Trust Fund: What is it and how does it work?

A trust fund, or trust, is an instrument used for the asset protection and succession planning of family affairs.

Through this institution of Anglo-Saxon law, some assets (immovable, movable or rights) of a subject (settlor) are separated from his assets and made out to another subject, the trustee, who manages and administers them in the interest of a beneficiary.

The trust fund can be created for a wide range of purposes, such as to fund charitable programs, provide education or health care support, or manage the estate of a deceased person.

In this guide we will explore what are trust funds in more detail, how they work, their advantages and disadvantages, and the different types of trust funds that can be used to achieve specific goals.

What is a trust fund?

A trust fund is an institution in which certain assets owned by a settlor are collected and managed by a trustee in the name and on behalf of a beneficiary or group of beneficiaries. The trustee invests the funds in a portfolio of assets and then distributes the fund’s profits according to the instructions of the beneficiary or the guidelines of the fund itself.

Aims and objectives of trust funds

Trust funds are used for a variety of purposes, which can range from funding charitable programs to providing education support, health care and other purposes.

An advantage of trust funds is that they provide a long-term fund management solution, as the trustee manages investments and profit distributions according to the instructions of the beneficiary. Additionally, trust funds are often used for wealth management, such as in the case of trust funds for the management of a deceased person’s estate.

Role of the trustee in the administration of a trust fund

The trustee is the trustee who is responsible for managing the trust fund. Its role is to protect the interests of the beneficiaries and to manage the investments and distributions of profits in accordance with the instructions of the beneficiary or the guidelines of the fund itself.

The trustee has a fiduciary obligation to act in the interests of the beneficiaries and to avoid conflicts of interest. Therefore, the trustee must act with the utmost diligence and prudence in making investment decisions and distribution of fund profits. The trustee is also responsible for filing tax returns for the trust fund and handling related administrative matters.

How does a trust fund work?

The establishment of a trust fund requires a written deed to be valid and effective.

The trust fund can be established by deed inter vivos or by testament and is usually established by public deed before the notary.
In the deed of trust of the trust fund, the settlor (or settlor) must specify:

• the national law which will govern the trust;
• the trustee : the person who becomes the owner of the assets transferred by the settlor (can be a natural person or a company);
• the beneficiaries, i.e. those who will be entitled to the profits generated by the assets placed in trust or who will receive the assets themselves at the end of the established institution;
• the purpose of the trust;
• the management methods of the trustee;
• the guardian, a person required to verify and check that the trustee’s activity is actually performed according to the interests of the beneficiaries or that it is adequate for the achievement of the purpose identified by the settlor. It is not a necessary figure.

The institution of the trust cannot be revocable to prevent trust assets from being attacked by creditors. Transfers of assets from the fund to the beneficiaries can take place after the establishment of the trust fund.

Creation of a trust fund

To create a trust fund, the donor transfers his assets or a sum of money to the trustee. The donor can also specify the purposes of the trust fund and guidelines for investment and distribution of profits.

Once the trustee receives the funds, real estate or other rights he will have to manage them following the guidelines of the trust fund.

Trust Fund Investments

The trustee must manage the trust fund’s investments diligently and prudently, following the guidelines of the trust or the instructions of the beneficiary. In the case of an investment trust, the trustee can invest the funds in a wide range of assets, such as stocks, bonds, mutual funds, real estate and other assets. The objective of the trust’s investments is to generate income and long-term capital growth.

Distribution of Trust Fund Profits

The trustee distributes the profits of the trust fund to the beneficiaries based on the instructions of the donor or the guidelines of the trust. Profits may be distributed annually, quarterly, or on any other frequency determined by the donor. The trustee may also keep some of the profits in reserve for future trust fund expenses or for emergencies.

Control and monitoring of the trust fund

The trustee is responsible for overseeing and monitoring the trust fund to ensure that investments are consistent with the fund’s guidelines or beneficiary’s instructions. The trustee must maintain accurate accounting records for the trust and file annual tax returns. In addition, the trustee must submit periodic reports to the trust fund beneficiaries to inform them of the fund’s financial condition and the profits it generates. If the trust fund is for charitable or other purposes, the trustee must also ensure that the objectives of the trust fund are met and that the beneficiaries are supported appropriately.

Types of trust funds

Trust funds can be created for a wide range of purposes and as a result, there are different types of trust funds. Some of the most common are:

Trust Fund for Charity

Charity Trust Funds are created to support social causes or non-profit organizations. The donor can specify the specific objective of the fund, such as health research, education or poverty reduction. The trustee invests the trust fund funds and distributes the profits to organizations selected by the donor.

Education Trust Fund

Education Trust Funds are created to support education and training. The donor can specify the educational institution that the fund is to support, such as a school, college or scholarship program. The trustee invests the trust fund funds and distributes the profits to the selected educational institution.

Health Care Trust Fund

The Health Care Trust Fund is created to support health care for the benefit of minor children or persons with disabilities. The donor can specify the specific objective of the fund, aimed at guaranteeing assistance, for the present and for the future, to these subjects.

Wealth Management Trust Fund

Wealth Management Trust Funds are created to manage the wealth of an individual or family. The trustee invests the trust fund funds and distributes the profits to the donor’s designated beneficiaries, such as family members or charities selected by the donor.

Living Trust Fund

The living trust fund is a type of trust fund that is created while the donor is still alive. This type of trust, also known as a "charitable giving trust fund", has been gaining popularity in recent years due to the fact that it allows the donor to make a donation of money, assets or property into a trust fund, but continue to benefit from it throughout your life.

The donor can designate himself or another person as the beneficiary of the living trust and receive an annuity from the trust. In this way, the donor can donate his assets without completely relinquishing control over them and without suffering too great a financial impact.

After the donor’s death, the living trust becomes a traditional trust, with the profits distributed to specific purposes or designated beneficiaries. The living trust fund may be an attractive option for someone who wants to make a significant gift, but doesn’t want to completely divest themselves of their assets or the income they can generate during their lifetime.

Difference between trust fund and equity fund

The trust fund and wealth fund are both forms of asset protection, where the assets are segregated from the rest of the owner’s assets and earmarked for a specific purpose. However, there are substantial differences to keep in mind.

In a trust fund, the beneficiary is chosen by the owner and can be any person, while in asset fund , the family of the owner is the beneficiary.

The patrimonial fund is reserved only for married couples and can only last for the duration of the marriage, but can last longer if there are minor children. The trust fund, on the other hand, can be created to protect any type of family, even if not founded on marriage, and its duration is established by the owner.

The estate trust offers only limited protection as creditors can still enforce the trust assets if the debt has been incurred for purposes other than the family, whereas in the trust fund creditors cannot enforce the trust assets because they are separate from the trustee’s estate .

In summary, both the trust fund and the trust fund serve to protect the assets, but the latter offers greater protection because the trust assets are completely separate from the assets of the trustee and the trustee’s creditors.

Tax Treatment of Trust Fund

The tax regime of the trust depends on the tax regulations of the country in which the trust is established and on the tax regulations applicable to the beneficiaries and the settlor.

In general, the trust fund is a separate tax entity from the individual of the settlor and beneficiaries, and as a result, is subject to its own tax rules. However, the settlor and beneficiaries may be required to pay taxes on certain deeds and transactions involving the trust fund.

Protection of creditors of trust fund settlor

The trust fund is a tool that allows to subtract some assets from the assets of the settlor and put them in the name of the trustee, depriving them of the effects on the settlor’s creditors.

However, if the intention of the fund is to take assets from creditors, they have legal remedies to protect their credit rights.

The ordinary revocatory action is a tool that the settlor’s creditors can use to remove the segregating effect of the trust. The cause of the trust must be worthy and the creditors of the settlor can invoke the non-worthiness of the founding cause of the trust to remove any effect and consequence from the transfer of its assets.

Original article published on Money.it Italy 2023-04-12 16:44:50. Original title: Fondo fiduciario: cos’è e come funziona?