Trust fund is money or other property managed by one person or group for the benefit of another person or group. Other terms for a trust fund include corpus, principal, and trust estate. The arrangement under which a trust fund is managed is called a trust.
In some cases, the property in a trust fund is taxed less heavily than property owned without such an arrangement. As a result, many people establish trust funds to reduce their taxes. Others create trust funds for the benefit of children or other people who cannot manage property themselves. Some people use trust funds to take advantage of an individual’s or institution’s special skill in managing property.
How a trust fund works.
Most trust funds involve three parties: a trustor, a trustee, and a beneficiary. In some cases, the trustor is also the trustee or the beneficiary. The trustor, also called the settlor or donor, creates a trust fund by giving property to a trustee. The trustee holds or invests the fund for the good of the beneficiary. The trustee may have charge of the fund for a few years or for more than a lifetime, depending on the terms of the trust. After the trust has terminated (ended), the trustee distributes the property as directed in the terms of the trust.
Any sane adult may serve as a trustee. However, most trust funds are handled by trust departments of banks or by businesses called trust companies. In most cases, the fee for the trustee’s services is set by an agreement between the trustor and trustee. Trustees must keep accounts of all trust funds they hold, invest, or distribute. In addition, they must follow the trustor’s wishes concerning investment of the fund. If the trust does not indicate the trustor’s wishes for investment, the trustee must follow guidelines set by state laws. A trustee must make good any losses that result from wrongful use of a trust fund.
Beneficiaries receive income from trust funds according to a variety of arrangements. For example, some beneficiaries periodically receive income earned by the trust fund. Other beneficiaries must wait and receive the accumulated income from the fund when they reach a certain age. Some beneficiaries receive payments from the trust fund until they reach a certain age. When they reach that age, the beneficiaries take possession of the fund themselves.
Kinds of trusts.
A trust that operates during the trustor’s life is called a living or inter vivos trust. A trust established by a will is called a testamentary trust. A revocable trust can be changed or abolished by the trustor. A trustor who gives up all rights to the trust fund creates an irrevocable trust.
Trusts established for the benefit of churches, colleges, or other nonprofit organizations are charitable trusts. Life insurance trusts receive the proceeds of insurance policies on the life of the trustor.
Courts occasionally create constructive trusts to protect property. For example, a person who has property that belongs to another may be named constructive trustee of that property. Such an arrangement protects the property and ensures that it will be returned to the rightful owner.
