WHAT he did - he could be a millionaire ditchdigger if he wanted, but he had to be employed. Apparently, he decided that since teachers got a lot of vacation, that's what he'd do. He actually only worked half days, which must have satisfied the terms of the trust. To his credit, he did seem to do what was expected of him as a teacher, and kids who had him (I never did) thought he was OK. After a couple years he broke the trust fund and quit teaching - I think he had enough business interests of his own by that time that he could satisfy the trust by calling himself a "businessman".
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  #9  
Old 04-27-2004, 01:28 PM
Mama Zappa Mama Zappa is offline
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(bump)

I saw an article on the Washington Post's website today that mentioned special needs trusts, thought some of you might find it interesting:

Quote:
...said she has known of two cases in which disabled adults lost government aid because of inheritance money. Both people still needed programs like Medicaid and food stamps to live well. They regained eligibility, she said, only after spending down some of their inheritance.
It included a link to a website that appears to have a lot of good info: http://www.familyvillage.wisc.edu/general/estate.htm
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  #10  
Old 04-27-2004, 02:33 PM
kunilou kunilou is offline
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There's no single rule about how a trust fund is set up, or how it's distributed.

When I was a trustee at my church, we had a general rule that the church could only take the interest from the investments, unless we voted to dip into principal.

When I was administrator of my father's trust, I could basically take whatever I needed and spend it on whatever I needed to (subject to the review of the other beneficiaries of the trust.)

Some trusts are designed to last perpetually, so they would be limited to paying only from the interest. Some are designed to pay a set amount each year, even if it means dipping into the principal. Some are designed to pay for a set number of years, and then give everything left to the beneficiary, or someone else.
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