How Does a Financial Trust Work?

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A grantor and trustee agree on the terms of the trust.
A grantor and trustee agree on the terms of the trust. (Image: Jupiterimages/Brand X Pictures/Getty Images)

A trust fund may benefit a child or spouse of the person setting up the trust. This type of trust fund helps to ensure this individual who benefits from the trust will always have adequate financial support. Wealthy parents might set up trust funds for their children, for instance, or middle-income parents might set up a trust fund for a mentally challenged child. Trust funds can also benefit organizations, such as nonprofits and schools, that need outside funds for their operations. The financial institution holding the funds typically invests them so the funds grow, benefiting both the financial institution and the beneficiary.

Creation

The person who creates a trust is known as the grantor. The grantor transfers money into the trust and determines the beneficiary, the individual or organization the funds will ultimately go to. The grantor meets with the trustee, which can be a financial institution or an individual, to plan how the funds will be dispersed. They may agree on a percentage of the funds that the trustee will receive annually as compensation for managing the trust. A tax attorney should advise on the planning of a trust to ensure that it complies with IRS requirements and is set up so the funds can be managed wisely.

Trustees

When creating trusts, people often deposit funds into an institution specializing in trusts, called a trust company, that lawfully can act as trustee and manage the funds. A grantor might opt to work with a bank, some of which have their own trust divisions, but banks have gained a reputation for being conservative with trust funds, keeping them from growing as much as they might, says Henry W. Abts in “The Living Trust.” Grantors may also appoint a relative or close friend with strong financial sense as trustee.

Management

A trust fund can dispense funds to the beneficiary at specified times to ensure the beneficiary always has access to funds. The beneficiary cannot withdraw all the money or take control of how the finances are managed until the time specified by the grantor. The trustee, or trustee institution, invests the funds in the ways it sees fit.

Alternatives

A beneficiary can also act as a co-trustee or sole trustee, if he sets up his own trust or the grantor gives him this status. This means he controls or helps to control how the finances are invested, and may have full access to them. He has the power to change the financial institution that manages the funds if he acts as sole trustee, or to decide to manage the funds on his own.

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