In short, a trust fund is something that’s set up for the purpose of benefiting another person or group. There are numerous types of trust funds, and the specifics and structures may vary depending the account is established and relying on its reason. Any type of trust fund will involve some sort of property of value — whether it’s money in the shape of cash, stocks, mutual funds, or bonds or whether it’s a piece of real estate.
We’ll give you the deets on the fundamentals — including the parties involved in any trust fund account, and we’ll then fill you in on what a trust fund looks like, how it relates to taxes, and why any person would handle their money or assets in this manner.
When dealing with money, you better have a good understanding of the main players involved. Regardless of your relationship with the grantor, trustee or beneficiary, and even if you’re dealing with a family member you know is a responsible person, it’s important to understand how any person functions in a financial relationship.
In any trust account, you’ll probably have at least three peeps involved:
Some people use the money to fund travels around the world; others use it to pay for education or a mortgage. A trust account can be set up for a variety of motives, but oftentimes it’s initiated by grandparents or parents for their grandchildren or children. A child trust fund, for instance, might be set up for a child so he or she will receive a certain amount of money at age 18 when heading to college or traveling the world. The grantor might decide that the beneficiary will receive $50,000 for education at age 18, and an additional amount of money post-graduation.
Some also set up a bypass trust to help plan for the future of their estate after they pass away. This type of account is an irrevocable trust, meaning it can’t be changed or terminated unless the beneficiary approves (a revocable trust, on the contrary, gives the grantor the right to modify the trust). Nevertheless, the grantor will decide the beneficiary’s rights to withdraw, and can limit the beneficiary's rights to distribute the assets of the trust.
Mothers and Fathers would possibly set up a bypass trust so that after their death, their money and/or real estate or other assets ( will be passed on to their children, and their children won’t have to pay estate taxes on those assets.
The IRS will not honor a bypass trust unless it’s prepared properly, so it’s wise to set up any bypass trust with an attorney by your side.
In fact, the same goes for all kinds of trust funds, which, if structured properly under the guidance of an attorney, can include tax advantages like maximizing estate tax bypasses.
So you want to claim your money? As a trust beneficiary, you have rights regarding the trust, but you should understand the wording in your documents well. If you don't, you should hire an estate attorney to ensure that the trust is operating as it should. You have the right to payments allotted to you by the trust's name, though there may be trust restrictions. For example, the trust might stipulate that the money used only for certain purposes (like educational expenses), and they may require a receipt from the beneficiary as proof. They can also set a specific age for you to take control of the assets. But, generally speaking, you can access your trust fund only after you reach adulthood, generally accepted at age 18.
The kinds of trust funds we’ve just outlined should now be confused with a term you may have heard of: the Trust Fund Recovery Penalty, which has to do with payroll taxes that business have to pay.
These taxes are meant to be withheld from employees’ wages, but oftentimes businesses or principals delay paying them so they can use those funds for other reasons. When the IRS finally comes along and those unpaid taxes have added up, they may issue tax lien notices or penalties against the business.
“There are three components of Federal employment tax: Federal income tax withheld from employees’ wages; Federal Social Security and Medicare taxes withheld from employees’ wages; and employer matching Social Security and Medicare tax,” explains Forbes writer Stephen J. Dunn. “The withheld Federal income tax and withheld Social Security and Medicare tax are called ‘trust fund’ taxes. Trust fund taxes that are withheld from employees’ wages but not remitted to the Federal government can be assessed personally against the ‘responsible persons’ of the business. Such an assessment is called a ‘trust fund recovery penalty.’”
There are a few steps to setting up a trust fund if you're on the giving end of it. Here they are broken down:
Specifically, you'll need to decide on your people involved in the trust, who the beneficiaries and contingent beneficiaries will be, how the assets will be managed or invested, how long the trust will last and whether it can be changed. Once you know all that, you can go ahead with opening a trust.
You'll want to go to an attorney in the state in which you want the trust fund domiciled. The trust law differs from state to state, but it has standardized a bit over the years thanks to the Uniform Law Commission, which works to promote uniformity of statutes throughout the United States. Talk with an attorney to create your trust in your state.
According to The Balance, "if the trust is not a grantor trust which the person donating the property is the sole trustee and retains certain powers, such as the right to revoke or modify certain portions of the trust instrument and therefore must report the trust assets and income under his or her personal Social Security Number on his or her Federal and State tax filings, the trust fund will need to request its own taxpayer identification number, or TIN."
You will need to retitle it and open financial accounts in the trust's name.
There are other trust funds about which you should be aware. Here are three major trust fund types.
According to the Tax Policy Center: "The Medicare trust fund comprises two separate funds. Tthe hospital insurance trust fund is financed mainly through payroll taxes on earnings and income taxes on Social Security benefits. The Supplemental Medical Insurance trust fund is financed by general tax revenue and premiums paid by enrollees."
According to the Social Security Administration: "The Social Security trust funds are financial accounts in the U.S. Treasury. There are two separate Social Security trust funds, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits."
According to Find Law: "Charitable trusts are trusts which benefit a particular charity or the public in general. Typically charitable trusts are established as part of an estate plan to lower or avoid imposition of estate and gift tax. A charitable remainder trust (CRT) funded during the grantor's lifetime can be a financial planning tool, providing the trustmaker with valuable lifetime benefits. In addition to the financial benefits, there is the intangible benefit of rewarding the trustmaker's altruism as charities usually immediately honor the donors who have named the charity as the beneficiary of a CRT."
There are dozens of types of trust funds, so if you’re considering using one, it’s essential to educate yourself on the different styles of accounts and the purposes of each. You should certainly consult financial and legal experts before making any decisions. There may be better ways to manage your money and save.
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