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What is a Trust Fund?

A trust fund is a special type of legal arrangement set up (entity) that holds property for the benefit of another person, group, or organization.


Simply a trust fund is a fund consisting of assets belonging to a trust, held by the trustees for the beneficiaries.

There are three parties involved in all trust funds:

  • Grantor: The person who establishes a trust fund and contributes property to it.
  • Beneficiary: The person or people who will eventually benefit from the assets in the trust fund.
  • Trustee: The person or organization responsible for administering the trust as it was intended

The primary motivation to create such a fund is for an individual (or entity) to create a vehicle that sets terms for the way assets are to be held, gathered, or distributed in the future.

There are too many possible reasons for using a trust fund to mention here, but here are some of the most common:

  • Making sure certain assets go to specific people after you're gone.
  • Grandparents often set up trust funds for their grandchildren, designed to pay educational expenses. When the grandchildren graduate, any additional principal remaining is distributed as start-up money which they can use to establish their post-college life.
  • Donating to charity (through a charitable trust).
  • Trust funds can protect assets that you cherish, such as a family business, from your beneficiaries. By using a trust fund, and letting the trustee be responsible for overseeing management, you could achieve this.

Once you place assets in the trust, they are no longer yours. They are under the care of a trustee. A trustee is a bank, attorney or other entity set up for this purpose. Since the assets are no longer yours, you don't have to pay income tax on any money made from the assets.

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