A trust fund account is a fund management account that includes a variety of assets, such as cash, property or estates, and stocks and bonds. Trust funds are typically established to preserve a person’s wealth or to ensure that loved ones are financially stable in future years. Parents, grandparents, and family members establish these types of accounts to protect assets for the intended recipients. They are often classified as a gift, which helps maximize tax benefits for the person establishing the account.
Trust fund accounts are created by a grantor for a designated beneficiary and then managed by a trustee. In some instances, parents serve as the trustee, however, most individuals appoint a trustee from a financial firm or law office to oversee the account. This ensures that the beneficiary does not squander property or violate the terms of the fund. In most cases, a trust fund imposes strict guidelines for distribution of assets, including age requirements, time lines for reimbursement. and caps on distribution amounts — especially for a child trust fund.
In certain cases, the courts may appoint a trustee to oversee the trust. The trustee is the legal owner of the assets of the trust fund. As the chief administrator of the account, the trustee must ensure that the trust’s assets are preserved, accounted for, and reported to the grantor and the beneficiary. The trustee is also responsible for filing required tax returns for the trust, compile financial reports for the grantor and beneficiary, and approving funds for the beneficiary.
Grantors can open various types of trust fund accounts. Some of the most common types include a retirement trust fund, estate or educational trust fund, charitable trust fund, and income and child trust fund. Many times, parents and grandparents create a child trust fund to monitor spending for a minor. Such an account could also be established to protect the privacy of a wealthy individual since wills are public documents and trusts are private.
Establishing a trust fund account offers financial benefits for both the beneficiary and the grantor. By protecting assets in a trust, a grantor guarantees that property, cash, or stocks are designated to a specified beneficiary following his or her death or divorce. Tax benefits also prompt the need for this type of account. Federal and state governments generally offer estate, gift, and income tax advantages for trust fund account grantors.