Tax Glossary

Trust Fund

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Last updated on:
March 17, 2024

A trust fund is essentially a legal arrangement aimed at securing assets for the benefit of an individual or group, typically managed by a third entity. It's a popular plot device in dramas, often depicted as a coveted or contested wealth reserve, but in reality, it's a strategic tool for asset management and future planning.

Essentials for Establishing a Trust Fund

  • Settlor/Grantor: This is the person who decides to place their assets into the trust, setting the terms for its management and distribution.
  • Trustee: Appointed to manage the trust according to the settlor's instructions, ensuring the assets are handled responsibly and according to legal requirements.
  • Beneficiary: The individual or group for whom the trust is established, intended to benefit from the assets held in trust. The beneficiary can sometimes be the settlor themselves.

Crafting a Trust Fund

Creating a trust involves collaboration between the settlor and a legal professional to draft the trust's terms.

Varieties of Trust Funds

  • Irrevocable Trust: Fixed and unalterable, the terms of this trust are set in stone once established.
  • Revocable Trust: Flexible in nature, allowing for changes, including adding or removing assets and altering terms as needed.
  • Charitable Remainder Trust: Designed to eventually transfer the trust's assets to a chosen charity, rather than personal beneficiaries.

Tax Implications for Beneficiaries

Depending on the trust's structure, beneficiaries might face tax obligations on the income they receive from the trust. This can vary widely:

  • In some instances, income is treated as pre-taxed at the highest rate, potentially leading to tax refunds for beneficiaries not in the top tax bracket.
  • Others may require direct tax payments on received income, necessitating a Self Assessment tax return.
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