What Is a Trust Fund and How Does it Work? — Nationwide (2024)

FAQs

What exactly is a trust fund and how does it work? ›

A trust fund is a legal entity that holds property and assets and can provide financial, tax, and legal protections. A grantor sets it up and funds it with money or assets. One or more beneficiaries receive the assets under specified terms. The trustee manages the trust and distributes its assets at a prescribed time.

While some may hold millions of dollars, based on data from the Federal Reserve, the median size of a trust fund is around $285,000. That's certainly not “set for life” money, but it can play a large role in helping families of all means transfer and protect wealth.

After a trust has been created, a bank account is opened for the trustee to access the money when necessary. The trustee is the only party that can access this account. When they need money to fulfill their duties, they can use the account to write checks, withdraw cash, or complete wire transfers.

Some of the ways trusts might benefit you include: Protecting and preserving your assets. Customizing and controlling how your wealth is distributed. Minimizing federal or state taxes.

Some trusts allow beneficiaries to receive regular distributions or access funds under certain conditions, such as reaching a specific age or achieving a milestone. Others may require the trustee to approve withdrawals based on the beneficiary's needs.

If the trust is structured properly, it can have a tax advantage for your beneficiaries. Assets that have gone up in value will receive a “step-up” in basis on your death, which means your beneficiaries will pay less in capital gains taxes. Assets that are gifted do not receive a “step-up.”

Creating a revocable living trust gives you a legal document that will protect your property, including your bank accounts and any other assets in your estate. You should put your bank accounts in a living trust to ensure the funds are easily accessible for your beneficiaries when the time comes to inherit.

A Trust Fund is a legal entity that contains assets or property on behalf of a person or organization. Trust Funds are managed by a Trustee, who is named when the Trust is created. Trust Funds can contain money, bank accounts, property, stocks, businesses, heirlooms, and any other investment types.

How do trust funds pay out after death? ›

The grantor can set up the trust, so the money is distributed directly to the beneficiaries free and clear of limitations. The trustee can transfer real estate to the beneficiary by having a new deed written up or selling the property and giving them the money, writing them a check or giving them cash.

Parents often make the mistake of choosing a trustee based solely on personal relationships without considering their financial acumen, integrity, and willingness to serve. Choosing one of the children is not always the best choice as other beneficiaries may see their role with suspicion.

The beneficiary, or beneficiaries, will receive the assets to spend or use as instructed by the trustees. Some parents leave money to their children to provide money for healthcare, to help them out if they're buying a house, or to help them launch a career.

Another possible way to get money out of a trust fund is to request a cash withdrawal. This would require putting the request in writing and sending it to the trustee. The trustee might agree. However, that individual or entity must also fulfill their fiduciary obligations.

Bank account beneficiary rules usually allow payable-on-death beneficiaries to withdraw the entirety of a decedent's bank account immediately following their death, so long as they present the bank with the proper documentation to prove that the account holder has died and to confirm their own identity.

The grantor can set up the trust, so the money is distributed directly to the beneficiaries free and clear of limitations. The trustee can transfer real estate to the beneficiary by having a new deed written up or selling the property and giving them the money, writing them a check or giving them cash.

It's all too easy to live exclusively on your trust income. As alluring as it might seem to spend it all, doing so makes you vulnerable to eventually running short of money or worse yet, falling into debt. The smart move is to establish a budget that includes using your income to build secondary income sources.

If you are wondering do trust funds gain interest, the answer is “yes, it is possible.” However, they must hold assets that produce income.

When you inherit money and assets through a trust, you receive distributions according to the terms of the trust, so you won't have total control over the inheritance as you would if you'd received the inheritance outright.