You Should Consider Setting up a Trust Fund—Even if You're Not a Millionaire

Do you hear the words “trust fund” and instantly think of a privileged kid who never has to work a day in their life? Or, maybe you think of specific celebrity heirs who became wildly famous for having a lot of money. Let’s face it, for most us, much of what we think we know about trust funds largely comes from the media, and it often leaves a bitter taste in our mouths. But there's value in talking about trust funds, and how they work, in less extreme cases.

While it’s nearly impossible to know how many Americans have a trust fund at any given moment, according to an April 2022 report, 67 percent of Americans have no estate plan at all. That means neither a will nor a trust. Historical data on inheritances suggests that back in 2010 only 21 percent of American households transferred wealth—presumably from one generation to the next.

Furthermore, data shows that not all millionaires got their money from a rich relative. “While 1 in 5 millionaires—21 percent—received some inheritance, only 3 percent received an inheritance of $1 million or more,” according to a 2022 Ramsey Solutions study. This means the majority—79 percent—of today’s millionaires became millionaires without receiving any inheritance at all from their parents or other family members.

On the flip side, you don’t have to be a millionaire to want to leave your kids or favorite charities something of value—cash, investments, homes, jewelry, and more. Doing that is more complicated than just writing down a list of assets and leaving it under your pillow. If that document were legally attested, it would be a will. But wills still need to be reviewed in probate court and those transfers could be heavily taxed. In fact, avoiding probate court is one of the major benefits of a trust fund. Here’s everything you need to know about trust funds and five reasons why you should consider opening one.

What are trust funds?

“A trust is an entity that you can fund with assets, like real estate, bank accounts, brokerage funds, life insurance, etc.,” explains Candace Dellacona, a trust and estates attorney in New York City.

Many people put their assets in a trust to make the process of distributing them easier. Trusts also help minimize tax liabilities and keep ownership of high-value assets private.

Who does what?

A trust involves three major players, and each one has an important role.

Grantor

A grantor is the person who turns over their assets to the trust. This person relinquishes ownership over specific assets placed into the trust and lets a trustee control them. While the grantor can decide to turn over full ownership immediately, most name a successor trustee—someone who will take ownership only if the grantor passes away or is incapacitated.

Trustee

The trustee is in charge of the trust. The trustee makes decisions, especially when the grantor passes away. The grantor can operate as the trustee while alive and name a successor trustee to take over if or when incapacitated or passed away. Based on rules established by the grantor, the trustee may have certain stipulations about how they can manage the assets.

Beneficiaries

The beneficiaries are the people who receive the assets in the trust when the named occurrence happens, typically when the grantor passes away. Beneficiaries can be individuals or charities.

The trustee must follow all the directions placed in the trust, file proper taxes, and report any changes to the beneficiaries.

Types of Trusts

The two main types of trusts are revocable and irrevocable.

Revocable trusts are the most common and they're more flexible than irrevocable trusts. A revocable trust can be changed throughout the life of the trust. A grantor can change the assets in the trust, the beneficiaries, and much more.

On the other hand, an irrevocable trust is much more rigid. Once assets are placed in an irrevocable trust, the trust can't be modified without the beneficiaries' consent. For tax purposes, an irrevocable trust has its own employer ID number, because, once created, it can't be associated with the social security number or individual taxpayer identification number of the person who created it.

5 Reasons You Might Want a Trust Fund, Even if You’re Not Rich

1. You want every dime of what you’ve got to go to the people you love.

Assets that aren't in a trust fund tend to go before a probate court in your state of residence. Not only does this process cost money for your beneficiaries, but any disagreement could mean that the government retains assets meant to go to your loved ones. When you don’t have much to pass on, every dollar used toward the legal process diminishes how much your heirs—whether a loved one or a charity—will ultimately receive.

“If you go through probate, creditors will take the first bite of anything you plan to leave your children or grandchildren, and you risk fighting between family members in court, as well,” says Sara Ovando, a partner at Ovando and Bowen in California. Trusts ensure that everything you have—no matter how big or small—gets to the people you name as inheritors.

2. You want to provide for a beneficiary with disabilities.

“Trusts are also commonly established when a parent has a disabled child,” says Dellacona. If you have children or grandchildren with disabilities that you want financially cared for upon your passing, you can state the parameters in your trust. Receiving money in a trust will also ensure that these individuals are still eligible for social security benefits, including Old-Age, Survivors, and Disability Insurance. It also ensures that they do not lose income-based benefits like subsidized housing and health insurance, just for receiving a windfall.

3. You want to guarantee money goes to your children if something happens to you.

It is a terrible thing to pre-decease your children before they become adults. The very thought haunts many of us. Parents typically get life insurance to protect against this possibility, but trusts also help. When a trust is set up, a grantor can stipulate that beneficiaries who are minors today will receive their inheritance when they come of age. Because a trustee must execute the trust as stipulated, it can also entail having the trust fund their education, needs, or talents even before the minor takes over full ownership.

4. You want your family to be able to grieve in peace.

Probate court is the last thing a grieving person needs to endure. Rather than having peace while grieving, loved ones will be looking through paperwork, trucking back and forth to court, and trying to remember conversations about what the deceased intended. And probate isn’t optional. Each state determines the estate limits. “In California, for example, probate will occur with anyone who passes away and has assets totaling $184,500; there is a simplified probate for smaller estates," says Ovando. "But when you have a trust and it's properly funded, your estate can avoid having to go through probate."

If your family is blended—consisting of children from different relationships or multiple spouses—probate court often opens old wounds that a trust can let rest in peace.

5. You want the tax benefits.

As mentioned previously, Ovando explains that an irrevocable trust is a legal entity that will have its own employer ID number to report taxes. Assets in an irrevocable trust also are not subject to estate taxes. Because the assets are no longer in an individual’s name, the grantor does not pay income taxes on the trust’s earnings when they are alive. This means that you can lower your taxable income during your lifetime.

Even better, beneficiaries don’t pay estate taxes they inherit from a trust. This means a lot to an inheritor who relies on income-based services. Even a small amount of money received could drastically change their benefits. You’d hate to have them pay more in taxes and benefit losses than the inheritance is actually worth.