It's time to take a closer look at trust funds. You may be surprised to learn they serve a purpose beyond funding the lifestyles of young heirs.

What exactly are trust funds, anyway?

Trust funds are legal entities that may hold an assortment of assets including cash, stocks and other investments. These assets provide an income stream to benefit named individuals or organizations (beneficiaries). Trust funds may continue to pay out to beneficiaries long after they've been set up, outliving the original contributor (grantor). An attorney is required to set up a trust fund, so expect to pay legal fees. Trust funds created during the grantor's lifetime are called living trusts.

Why Would I Want to Set Up a Trust Fund?

Despite the costs, trust funds are a useful way to manage money when certain factors come into play, or when a specific sequence of events occur. Here are five situations where a trust fund makes sense.

A Special Needs Trust

If you have a family member that is physically or mentally disabled, setting up a Special Needs Trust to provide care makes sense. Benefits from a Special Needs Trust may be used for expenses not covered under public benefits programs, as long as they're paid directly to the service provider. This allows the public benefits to continue without being reduced, since a regular cash gift could potentially disqualify them for supplemental security income or Medicaid. Parents, siblings, or other family members of a special needs individual may set up a trust. Since each state has specific guidelines for how these trusts can be spent, be sure to verify your state's individual regulations.

Care Management Trust

Care Management Trusts are becoming more common as aging baby boomers and their children recognize the benefit of detailing exactly how they wish to be cared for in their final years. A Care Management Trust, with yourself as the beneficiary, can be used to appoint a person - "trustee" - to make decisions for you once you become elderly and/or incapacitated. You may address anything you see as important to your future care, such as your wishes about receiving at-home care or moving into an assisted living or long term care facility. Setting up a Care Management Trust before it is actually needed prevents family members from having to second-guess your wishes and make stressful decisions at what may be an emotional time.

To Benefit Minor Children or Grandchildren

Sometimes a parent, grandparent or other family member passes away and leaves minor children as beneficiaries of their estate. In these cases, a trust fund is a good option to manage the inheritance since most children can't yet make wise financial decisions. Trust funds for minor children may be set up as part of your estate planning, and could include details such as how the money should be used.

Some examples of situations where a minor child trust fund makes sense include children becoming orphaned and receiving insurance funds, donations, or receiving an inheritance that must be managed and then distributed among several minor children. In these cases, aunts, uncles, or grandparents may use a trust fund to manage money for the children.

To Collect Funds from More Than One Person

In today's world, a trust fund may even be thought of as a legally structured way to accumulate crowdfunding, especially when it comes to collecting funds from the public in order to benefit a child or a cause. For example, children whose parent(s) have been killed accidentally or in the line of duty, or who must undergo expensive medical treatments due to accident or illness. Trust funds can be set up to collect donations from the public to help with living and/or medical costs of beneficiaries.

A Living Trust To Avoid Probate

Some individuals may consider a living trust to avoid the often complicated process of probate when they pass away. This type of trust fund is set up by an individual while they are still alive, who then names themselves as the trustee. Their property is transferred to the trust, though they retain ownership of the property, simply as the trustee. Within the trust, you may name who you would like to inherit the property after your death, called the "successor trustee(s)." This transaction of property after your death is frequently far quicker and less complicated than probate. A living trust is particularly useful for people who own real estate (including vacation property) across the country, as probate of estates including multi-state real-estate can be complex and expensive endeavors.

The Bottom Line

Despite their reputation as a tool for wealthy families and investors, trust funds make sense in a variety of situations that occur frequently among non-wealthy people. Managing money for minor children or special needs family members, and collecting funds from many contributors to benefit just a few individuals are some examples. As the population ages, care management trusts and living trusts can simplify the care of elderly family members as well as the transfer of their estates to beneficiaries.

Want to learn how to invest?


Delivered twice a week, straight to your inbox.