How much interest does a Trust Fund get? Why would I get a Trust Fund?
A trust is a legal concept and a way to manage assets for another’s benefit. The settlor creates the trust. The trustee (legal title holder) manages the trust for the benefit of the, duh, beneficiary (equitable title holder). Or, as I prefer, the cestui (pronounced cetty) que trust. Those types of phrases are why lawyers make the big bucks. Finally we have the res (thing) of the trust.
So, putting it all together, the settlor creates a trust managed by the trustee for the benefit of the cestui que trust. Whatever is in the trust is the res. The res is where you seem a little confused.
The res can be real property (land), personal property (stuff), equities (stocks), bonds, anything which produces income basically. That is why the answer is it depends. The income can be almost anything. Moreover the settlor can plow as much of the trust income back into the trust as desired or distribute it out to the beneficiary or beneficiaries.
Why have a trust? Several reasons: taxes, estate planning, ability to control the distribution of assets after death, charity, and more. Charitable trusts benefit from cy pres reformation rules. Basically a court will attempt to save a poorly written trust document which benefits a charity.
I can give you more. I fear you may be nodding off.
I am sorry it has taken so long to get back to you. I missed out on how to be notified in my mail of an answer. I will work on that.
A person I know wants to put some money in a trust and live off of the interest. Is that possible? Your answer was totally understandable.
They can live off the interest without putting the money into a trust. What advantage to they expect to gain by putting the money into a trust?
Your friend is suffering from the misperception that a “trust fund” is a definite thing, like a 2002 gold Toyota Camry with leather seats, a CD changer, etc. etc. In fact, a trust fund (or an annuity, and IRA, a mutual fund, etc.) is just a category, like a “car.”
Can your friend live off the interest from a trust fund? Dunno. How much interest does the fund pay? For how long? Is it variable or fixed-rate? Taxable or tax-free?
Your friend could put the money in a trust, and if the trust invested its money in a bank savings account, your friend would get 1% interest plus change. On the other hand, if the trust invested in Argentinian junk bonds, your friend might get 39% interest, for about a week, until they are worthless.
It really matters what the terms of the trust are. Is it a basic living trust? Is it a real estate investment trust? Is it a particular investment, jjust called a trust by the people involved? Is it a PONZI scheme?
And he could get the same returns by investing his moeny in a bank account or in Argentinian junk bonds without using a trust at all.
My mother inherited money from a deceased relative and doesn’t even know what she is getting. She is elderly and needs an income. Someone told her she will need the trust and that she will be able to live off of the interest.
Since I didn’t know anything about financial matters, I thought I would ask all of you what you thought.
Perhaps, she should put it in a fireproof safe under the bed.
Fireproof, good idea.
On the other hand, depending on how risk averse* she is bonds or money markets might be good. Right now stocks are pretty volatile, but the general rule is that a mix of stocks, bonds, and cash (money market funds) or stock funds and bond funds is best.
Some stocks are pretty reliable, like utilities. They tend to provide more income in terms of dividends but the price of the stock rarely, if ever, shoots up 4000%. On the other hand, small companies usually pay no dividends but can go up - or down - in price dramatically. Right now, with a sluggish economy, I recommend caution if she needs the money. Maybe 70% or more in bonds and money market funds (Money markets are like checking accounts, easy to make withdrawls in large amounts).
Living off the income is problematic depending on how much is earned versus what is spent, of course. If the inheritance is large, then a good safe investment returns a lot of money.
Stocks or stock funds: You own a small chunk of the company. The share value goes up and down in price. Dividend income, usually paid quarterly, is useful for someone who needs the money to live on. Therefore, big established companies are best as they pay more in dividends. The so-called “blue chip” stocks are the big companies, also the “Dow components.” Again, utilities are pretty reliable. People tend not to quit using power or water.
Bonds or bond funds: You are loaning money to the governmental agency or company. You get a fixed rate of return. Good and safe so long as the company or governmental entity is not defaulting on it’s debts - which does happen. There are bond ratings. AAA is great, then it gets worse.
Money market funds: Similar to bonds. Usually connected to government securities. Again, a fixed or somewhat variable rate of return. You rarely lose all your money in money market funds unless there is an apocalypse or something.
There are many internet resources for learning about stocks, bonds, and other investment options. I would Google “index funds,” “bond funds,” “stock funds,” “money market funds” and go from there.
A “fund” is a good way to diversify your investments. For example a stock fund allows you to own a little bit of many companies versus a single stock which is one company. Of course just as a rising tide lifts all boats, an ebbing tide leaves everyone up on the rocks. I invested a chunk of money in LMT (Lockheed Martin Corp.) a while ago, it doubled. Risky, but it paid off. OTOH, my tech funds, well diversified in many companies, are worth 1/3 of what I paid. I did well compared to some people. Scared and confused? Good, now you understand.
Remember, safe is boring, but it beats losing all your money.
As for trusts, they are primarily for distributing assets upon death or managing assets for the benefit of someone else. I would first find something good to invest in before worrying about a trust. Make sure your mom has a will. Trusts are basically wills that can take effect before death. They are useful for people with a lot of money, less so if the amount is small. Inheritance or estate (if Republican, “death”) tax is a huge bite if it applies at all.
Finally, TALK TO PROFESSIONALS WITH GOOD REPUTATIONS BEFORE DOING ANYTHING RASH WITH THE MONEY. Ask around, and do a lot of research, you will be glad you did. Lots of ‘experts’ are morons or crooks. Some are wonderful and helpful. Like medicine, seek at least a second opinion.
*financial term for how much you can stand to lose the money. If you are highly risk averse you really need it.
Thank you very much for this excellent, complete answer. I have printed it and will research every thing you said.