What is a trust fund?

A trust fund is a legal entity set up to hold financial assets such as stocks, bonds, cash, property and businesses on behalf of an individual or an organisation. There are three main parties involved in a trust fund. A grantor or settlor establishes the trust, a beneficiary receives the assets and a trustee manages the assets for them.

Where have you heard about a trust fund?

You might have heard a trust fund explained as part of financial planning advice. Trust funds are a common tool for investors to organise their assets in the most tax-efficient way, and to pass on their assets to their relatives.

What do you need to know about a trust fund?

There are several reasons to organise assets into a trust fund: allocating assets to a minor child; managing family assets; managing assets for someone who is incapacitated; passing on assets while the grantor is alive and passing on assets as an inheritance.

How trust funds work depends on the type of trust, but broadly they allow the grantor or settler to establish the terms by which their capital is managed and who can receive it.

Types of trust funds

There are many types of trust funds, which work in different ways and have different benefits. Some of them are:

• Bare trust. Also known as a basic trust, it grants the beneficiary the right to receive the assets at any time if they are over the age of 18. This type of trust is typically used for a child trust fund.

• Discretionary trust. Also known as an accumulation trust, it allows the trustee to make decisions about how the capital and income generated by the assets are used to benefit the recipients of the trust, for example, grandchildren.

• Interest-in-possession trust. Allows the beneficiary to receive income as it is generated by the assets in the trust. For example, a spouse can receive an income for life, after which it passes to their children.

• Mixed trust. Allows different assets within the trust to be treated in different ways – some with the terms of discretionary trusts and some as interest-in-possession. These can be used to benefit multiple children of different ages.

• Grantor trust. Gives the grantor/settlor, or their spouse or civil partner, rights to benefit from the trust, for example, if they become ill in the future.

• Charitable trust. Donates assets for charitable purposes free of inheritance tax and capital gains tax.

• Living trust. Also known as a revocable trust, it gives the settlor control over their assets during their lifetime and avoids probate upon their death. Unlike an irrevocable trust, it can be changed, although it has fewer tax benefits.

• Blind trust. A type of living trust in which the trustee has full control. The grantor and the beneficiary are not aware of the assets in the trust. Useful to avoid conflict of interest.

• Asset protection trust. Protects the assets it contains from any claims of future creditors, lawsuits, or other claims.

• Land trust. Manages property on behalf of the grantor and beneficiary.