Building a Trust Fund Portfolio

Trust Funds Are For Everyone

Among the most common misconception about trust funds is that they are the province of the very rich. Nothing could be farther from the truth. Trust funds are for everyone looking to control their assets or income or both for future use by people and institutions of their choice in a variety of ways.

What is a Trust Fund?

In broad terms, a trust fund can be defined as a legal relationship that authorises one party to hold and manage assets for another party.

The person or persons establishing the trust and providing the assets are referred to as the settlors, trustors, or grantors. The individual or individuals responsible for executing the terms of the trust are appointed by the settlors and referred to as the trustee or trustees. The individual or individuals or the institutions benefiting from the trust are referred to as the beneficiary or beneficiaries.

Trust funds serve multiple purposes.

Trust funds are established to control the disbursement of assets to children when they come of age for educational purposes, home purchases, business startups or future healthcare expenditures.

Trust funds can also be used tin second marriages to protect assets for the children from the first marriage.

Trust funds can be used to distribute assets to charities, or any party the settlors designate as beneficiaries in lieu of a legal last will and testament.

Another misconception about trust funds is that a trust fund and a trust are the same. In reality, a trust is a broader legal arrangement where trustees have the added responsibility of managing the assets for the beneficiary. Trustees can make investments for the beneficiaries.

Individuals can establish asset protection trusts to shield assets from creditors and legal claims. Trusts can also be established for estate and tax planning purposes.

Trust funds can be established for many purposes, but their use is most common for future needs of their children and grandchildren, from college to careers. However, one of the many variations on trust funds is the spendthrift trust where trustors restrict access to children deemed spendthrifts for specific purposes.

How Do Trust Funds Work?

The legal and financial complexities of trust funds make it advisable to engage a trust fund professional to establish the trust fund. There are companies and attorneys that specialise in trust fund as well as trust fund departments within Australian banks.

The basic process of how trust funds work is relatively simple. The trustor or trustors (settlors) fund the trust fund. The trustee or trustees manages the trust fund, releasing assets to beneficiaries according to the wishes of the trustors as outlined in the trust fund agreement. Trustees are typically a trust company, the trust department at a bank, or a trust attorney, but family members or friends can also serve as trustees.

Trust funds can be revocable – where the trustors can modify or revoke the terms of the trust fund agreement at any time – or irrevocable where the trustors turn over asset ownership to the trustees permanently to follow the original terms of the trust fund agreement. Irrevocable trusts have a significant tax advantage since ownership is transferred from the trustor to the trustee, absolving the trustor of the tax burden. In addition, irrevocable trust provide full asset protection from creditors and lawsuits as the trustor is no longer the owner of the assets.

Financial professionals point to the cost and complexities of asset acquisitions made once the trust is established increasing the cost of the trust. In addition, these professionals claim revocable trusts are not substitutes for estate planning.

Some trust fund agreements stipulate the trustees can distribute assets over time beginning at a certain age in children while others distribute as a lump sum.

Family businesses and small businesses can establish trust funds for the same purposes – protection of assets with distributions to beneficiaries according to the terms of the trust fund agreement established by the settlors, or trustors.

Building a Trust Fund Portfolio

Building a trust fund portfolio is in many ways similar to building any investing portfolio, with the exception of who controls the asset selection. A trust fund is established and funded by the settlors with the trustees responsible for establishing an investment strategy and assets in the portfolio according to the guidelines specified in the trust fund agreement – from individual stocks to bonds and other fixed income securities to mutual funds and exchange traded funds (ETFs).

Trustees have a fiduciary responsibility to act in the best interest of the settlors and  are responsible for reviewing and monitoring portfolio holdings over time. Trustees are also responsible for tax preparation.

The trustees responsibilities are significantly greater than in a simple trust fund with timed distribution to beneficiaries. For that reason, establishing such a fund requires professional assistance with a financial professional the soundest choice for trustee selection.

Trust Fund Alternatives

In Australia, the most common alternative to a trust fund is the Superannuation Fund which serves as an employee retirement fund. Employers are required to put a defined percentage of an adult employee’s fund into an individual superannuation account monthly. Individuals and in some case a government entity can also contribute to the fund. Superannuation funds are then invested in a variety of options, from stocks and bonds to fixed income and property.

Australian Education Bond Funds are a viable alternative to a trust fund for college education. Like any investment bond, Education Bonds appreciate in value and come with some added benefits including special education tax and estate planning features.

Direct investing in stocks, bonds, fixed income instruments, and mutual and exchange traded funds are additional alternatives to trust funds.

Although asset distribution is limited to the death of the creator of a last will and testament, they are an alternative to trust funds. Wills are less expensive and for people with simple estates and asset distributions wills a are viable alternative to the more complex and costly trust funds. Estate planning is another alternative to trust funds with the additional benefits of tax advantages not found in all trust funds.

Contrary to popular belief, trust funds are for everyone with assets they wish to protect and formally pass on to designated beneficiaries. Individuals establishing the trust – the trustors, settlors, or grantors – put designated assets in a “holding” status under the management of a trustee designated by them to manage the assets until ready for distribution to beneficiaries named by the trustors at a time specified in the trust agreement.

Investors who lack the time to build and manage an investment portfolio on their own and have the resources to hire professional help can build a trust fund with an investment portfolio as assets in the fund. Like any trust fund, trustees manage the assets in a trust fund portfolio for the future benefit of parties designated by the trustors.