Are Trust Funds a Good Idea? 3 Pros and Cons

The term “trust funds” may have different meanings for different people. And so, when we hear the word, it’s usually difficult to pin down what exactly someone is talking about.

While the concept of trusts can be dated back to the days of the Roman Empire, they still very much exist today. During that era, only citizens of Rome could own property. Therefore, when soldiers faced deployment, they’d transfer their property’s ownership to a trusted friend to ensure their families were cared for. With the arrival of colonists, the concept of trust also arrived in the United States.

Once regarded as tools only available to the ultra-rich, they have become popular among almost any socioeconomic class with time.

So What is a Trust Fund?

A trust fund establishes a legal entity to hold assets until an intended recipient receives them. The recipient may receive it when they reach a certain age or under whatever stipulation the previous owner of assets decides. There are generally three key elements that comprise a trust fund:

  • Grantor

The grantor is a trust maker who sets up the trust and fills it with assets

  • Trustee

A trustee manages and performs relevant functions of all the assets present in a trust

  • Beneficiary

This third element is a person or group who profit from the trust by receiving assets or other benefits

Trusts can contain any asset imaginable, including property, cash, bonds, or stocks. But before you begin the process of creating a trust, it’s crucial to weigh down its pros and cons.

Pros of a Trust Fund

  1. Avoids Probate

Perhaps the primary reason people prefer setting up a trust instead of writing a will is avoidance or probate courts. The probate ensures your debts and assets get distributed according to the laws of whichever state you’re living in. Usually, when a parent or grandparent dies, their children and grandchildren cannot access their inheritance until it goes through the legal process of probate. This process can be costly and time-consuming. However, a trust directly gives the ownership rights to grantors and their beneficiaries, which means these assets are already distributed and can avoid probate entirely. 

  1. Offers Privacy

With the involvement of a probate court, your family has no privacy. It’s an open process, and the details of your debts and assets become a part of the public record. Anyone can therefore see the extent of your wealth. But since a trust foregoes the need for probate, the details and contents of the trust stay only with the people involved in it. Even after the initial trustee dies, the trust remains private, and no outsider can access the information about its assets.

  1. Grantor’s Incapacitation

A trust allows the grantor to benefit from a property or any other asset should they become physically or mentally incapacitated. The trust allows a grantor’s successor trustee to take over the handling and management of current assets. If you, as a grantor, set up the trust, you can save your family from possible chaos that may ensue when you’re no longer able to manage financial affairs. During your lifetime, you’ll be able to benefit from your assets without worrying about them suffering potentially heavy losses.

  1. Other

Several other benefits of a trust fund can be:

  • Maintain control of your finances even after you’ve passed away
  • Flexibility to deal with assets as you please
  • Easy asset management

Cons of a Trust Fund

  1. Additional Costs and Paperwork

Setting up a trust fund is more complex than documenting a basic will. For including property as part of the trust you set up, the registration must be in the name of the trust. If a property isn’t registered in the trust’s name, the estate will likely undergo the probate process anyway. The probate procedure then invites all the drawbacks you wish to avoid in the first place. Among other expenses, you’ll have to pay tax filing fees, trustee fees, and even asset retitling fees. Since the process is complicated, you may have to hire a legal advisor, and therefore you must also take the legal fees into account.

  1. Loss of Ownership of Assets

Once you transfer your assets into a trust, you no longer hold ownership over them. You may retain some control by having the authority to appoint or remove a trustee who then controls the assets, but it’s important to remember that you no longer own those. If you cannot give up ownership and keep treating these assets as your own, the trustees may declare it a ‘sham.’

  1. Electing the Wrong Trustees

Grantors may choose the wrong trustees when setting up a trust. A suitable trustee is financially stable, trustworthy, and savvy. Although most people opt for a close relative or friend, it may not always be the right choice. The biggest problem is that resentments and tensions may arise when they’re in charge of the trust. Therefore, how well your trust operates depends on whether or not your trustees understand what they must do.

Conclusion

Deciding whether creating a trust fund is suitable for you or not first requires you to weigh its benefits and risks. In most cases, risks can be mitigated and managed with careful planning and a proactive approach. For instance, hiring the right experts who can help you set up a trust fund will ensure you stay protected against any potential threats—present or future.