What exactly is a “trust fund”? How exactly do trust funds work? ANy information would be appreciated!
The basic answer to your question that a “trust” is a legal entity that holds assets and stipulates how they are held, managed, and distributed. Parents and grandparents can set these up for kids to say, pay for college, or provide for the beneficiary in case of death. The trust has a legal status and is controlled by a “trustee” named by the person that set up the trust. A trustee could be an attorney or a trusted family friend. Think of a trust as a bank account with a person designated to look over it and a contract that says what happens to what is in the trust. When a large amount of money is put into a trust for a minor child, that is often called a “trust fund”. The trust decides when and how the child gets the money. It is common to pay out at certain intervals (18, 21, etc.). Most people with money recognise that it is probably not a good idea to give the child say $5 million on their 18th birthday. They set up trusts to protect the child from himself and others.
Trusts are actually pretty complicated and can be used for may things. Read more here.
http://www.pueblo.gsa.gov/cic_text/money/trust-fund/trusfund.htm
If you are referring to government trust funds, then the answer is that they are merely bookkeeping conventions. The two biggest are the Social Security Trust Fund and the Medicare Trust Fund. They are, in effect, accounts holding enormous sums of money. most of the money in there exists in the form of United States Treasury Securities (i.e. bills, notes and bonds). When people pay their Social Security and Medicare taxes, the money goes into the trust fund, meaning that it’s used to pay for more securites that are held in the account. People’s Social Security and Medicare payments then come out of the account. The law allows money to be paid only so long as their is money in the trust fund.
Of course “trust fund” can also refer to private investments. Typically we think of private trust funds as being money that people put aside and invest for some future cause, such as retirement or college education.
IANAFinancial Analyst, but the bare bones is that a trust fund is property held in a trust. A trust is a legal structure by which one person (the trustor) gives financial control over property to another person or institution (the trustee). There are a number of reasons why trusts are set up. For example, say you’re a parent of a minor child, and you have substantial assets. If you die before your child is an adult, you probably wouldn’t want your teenager or pre-teen to try to manage those assets. So you put them in a trust and name a trustee to manage the assets on behalf of your child until he or she is old enough to do it for themselves. There can also be tax benefits to having your property held in trust rather than in your own name.
Thanks for the replies!
Is it kosher to tack on additional questions after the original question is answered? (Apologies to the mods if it isn’t, I’ll create a new thread)
Is there a method by which one can use a trust fund to evade estate taxes? If you put your money into a trust fund for your children, do they get slapped with an estate tax if you die before the trust is executed? What if you’re still alive when the trust is executed?
Generally no. The IRS considers your estate to include every source of wealth, including revocable trusts. You can sometimes create an irrevocable trust which will remove the corpus (that money you contribute to the trust) from your taxable estate, but IIRC irrevocable trusts can only be set up for certain purposes (charity, education, etc.), and setting stuff up for your descendants doesn’t qualify.
That said, the site Otto links describes an “A-B trust” which can double the estate tax exemption by taking advantage of both parents’ right of exemption. I have no reason to think that’s not valid, but I’m certainly not endorsing anything like that.
This is not my area – this response is constructed from my vaguely-remembered Decedants’ Estates class that I took in my very last semester of law school, and in which I received the worst grade of my law school career, so the above might be completely wrong.
–Cliffy