Trust funds are designed to provide financial support and protection for your loved ones, and can be an effective financial tool depending on your circumstances. If you have assets you’d like to distribute before or following your death, you may want to consider setting up a trust fund.
This article covers the fundamentals of trust funds, including their definition, workings, benefits, types, setup process, and more essential details.
What is trust fund?
A trust fund is an estate planning arrangement that allows an individual to set aside money or other assets for the benefit of selected beneficiaries. To understand how a trust works, it is important to know the three main roles involved:
- Grantor: The person who creates the trust and transfers assets into it.
- Beneficiary: The individual or individuals who receive the benefits or assets from the trust.
- Trustee: The person or institution responsible for managing and administering the trust assets.
Trusts hold and manage assets on behalf of others and are typically established with the help of a qualified estate planning professional. A trust fund can include various asset types such as cash, real estate, investment portfolios, business interests, or a combination of these.
How does a trust fund work?
A trust fund involves three key participants: the grantor, the trustee, and the beneficiary. The grantor is the individual who creates the trust and transfers their assets into it. The trustee is the person or organisation responsible for managing and overseeing the trust’s assets. The beneficiary is the person or entity designated to receive the assets held within the trust.
To establish a trust fund, the grantor typically collaborates with an attorney to draft the trust agreement. They may also consult a financial advisor to ensure that their assets are allocated in the most efficient way. The grantor will choose a trustee, which could be a trusted family member or a financial institution. The next step is to select one or more beneficiaries, such as family members, business partners, or charitable organisations. Alongside the lawyer, the grantor will outline the terms of the trust, specifying which assets are to be included and how they will be distributed. What sets trust funds apart from other estate planning tools is their ability to allow the grantor to set specific instructions for how and when the beneficiary will access the assets. For instance, the grantor may choose to distribute funds on an annual basis or provide a lump sum when the beneficiary reaches a certain age. Additionally, the trust can be structured to cover significant expenses, such as education costs or a home down payment.
A common feature in many trust funds is the "spendthrift clause," which protects the trust's assets from being used to settle the beneficiary’s personal debts. For example, if a beneficiary were to run up large debts through gambling, creditors would not be able to claim the funds in the trust. This clause ensures that the beneficiary has a financial safety net, even if their personal financial situation becomes difficult.
Also read: Types of investments
What is the purpose of a trust fund?
Trust funds are created to serve specific financial or personal purposes, such as:
- Providing income for beneficiaries, such as a special needs child.
- Distributing assets after the grantor’s death.
- Supporting the grantor and covering expenses if they become incapacitated.
- Contributing to charity or philanthropic causes.
Trust funds can hold a wide range of assets, including investment accounts, businesses, real estate, or bank deposits. The grantor decides how and when beneficiaries will receive distributions—for example, fixed annual payments, lump sums at a certain age, or funds earmarked for specific uses like education or housing.
Restrictions can also be applied. A common example is a spendthrift clause, which prevents trust assets from being used to settle the beneficiary’s debts.
What are the benefits of trust funds?
Multiple benefits are there in India for registering a trust in India. Some of them are:
- There are statutory rights associated with trust funds.
- The number of audits is lower.
- It is autonomous in nature.
- Long-term tax benefits can be enjoyed.
- Heirs and successors can enjoy the benefits as they can avoid probate. The probate court processes are time-consuming and emotionally draining. By creating a trust fund, the entire probate process can be avoided.
- The appointment of a trustee ensures that the assets within a fund are taken care of well until the beneficiary reaches legal adulthood.
- Proper control is executed through trust funds.
How to set up a trust fund
Setting up a trust fund involves deciding the structure of the trust, selecting trustees and beneficiaries, preparing legal documents, and transferring assets into the trust. While simple trusts can be created using guides or specialised software, working with an estate planning or trust attorney can help ensure the arrangement aligns with your goals and legal requirements.
Before creating a trust, consider the following:
- What is the purpose of your trust?
Define whether you want to support beneficiaries, avoid probate, manage taxes, protect assets, or contribute to charitable causes. - Who are your beneficiaries?
Beneficiaries may include family members, heirs, or organisations such as charitable institutions, depending on the type of trust you establish. - Who will be the trustee?
You may act as the trustee yourself, appoint a trusted individual, or select a professional entity such as a trust company, attorney, or financial institution to manage the assets and oversee the trust’s administration.
