Trust funds for protecting and preserving wealth
Earlier this week I read a newspaper story about a mineral billionaire who passed away recently, and his estate administration turned into chaos and hate among family members. In digesting what is written I thought about the role of trust funds and how helpful they can be in such situations.
Trust funds are a great way to build, protect and preserve wealth for future generations, but many people tend to shy away from them because they think they are only for the rich. Almost same perception held for stock markets investments. Although it also true that trusts have an association with rich and powerful families, but trust funds can make a lot of sense even if you are a widowed mother who just wants to leave some form of wealth to a child to help him or her complete his or her education.
Before we proceed – let us answer the basic question, what is a Trust Fund? it is a special type of legal entity that holds assets/property for the benefit of another person, group, or organization; and there are three parties involved in almost all trust funds:
• The grantor: the person who establishes the trust fund, donates the property (such as cash, shares, bonds, real estates, investment units, livestock, art, a private business, and other valuables bequeathed to a minor as is declared in a formal will) to the fund, and who decides the terms upon which it must be managed.
• The beneficiary: the person for whom the trust fund is established. It is intended that the assets in the trust, though not belonging to the beneficially, will be managed in a way that will benefit him or her, as per the specific instructions and rules laid out by the grantor when the trust fund was created.
• The trustee: The trustee, which can be a single individual, an institution, or multiple trusted advisors, responsible for overseeing that the trust fund maintains its duties as laid out in the trust documents and applicable law. The trustee is often paid management fee. Some trusts give responsibility for managing the trust assets to the trustee, while others require the trustee to select qualified investment advisors or a custodian to handle the money.
Over time the need for trust funds has become increasingly popular, and in demand, occasioned by the unfortunate occurrence of death or other events, and as it should be beneficiaries (i.e. minors) are practically incapable of making choices on how to use assets/property left for them by their parents or guardians. In such cases, trust funds are great vehicles that ensure the purpose for which assets were set is met.
Even in cases where the deceased may have omitted some dependents knowingly or otherwise, Trustees would normally have discretionary rights on how to have funds distributed, however, whatever it may -- it would be best to ensure that the funds are distributed according to the wishes of the deceased. In case beneficiaries they are minors, funds should be set aside as a trust to meet obligations that range from upkeep to school fees in favor of the minor.
So, why would one consider using a Trust Fund? In addition to the beneficiary’s protections, there are several reasons trust funds may be of use, among others, these may be key:
• If you don’t trust your family members to follow the letter of your intentions following your passing, a trust fund managed by an independent third-party trustee can often alleviate your fears.
• Parents often set up trust funds for their children, designed to pay educational expenses. When the children graduate, any additional principal remaining is distributed as start-up money which they can use to establish their post-college life.
• Trust funds can protect assets that you cherish, such as a family business, from your beneficiaries. Imagine you own a bottled water factory and feel tremendous loyalty towards your employees. You want the business to continue being successful and run by the people who work in it, but you want the profits to go to your son and daughter, but who has an addiction problem. By using a trust fund, and letting the trustee be responsible for overseeing management, you could achieve this. Your son would still get the financial benefits of the business, but he would have no say in running it.
What we learn is that, to a great extent, trust funds ease the burden on the guardian or the surviving spouse who now has to raise children alone, even once the children come of age, with the approval of the trustees, the remaining funds can be released to them directly.
How does it work? Trustees normally set up a trust fund which can have a pool of trusts managed professionally by a team of service providers such as a fund manager and/or a custodian who may a bank. This ensures transparency in the day today transactions of a fund. These service providers report to trustees on the schemes of performance and other functions as per their mandates.
However, bearing in mind the costs needed to set up a trust and maintain it, trustees can opt for already existing trust funds in the market, unless it is completely necessary to do so. Under the principle of economies of scale, a pool of trust funds will help in cost saving while maximizing on returns.
Although trustees can opt to continue managing these funds on behalf of the minor, having the funds managed in an established trust fund that houses a pool of schemes is often easier as directly managing the same can be demanding. This has to be done through the consent of the guardian with the sole purpose of helping them better understand the decision and why it is easier. Well set up trust funds ensure money is continually invested and good returns are realized.
