Trust Fund

A trust fund is a legal setup enabling someone to place assets into a dedicated account for the advantage of another individual or entity.
Trust Fund
3 min
10-May-2024

The meaning of a trust fund is a legal agreement that enables a person to put different kinds of assets (like stocks, money, bonds, Certificates of Deposits, real estate, a business, and others) in a specialised account. It is done to benefit an entity, an organisation, or a person.

What is a trust fund?

Trust fund meaning can’t be defined in a single way. As per the purpose of establishing a trust fund, it can take up various forms. Different stipulations can be used to establish different trust funds.

One of the main reasons for establishing a trust fund is that it provides you with tax benefits. In addition, it provides financial protection to the beneficiary.

What are the benefits of trust funds?

Multiple benefits are there in India for registering a trust in India. Some of them are:

  1. There are statutory rights associated with trust funds.
  2. The number of audits is lower.
  3. It is autonomous in nature.
  4. Long-term tax benefits can be enjoyed.
  5. 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.
  6. The appointment of a trustee ensures that the assets within a fund are taken care of well until the beneficiary reaches legal adulthood.
  7. Proper control is executed through trust funds.

Read more: Mutual funds

What are the different types of trust funds?

In India, there are various types of trust funds. Some of the most popular ones are revocable, irrevocable, testamentary, spendthrift, special needs, asset protection, and charitable. A trust can be regarded as private, public, or private-cum-public trust, depending upon the trust’s possession.

While a public trust works as either a religious or charitable trust, a private trust works as per the provisions of the Indian Trusts Act of 1882.

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How does a trust fund work?

A trust fund works to implement the wishes of the grantor. Even when the grantor is alive, it is the trustee that manages the assets under the trust fund. Upon the death of the grantor, the assets can be transferred by the trustee to the beneficiary (provided he/she has attained adulthood) as per the wishes of the grantor. This handover can be done either in lumpsum or through the creation of a regular income stream. 

How to establish a Trust Fund?

To establish a trust fund, 3 parties are needed. They are:

  • Grantor: This entity sets up the trust fund and also includes all the assets in this trust.
  • Beneficiary: This is the entity for whose financial support of benefit this trust has been set up.
  • Trustee: It can be any neutral entity, whether a bank, a professional, a lawyer, or a confidante of the grantor. It is the trustee that manages all the assets of the trust.

A trustee manages a trust fund on behalf of the beneficiary. He/she must act for the benefit of both the beneficiary and the grantor.

Read more: Compare mutual funds

Summary

A grantor can transfer all or some of his assets (securities, real estate, and others) to a trust fund, which will be managed by a trustee. This is usually done to secure the financial future of a minor, save tax, and avoid probate. When a beneficiary becomes an adult, the trustee will transfer the assets to him/her.

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Frequently asked questions

What is trust fund baby?
If your parents have set up a trust fund in your name, then you’ll be called a trust fund baby. Though it is generally perceived that a trust fund baby is overly privileged, in reality, that’s not always the case. A trust fund provides a baby with financial security. But it doesn’t always mean that the trust fund baby will have a luxurious life.
Do you make money on a trust fund?
Whether a trust fund makes money or not depends on the type of asset that is held within that trust. If the trust holds collectables or real estate, it doesn’t earn any interest. If the trust fund has assets such as CDs (certificates of deposits) or savings accounts, then it will earn interest. If your trust fund makes money from capital gains, dividends, interest, or others, they will be taxable.
What is the difference between a bank and a trust fund?
A bank is a financial institution that accepts funds and other deposits from people and keeps them in their reserves. Banks use the deposits in their reserve to make loans and earn money. However, trust funds, on the other hand, are legal bodies that hold assets on behalf of a person or group. This special arrangement appoints a trustee to manage trust funds on behalf of that group or person. While a bank usually deposits money, a trust fund can include any kind of asset including bank accounts, cash, stocks, real estate properties, business entities, Certificate of Deposits, bonds, and other kinds of investment.
Is a trust fund good?
Yes, a trust fund is good because it helps its beneficiaries or estates be served well in all financial conditions. Any kind of probate can be avoided by the beneficiaries due to the trust fund. In case of special requirements such as educational needs or paying medical bills, the beneficiaries can utilise the dedicated money from the trust fund.
What are the disadvantages of a trust fund?
In India, one of the main disadvantages of trust funds is their irrevocability. Once a trust has been created, it can’t be revoked or changed easily. A trust fund can become a problem in case the circumstances change such as the beneficiary dies or goes through divorce proceedings. As trustees run a trust fund and its assets, there is a loss of control over the assets.
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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.