Trust Fund Definition in Estate Planning

What Is a Trust Fund?

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In estate planning – as well as in many other areas of law – a phrase is often used by the masses that may or may not bear any resemblance to the legal term it originated from. Its actual meaning can get lost in the translation. One definition of "trust fund" explains what people think it means -- and it's pretty accurate. Another relates to what it technically means. 

The Popular Trust Fund Definition

“He’s a trust fund baby.” “She has a trust fund.” In this context, the term "trust fund" indicates that these individuals are set up for life because a trust of limitless capacity takes care of all their financial needs.

This may or may not be on the mark.

Trusts That Live On After the Death of the Grantor 

A “trust fund” can mean a living trust that continues to function after the death of the grantor – the individual who created it. When the grantor forms an irrevocable trust, he steps aside immediately, naming someone else as trustee to manage it and its assets. If the trust continues to operate after the grantor’s death – and many irrevocable trusts do – it may be referred to as a trust fund. It provides long-term financial support from its assets and income to its beneficiaries.

The grantor often acts as trustee of his own revocable trust and manages its property during this lifetime. Many revocable trusts are settled when their grantors die. All the property held by the trust is immediately transferred to its beneficiaries and the trust entity is dissolved. But this isn't always the case. 

The grantor may have left minor children who cannot legally own their own property, so he might have directed in his trust instrument that it should continue after his death.

His successor trustee -- the individual he named to take over for him -- should manage its income and property for the benefit of his children until they come of age. They’re “trust fund babies,” but the trust may not necessarily hold sufficient assets to allow them to live in the lap of luxury for the rest of their lives.

Definition of a Trust Fund in Legalese

After a grantor forms a living trust -- either revocable or irrevocable -- he must move property into its ownership or the trust is useless, just an empty vessel. The legal term for this process is called “funding" a trust. Technically, a trust’s fund is the property it owns, whether it be cash, stocks, bonds, life insurance or real estate.

This property is also sometimes called the trust’s corpus. Ideally, the corpus will generate income, perhaps in the form of interest, dividends or rents. Some or all of this income may be immediately payable to its beneficiaries, or the trust may hold onto it and reinvest it. This would depend on the grantor’s wishes as expressed in his trust instrument. 

NOTE: Laws can change periodically and the above information may not reflect the most recent changes. Please consult with an attorney for the most up-to-date advice if you're considering forming a trust. The information contained in this article is not intended as legal advice and it is not a substitute for legal advice.

Also Known As: Trust Corpus, Trust Funds