What Is a Trust Fund and How Does It Work?

Trust funds often get a bad rep—often, people assume they are only for the ultra wealthy.

But that’s not actually true (or doesn’t have to be). Sure, trust funds might be a good place to park your cash if you’re a millionaire. But you don’t have to be rich to make a trust fund a part of your financial toolkit. A trust fund can be a useful component of your estate planning (in addition to other steps like writing your last will and testament and picking your children’s guardians).

How do trust funds work? What is a trust fund, exactly? Let’s explore how trusts work, how to use a trust and if this is a vehicle that makes sense for your situation.

Simple Definition: What Is a Trust Fund?

A trust fund is an estate planning tool that can hold property or assets on behalf of someone or some group. It’s generally not a separate legal entity in its own right, but a trust establishes a fiduciary relationship where one person manages money, property or other assets on a beneficiary’s behalf.

There are three main parties involved in a trust: the person establishing the trust, the person managing it, and the beneficiary the trust fund assets are for.

The person who creates the trust is called the grantor, trustor, settlor or trust maker. If you set up a trust through your will, you could also be called the testator or decedent. The grantor chooses the rules behind the trust and decides what property the trust will hold (by transferring assets into the trust).

The person who will ultimately receive the money or property in the trust is the beneficiary. There may be rules or conditions for how the beneficiary receives or uses the assets in a trust. For example, a trust might allow a beneficiary to live in a home owned by that trust, but not rent it out or sell it. Depending on how the trust is set up,

beneficiaries may inherit the trust’s assets according to a specific trigger like age—for instance, inheriting money when the person turns 21.

The person or entity who oversees the contents of the trust and fulfills the various responsibilities is the trustee. This person doesn’t actually own the property in the trust. Instead, they oversee the distribution of the property to the beneficiaries and make sure that the stipulations put in place are being followed. Trusts can have multiple or co-trustees, or even institutional trustees (meaning that a company oversees the administration of the trust). Many trusts name successor trustees in case the first-choice trustee becomes unavailable.

In many cases, the trustee receives some sort of compensation for the effort, like a management fee.

How Does a Trust Fund Work?

A trust fund holds assets you want to give to a beneficiary at a later date. There are several different types of trust, and as the grantor, you set the rules for how the assets in the trust can eventually be distributed.

The trustee must act in the best interest of the trust and the beneficiary at all times—it’s a fiduciary duty, which means there can be legal ramifications for breaching that duty. The beneficiary receives your distributed assets according to the rules of the trust, as administered by the trustee.

Trust funds can hold lots of kinds of property, from cash to investments to real estate to artwork. They can even hold businesses in them. Basically anything that is valuable can go in a trust fund.

Putting assets in a trust lets you pass property to someone in a structured way and potentially impose rules or conditions, even after you’re no longer around.

Some trusts may be able to shelter assets from estate tax and from creditors after you’re gone. They’re also a private way to transfer wealth because only the trustee and the beneficiaries know the contents of the trust and the rules around their distribution. Some types of trust can avoid probate, the court process of executing a will, which is a matter of public record.

What Are the Benefits of a Trust Account?

A trust fund can help you pass money or property to a beneficiary in a more structured and detailed way than a straightforward payable on death account transfer. It can also be a helpful tool to hold assets for people who cannot manage property on their own, such as minors.

Here are some common reasons people choose to create trust funds:

• Designate who should receive the assets: Perhaps you’ve gotten remarried and want to make sure your children (but not your new spouse’s children) get your money.

• Set terms for when a beneficiary takes control of funds: Legally, minors reach the “age of majority” and can legally inherit money and property at age 18 (in some states, UTMA accounts transfer when the beneficiary turns 21). If you don’t think they’ll be ready, you could set up a trust that doesn’t grant access until they’re 21, 25 or 35, for example.

• Specify how assets can be used: You might stipulate that the money can only be spent on education.

• Pay out at intervals: You can structure the account to distribute money to the beneficiary at intervals, according to a schedule you set. For example, you might choose to distribute a third of the trust assets when your children hit 25, a third at 30, and a third at 35—or you might prefer to follow an annual schedule. This may be helpful if you prefer not to leave a large lump sum.

• Consider a “spendthrift” provision: A spendthrift trust may be able to help protect trust assets from creditors, and it can limit how the beneficiary accesses funds to help avoid irresponsible use of the money. If you want to set up a spendthrift trust, it can be helpful to work with an experienced estate planning attorney to ensure the trust is set up properly for the conditions you choose. Not all states recognize a spendthrift trust, so look into laws in your state carefully to determine which options may be a good fit for your needs.

• Skip a generation: You could specify that your money should jump a generation and go directly to your future grandchildren.

• Protect a business you own: Let’s say you run a business and want to protect your employees’ jobs. Let’s say you also want to pass down the profits to one of your children. You could name a trustee to oversee the management of the business and pass on profits to your child.

• Reap potential tax advantages: Not all trusts receive tax advantages. Still, if you structure your trust in certain ways, you might be able to optimize estate or income tax planning.Protect your privacy: Unlike a will, which goes through probate court and leaves public records, trusts are private. If you want to make sure that people in

  your extended network—or the media, if you’re famous or of public interest—don’t have access to the details of this inheritance, a trust can be a helpful way to keep some financial matters out of the public record.

For all of these scenarios, you can set up a trust with specific instructions with the help of a qualified professional.

What Are the Disadvantages of a Trust Fund?

As with any estate planning option, a trust can be helpful for some people and not so for others. Some disadvantages may include:

• There are more strings attached to your heirs inheriting your property.

• The cost of creating a trust can be prohibitive for some people.

• It can add an inconvenient extra step if you’re just trying to arrange a basic set of instructions for where your property should go after you pass away.

• Administering the trust fund may be more complicated than simply transferring assets to a beneficiary after you pass away. For example, a trustee may need to make regular distributions to a beneficiary and keep track of certain milestones (for example, when the beneficiary turns a certain age.)

• Although trust funds may make sense in some cases because of the tax benefits, living trusts (also known as revocable trusts) don’t confer the major tax benefits of irrevocable trusts.

Trust Fund vs. a Will

A trust in no way replaces a will. A will is the legal document for you to name an executor, designate your preferred legal guardians for your children and specify how you wish to distribute your property. Without a will, the state where you live will distribute most of your property and assets according to intestate laws, which might not align with your wishes.

In fact, a will may be the most important part of your estate plan. (Psst: Fabric lets you make a will for free online.)

That said, having both a will and a trust can help give your more control over passing on your money and assets to the people you choose, and in the manner you choose.

Types of Trust Funds

As with many areas of planning for your financial future, you’ve got choices. Consider potential advantages, disadvantages and conditions of different trusts carefully. Consult

with a professional to ensure the terms of your trust are set up correctly to be valid and reflect your wishes.

Irrevocable Trusts

This kind of trust, as the name implies, can’t be modified or dissolved later. Once you place assets in the trust, they are no longer yours. They are owned by the trust on the behalf of the beneficiary.

Since the assets are no longer in your direct possession, you don't have to pay income tax on any income earned from the assets, or estate taxes. If you create an irrevocable trust to donate your assets to charity, you can take a charitable income tax deduction for those assets, too.

While there are benefits to creating an irrevocable trust, the biggest negative is you can’t make any modifications. You can’t get that money back later, even if you really need it.

You can also set out guidelines for a future trustee. For example, if you fear you might become physically or mentally incapacitated, you could manage your own assets but have a trustee in the wings to step in if needed.

Asset Protection Trust

An APT is a kind of irrevocable trust that exists to protect assets from creditors. Unlike many other types of trust, the trustee that you select has full control over the assets in the trust. You essentially relinquish ownership of your assets when you put them into an APT. Since you no longer own that property, people and entities to whom you owe money can’t seize them.

Not all states allow APTs. Check your state law to see if this is an option where you live.

Generation-Skipping Trust (GST)

A GST is set up so the assets in the trust skip to the trustor’s grandchildren or other qualifying younger relatives or beneficiaries. GSTs can offer certain tax advantages if you leave an inheritance to people who are at least 37.5 years younger than you, as compared to leaving the trust to your children and having them pass the assets along to your grandchildren. This type of trust may be most helpful for people with large estates who need to consider estate tax in their plans.

Grantor-Retained Annuity Trust (GRAT)

A GRAT is a type of irrevocable trust that essentially stops the appreciation of assets so that when the estate passes to the beneficiaries, they won’t owe estate or gift taxes.

The grantor typically places assets that are likely to appreciate in value, like stocks, into

the GRAT for a set number of years. During the term of the GRAT, the grantor receives annuity payments from the trust equal to the original value of the assets when they were put into the trust. When the term ends, the beneficiaries receive the remaining assets (basically the appreciation of the original assets) in the GRAT and may have little or no gift tax to pay. This is another type of trust that may offer the most benefits to high net worth individuals hoping to minimize estate and gift taxes.

Individual Retirement Account Trust

To create an IRA trust, you can name a trust as the beneficiary of your IRA assets when you pass away. That way, you can set rules around how your beneficiaries manage your IRA assets. It can be complicated to make sure that IRA trusts meet IRS requirements, so consult with a qualified estate attorney to make sure your IRA trust is set up appropriately.

Marital Trust

A marital trust is an irrevocable trust that allows a tax-free transfer of assets to the surviving spouse when the first spouse passes away. When the second spouse dies, the assets may be subject to estate tax before being distributed to the second spouse’s heir. This type of trust is often used to reduce estate tax; as with other types of trusts for high-net-worth individuals, consult with a qualified estate attorney for more details.

Medicaid Trust

Medicaid trusts are irrevocable trusts that effectively exclude assets from a person’s net worth so that they don’t exceed the asset limits to qualify for Medicaid. The purpose of a Medicaid trust is to allow a person to receive long-term care through Medicaid either in their home or in a facility. In order for a Medicaid trust to fulfill that purpose, it must be established at least two and a half years before the grantor needs long-term care.

Special Needs Trusts

One reason to consider a trust fund is if you have a child with special needs. You can help ensure the child receives detailed care through a trust, even if you were to pass away unexpectedly. You may be able to designate the special needs trust as the beneficiary of your life insurance policy, rather than designating your dependent directly. This has a few advantages. First, if your dependent isn't capable of managing the money, it puts someone else in charge. Plus, making the trust the beneficiary might help you stay eligible for as many government resources as possible.

If you’re caring for someone with special needs, you’ll likely want to work with an attorney who specializes in special needs estate planning.

Charitable Remainder Trusts

These types of trust funds could potentially help shield money from taxes while passing down money to a charity you care about. With a charitable remainder trust, you can donate your assets to a charity, which serves as the trustee and manages those assets, even while you’re alive. These trusts typically come with a way for you to receive a certain portion of the trust value each year, which can give you a predictable source of income. When you pass away, the remainder of the trust goes to the qualified charitable organization.

In other words, you could “pre-gift” a charitable contribution now to receive an immediate tax benefit, and also shield your assets from estate taxes by reducing the size of your estate upon your death (at which time the funds would belong to the charity in full).

Grantor Retained Income Trusts (GRITs)

This type of trust fund is most relevant for the very wealthy. The idea behind this type of trust is to try to reduce how much the government values your property for estate tax purposes. GRITs may allow the trustor to earn interest income from assets in the trust without counting the value of that property in the grand total for estate tax purposes.

Revocable Trust

This is the opposite of an irrevocable trust, as you might have guessed from the name. You can change, update or revoke the trust, which gives you more control over the assets. Also called “living trusts,” these trusts take effect when you’re still living.

You don’t get the same tax benefits as with an irrevocable trust, but you maintain a lot more flexibility to control the assets. This kind of trust still gives you the ability to set rules on who should inherit your assets, and how.

You can set out guidelines for a future trustee. For example, if you fear you might become physically or mentally incapacitated, you could manage your own assets right now but have a trustee in the wings to step in if needed.

Land Trust

A land trust transfers ownership of a piece of property or a mortgage into the trust while the grantor is still alive. Land trusts are revocable trusts. There are two types of land trusts that correspond to the two typical reasons people create land trusts. A title-holding land trust allows a property owner to obscure their land ownership. A

conservation land trust exists to protect natural resources, historic property or ecosystems from development.

Testamentary Trusts

You can create a testamentary trust through your will to control what happens to your assets and how your property should be inherited. If you go this route, then the probate court would verify and examine your will after you die. Provided that the court accepts your will as valid and proceeds to fulfill the instructions you’ve laid out, that’s when any trusts would take effect, if you dictated that they should be created through the document.

Spendthrift Trusts

This is a broad term to describe trust funds that are constructed to restrict the beneficiary’s access to the money to protect the assets from creditors or from being mismanaged by a financially irresponsible beneficiary. A spendthrift trust can be helpful in cases where your beneficiary struggles with substance abuse or other issues that can lead to problems with squandering money. Not all states recognize spendthrift trusts, and you need to follow specific rules to set this up correctly, so review applicable rules carefully and consider working with a professional if you wish to pursue this option.

Who Needs a Trust Fund?

Trust funds can be a helpful estate planning tool for people with high net worth because there may be options to help reduce or avoid estate taxes.

The government imposes a maximum amount that you can bequeath to someone without incurring federal gift or estate taxes. In 2025, the exemption was $13.99 million for a single taxpayer. If your wealth exceeds the exemption, a trust fund might help you pass money to your heirs while reducing or elimination tax obligations.

Trust funds have a reputation for applying mainly to the “one percent” or extremely wealthy families only. But you don’t need to earn an upper-crust income to find value in creating a trust for your family.

If you have dependents with special needs or you want to pass along funds to your child at a specific age or with particular instructions, a trust may help give you the tools to set the terms you choose. While there is a cost associated with opening a trust, especially if you need to consult legal or financial representatives to help you, the cost may be worthwhile so you can pass on assets the way you that makes the most sense for your situation.

How to Open a Trust Account

To create a trust fund, you’ll need the following information:

• Name of the trust

• Description of the trust, namely why the trustor is creating it

• Trustee name plus any directions about replacing a trustee if he or she can no longer serve

• Beneficiary name

• List of property owned by the trust fund

• Duties and abilities of the trustee (for example, whether the trustee can buy or sell property contained in the trust or how the process works if the trustee wants to resign or transfer responsibilities to someone else)

• Details on what should happen if the trustor, trustee or beneficiaries passes away or becomes incapacitated

You’ll need to choose what kind of trust you want to set up, which will depend on your goals and the type of property you want to put into the trust.

Then you’ll need to create the trust document, which is the source of truth for information about the trust and how it operates. It will establish who the grantor, trustee, successor trustee, and beneficiary or beneficiaries are, and the assets that the trust contains. Once the trust document is complete, you must have it notarized and sign it.

Your state may have additional rules about witnesses or extra documentation to file when you establish a trust, so make sure you’re fulfilling those requirements.

Next, you’ll fund the trust. For any assets that are payable or transferable upon death, like retirement accounts, you can name the trust as the beneficiary. You can set up a trust on your own or use an online estate-planning service to guide you through the process. But if your situation is complex, it is likely best to call in an expert.

You may want to work with an estate attorney if:

• You’re not sure how to correctly fund the trust

• You have a very large estate and think you might incur estate tax

• You have life insurance policies with large death benefits

• You want to set up an irrevocable trust

• You want to set complex conditions about how the assets are distributed and used

If you decide you want to work with an attorney, look for one who specializes in the preparation of trusts, because estate planning is a broad, complex field.

Frequently Asked Questions

Can a Trustee Withdraw Money From a Trust?

Laws vary depending on where you live, but a trustee is never allowed to withdraw funds for his or her own personal use. That's because the trustee has a fiduciary responsibility, which means he or she is legally bound to act in the best financial interest of the beneficiary and must follow the rules and terms of the trust agreement.

The trustee is the only person (or people) who can take money out of a trust account.

How Much Money Do You Need for a Trust Fund?

Setting up a trust can be complex and does cost money. Many attorneys will charge anywhere from $1,000 to $5,000 to create a new trust. The price will depend on where you live and the complexities of your situation.

You could consider using online preparation services to reduce costs. While this option can be more affordable, you should still consult with a licensed attorney if you need legal advice. A very basic trust fund can involve little more than a few pages of paperwork.

Do Trust Funds Grow? Do Trusts Earn Interest?

A trust fund is a vehicle that contains other assets, meaning that not every trust fund is the same. You need to put assets or property into a trust fund. So, if the assets you have inside the trust fund grow (for example, investments that grow over time or earn interest), then yes.

A trust account can be as simple as a bank account where the money is owned by a trust rather than an individual. Like other bank accounts, some trust accounts can earn interest.

How Long Do Trust Funds Last?

Trusts can last for a long time, but the exact rules can vary by state. In many cases, a trust ends soon after the death of the grantor, when the beneficiary takes control of the property. State and federal law may allow most trusts to keep going for 21 years, according to the “rule against perpetuities,” although this often isn’t necessary. In some cases, such as some special needs trusts, a trust may be allowed to remain open for longer in order to provide for the beneficiary throughout their lifetime.

Trusts can terminate early if they run out of property, or if the probate court orders it to end, which is rare.

How Do You Get Money Out of a Trust Fund as a Beneficiary?

It depends on the rules of the trust. You may only be able to access a certain amount of money each year, or you may need to wait until you’re a certain age to take ownership of the assets.

The trustee is in charge of managing the assets while they are in the trust, and it is their job to distribute the assets to you according to the rules of the trust.

What Kind of Assets Can Go Into a Trust Fund?

It depends on the type of trust, but most types of assets can be transferred into a trust fund. Cash, securities like stocks and bonds, and physical property like technology and art can go into a trust fund. You can also transfer the deed to your home or car to your trust.

Life insurance policies and retirement accounts like IRAs and 401(k)s can’t be transferred into a living trust directly. But some providers and policies may allow you to set a policy up so that the trust is the beneficiary. That way, when you pass away, these policies and accounts move into the trust.

Can Creditors Seize Assets From a Trust?

An irrevocable trust protects your assets from creditors after your death. Since revocable trusts cannot be changed during your lifetime, the money is under the trust’s control rather than yours. Therefore, it can’t be used to satisfy your debts.

A revocable trust, on the other hand, does not protect your assets from creditors. Since you can make changes to a revocable trust during your lifetime, it will be counted among your personal property.

The Bottom Line

A will may offer a simpler and less expensive way to pass down property to a loved one than a trust. If you go this route, you may be subject to more taxes and your estate will need to go through the probate process. If you open a trust, you may have more opportunities to reduce or eliminate certain taxes, set your terms for when and how beneficiaries can use the money and set up complex financial plans.

Whether or not you would benefit from including a trust depends on your financial circumstances and estate planning needs. But for some families, a trust can be a helpful measure to help add structure and control to some of your plans for the future.

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