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Guidelines For Investing Funds That A Trust Manages

Oct 10, 2022 By Triston Martin

Setting up a trust is the most common way to avoid probate in your state and ensure the smooth transfer of your assets upon your death. As a rule, a trust's initial assets come from the grantor. The beneficiary's third party (the trustees) then manages these instruments. The assets placed in a trust do not merely sit there. The trust's assets can be invested unless the trust document prohibits such activity. Trust funds need not remain idle.

Methods For Making Use Of A Trust

Trusts can be either inter vivo (alive) or testamentary (set up after someone's death) (established when the grantor dies). It is possible to change or cancel a revocable trust until the grantor's death when the trust becomes irrevocable (it cannot be changed or canceled). A trust fund's capital may be invested in any asset that would be consistent with the fiduciary duty the trustee owes to the trust's beneficiaries unless the trust instrument, the document that defines the conduct of the trust, expressly prohibits or permits investing actions. When investors or executives amass a sizable holding in a blue chip stock, they may put some of those shares into a trust for their heirs to collect the dividends tax-free.

Considerations For Investing In Trust Funds

Several considerations will influence how you decide to invest the money you are gifting into a trust fund. For several years, the trust could be instructed to keep all of its dividend, interest, or rental revenue. If the child beneficiary is still a juvenile and you don't want payments to start until they reach a certain age, you can accomplish this. Because trust funds are subject to reduced tax rates, they must be invested in a way that reduces tax liabilities if this is the case. Earnings from dividends can quickly push a person into a higher tax bracket. You may have thought about investing in dividend-free equities or tax-free municipal bonds.

The Trust Investment Process Is Straightforward

Investing in trust funds is a simple step that might be overlooked when establishing a trust fund. The trust instrument and other proof of the trust's formation will be required. You must file for the trust to keep tabs on the annual taxes. You may need to reference the tax identification number you obtained from the IRS. The trustee then establishes a bank or brokerage account in the name of the trust and uses the funds to make financial investments on behalf of the trust. The trustee may choose to invest the trust's funds themselves or hire a certified investment advisor, depending on the terms of the trust.

Different Ways To Invest With Trusts

Investments like index funds and other mutual funds are commonplace in smaller trusts. Individually managed accounts investing directly in stocks rather than through pooled structures are more common in larger trusts. Allocating some of your funds to private equity or hedge funds is one conceivable exception to this rule. A brokerage house like Charles Schwab would be a good place to set up a trust fund account. Aside from any limitations imposed by the trust instrument and paperwork, the account would appear to be a standard brokerage account. A mutual fund provider like Vanguard, which offers a variety of investment options at differing rates and fees, would be a good choice for setting up a trust account. Its fees may be surprisingly low if you require a trust with minimal management that invests in boring assets.


Consulting an expert can help you determine if establishing trust is in your best interests and those of your loved ones. If you want professional guidance on whether or not trust may be beneficial to your long-term financial plan, you can consult with an estate planning attorney or financial counselor. "You simply have to understand that a trust is an entity, just like a person, and it occasionally makes sense for an entity to own an item for someone else," says Lora Hoff, a certified financial planner in the Dallas area whose clients are mostly doctors and other medical professionals.

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