Trust Fund

Financial Dictionary -> Investing -> Trust Fund

What is a trust fund?

By definition, a trust fund is a fund that is held in trust. If you need a clarification on this concise explanation, you may add that a trust fund is an arrangement, by the force of which one can raise sustained benefits in favor of another individual or legal entity. For example, parents may set up a trust fund in favor of their children and give them financial security in the future. Wealthy businessmen and magnates sometimes establish a trust fund in favor of a charity or another not-for-profit organization.

It has to be mentioned that a trust can include a wide range of assets such as cash deposits, real property, stocks, bonds and even state securities, among others. With regard to its management, a trust fund can be managed by a single trustee, or be structured in such a way that allows management by a board of trustees. The trustee or the group of trustees who manage the fund are responsible for the resources held in the fund. They have to make sure that these resources are used in a way that yields the highest possible profit to the recipient of the fund. It is the responsibility of the trustee to see that resources included in the trust fund are used in the best interests of all recipients.

However, the use of the trust fund's assets is a subject to some restrictions such as: the recipient may not be allowed to earn annual profit from the fund until he or she comes of age. During this period, the trustees may be entitled to provide monthly allowance to the recipient. These can be used to cover his or her living costs and tuition fees. Also, when the recipient comes of legal age, he or she may start drawing a limited amount of money from the trust fund each month. As an alternative, the recipient may file a petition with the purpose of assuming full control over the fund's resources. In addition, at the end of each year, the recipient of a trust fund is given a compensation. The sum could be a fixed amount of money or a percentage of the fund's profit during the year.

There are several good reasons to establish a trust fund: it may serve as means to lower some of the estate taxes, helps to easily transfer assets to the designated beneficiaries, and serves to establish asset supervision for minors with little financial experience. In most cases, rich people establish trust funds in favor of their loved ones (or charities), making sure that recipients will receive a stable monthly income after their death. In contrast to a last will letter or testament, giving the beneficiaries full control over the grantor's assets after his death, a trust fund provides for sustainable support in the long run. Persons who are about to establish a trust fund may consult with a lawyer. He or she will evaluate their financial situation, personal circumstances, and best options.