Trust Funds Aren’t Just for the Rockefellers

Trust funds are terribly misunderstood. They are one of the most flexible planning tools to nurture, create, and pass on wealth ever known to man. They can be as rigid or as flexible as you desire. Even more importantly, you don’t have to be rich to use trust funds.  These structures are not relegated to the realm of the Rockefeller and Walton families.

I’ve been studying them intensely for the past few days in anticipation of meeting with the lawyers to help a family member establish a series of trust funds.

Our Experience with Trust Funds in College

When Aaron and I went to college, we didn’t realize how widely utilized trust funds were among our friends, having paid our own way through school. One girl we knew had a grandfather that established a series of trust funds shortly after returning from World War II even though he was single at the time without a wife, let alone children or grandchildren!

He contributed $10,000 to the trust funds and specified that they should grow until his grandchildren graduated from college. Each trust paid for all of the tuition and expenses of a higher education and, upon graduation, terminated with the bulk of the trust paid out as a lump sum to the heir. These funds were for them to use to establish their own business, start a life, or whatever else they desired. If they squandered the money, so be it. Furthermore, it was their responsibility to start something for their own grandchildren.

The girl we knew had spent much of her trust fund on college, attending an expensive private university. She expected to have only $100,000 to $150,000 upon graduation as opposed to her brother, who chose a full-ride scholarship school so he could pocket the entire $300,000+ he had coming to him. Not only did they avoid student loans, they were able to start out years ahead of everyone else. The girl we knew was smart and motivated so it wasn’t a detriment to her at all. It was a perfect example of how a trust fund should work.

Another girl we knew had her college paid for by a series of stock investments her grandparents had put into an account when she was very, very young.  She knew exactly which stock paid the tuition each year.  “Oh yeah, this year is Schering-Plough.  Last year was McDonald’s.”

The original grantors of the trust fund were wise because they knew that they could exponentially increase their family wealth by locking money away and harnessing the power of compounding.  After all, if you put $25,000 into a trust fund today and left it to grow at 10% for 70 years, it would be worth almost $20,000,000 for your grandchildren and great-grandchildren.  People just don’t think that far ahead in many situations.  Of course, administration expenses and compressed tax brackets are going to result in net returns being lower than that, most likely, particularly if there is a fixed-income component but the underlying principle remains the same.

Trust Funds Have a Wide Variety of Uses

There are a wide variety of uses for trust funds including:

• Holding life insurance policies so payouts are held in trust and can’t be touched by creditors.  Life insurance trust funds often can be excluded from probate and estate taxes if structured correctly.
• Spenthrift trust funds are designed to protect a beneficiary from debt collectors or legal judgments, making it impossible for them to pledge or assign their right to trust fund distributions.
• Voting control trust funds allow family members to maintain ownership and / or voting control of a business and elect the managers who run it.
• Charitable trust funds, such as a charitable remainder trust, let a portion of your money compound and go to your beneficiaries, which can include charitable organizations.
• Spousal trust funds could be used to leave your assets to your spouse but guarantee that none of it went to their second husband or wife if they remarried, instead going to your children following their death.
• You can have all of your assets transferred to a trust fund when you die, and have the trust fund benefit your second husband or wife by providing income  upon which they live.  Once they die, the money could then go to your children from the first marriage, ensuring that they weren’t frozen out of your estate.  This is a type of QTIP trust.
• Incentive trust funds can be used to only make payouts upon completing of successful “goals” such as graduating from college, or matching retirement savings for the family member $5-$1 or whatever else you wanted.  You could do almost anything.

There are a lot more options.  It is amazing to study all of these.  Right now, I could transfer shares of my operating businesses to trust funds that will someday benefit future generations but serve as trustee and manage the investments myself.  You could use a trust fund to maintain ownership of a family farm or corporation so that one worthless generation couldn’t squander it for the folks that came after them.

Trust funds are so flexible you could even create a trust that specifically grants annual cash distributions to your grandchildren solely for clothing purchases to make sure they spend their days wearing Brioni, Kiton and Canali.

Alternatively, or in addition, you could create a trust fund that solely paid for piano, tennis, swimming, and art lessons.

You could establish a trust fund for your son or daughter and each Christmas, transfer $13,000 worth of cash, stocks, bonds and real estate to it with instructions that no payments should be made to your child until they turn 65 years old, effectively creating a private retirement pension plan beyond the reach of creditors!

You could put a family lake house in a trust to ensure that each of your kids have the right to use the property each year and that it cannot be sold.

I could have been perfectly happy in an alternative life working as a trust attorney (as long as I, myself, were independently wealthy).  These structures interest me that much, especially for use in conjunction with private investments where family control is vital.