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What Is a Trust Fund (Plain English)
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Get StartedWhat Is a Trust Fund (Plain English)
Think of a trust fund like a special savings account with rules. Instead of just putting money in your name, you put it in a trust's name. Then you write down specific instructions about who gets the money and when they can have it.
Here's a simple example: Sarah has $100,000 and wants her daughter to have it for college. But her daughter is only 10 years old. Sarah creates a trust fund and puts the money there. She writes instructions saying her daughter can only use the money for education expenses when she turns 18.
This approach gives families incredible flexibility and control. Unlike other financial arrangements, trust funds let you set conditions that protect your beneficiaries from their own inexperience or poor judgment while still providing the resources they need to thrive.
Trust Funds vs. Regular Savings
Regular savings accounts are pretty straightforward. You put money in, you take money out. Trust funds are different because they have three important people involved:
- The Grantor: This is you, the person putting money into the trust
- The Trustee: This person manages the money and follows your rules
- The Beneficiary: This person eventually gets the money
With a regular savings account, if something happens to you, the money might get stuck in probate court for months. With a trust fund, the trustee can immediately start helping your beneficiaries according to your written instructions. No delays, no court approval needed.
Trust Funds vs. Wills
Many people think wills and trust funds do the same thing. They don't. A will is like leaving a note that says "give my stuff to these people." But that note has to go through probate court first. In California, probate can take 12 to 18 months and cost thousands of dollars.
A trust fund works immediately. No court needed. No waiting period. No public records. Your trustee just follows your instructions and starts taking care of your beneficiaries right away.
Think of it this way: A will is like mailing a letter through the post office. A trust fund is like handing the letter directly to someone. The difference becomes especially important during family emergencies when beneficiaries need immediate access to resources for medical bills, housing, or other urgent expenses.
Trust Funds vs. Joint Accounts
Some California families think joint bank accounts solve everything. They add their kids' names to their accounts, thinking this avoids probate. This can backfire badly.
When you add someone to your bank account, they legally own that money immediately. If your son gets sued or divorced, his creditors can come after your money. If your daughter has debt problems, collection agencies can freeze your joint account.
Trust funds protect against this. The money belongs to the trust, not to your beneficiaries. Creditors can't touch it. Divorce courts can't divide it. Your instructions control everything, creating a protective barrier that joint accounts simply cannot provide.
California-Specific Benefits
California has some unique advantages for trust funds. Our state doesn't have inheritance taxes, which makes trust planning simpler. California also recognizes many different types of trusts, giving families lots of flexibility.
California's probate fees are particularly high compared to other states. They're calculated as a percentage of your estate's value. For a $500,000 estate, probate fees alone could be $26,000. A trust fund avoids these fees entirely.
California also has strong privacy laws. Trust funds remain completely private, while probate records become public information that anyone can access online. This privacy protection becomes especially valuable for families who prefer keeping their financial affairs confidential from neighbors, business competitors, or opportunistic individuals.
Common Types of Trust Funds
Most California families use revocable living trusts. "Revocable" means you can change your mind and modify the trust anytime while you're alive and mentally capable. "Living" means it starts working immediately, not after you die.
Some families need irrevocable trusts. These can't be changed once you create them, but they offer better protection from taxes and creditors. California families often use these for Medi-Cal planning or protecting assets from lawsuits.
Special needs trusts help families with disabled beneficiaries. These trusts provide money for extras while preserving government benefits like SSI or Medi-Cal. A guardian might also be involved in managing these specialized arrangements when beneficiaries cannot make decisions independently.
What Can Go in a Trust Fund
Almost everything you own can go into a trust fund. Bank accounts, investment accounts, real estate, cars, jewelry, artwork, business interests. In California, your house is probably your biggest asset, so getting that into your trust is usually the top priority.
Some things can't go in trusts, like your 401(k) or IRA while you're alive. But you can name your trust as the beneficiary of these retirement accounts. Digital assets like cryptocurrency, online businesses, and intellectual property rights are becoming increasingly important components of modern trust funds as well.
The process of transferring assets into your trust, called "funding," requires specific steps for each type of property. Real estate needs new deeds. Bank accounts need new signature cards. Investment accounts need beneficiary changes. Understanding which assets belong in a trust helps ensure your estate plan works properly when your family needs it most.
Trust Fund Costs
Creating a trust fund in California typically costs between $1,500 and $4,000 depending on complexity. This might seem expensive until you compare it to probate costs, which often run $15,000 to $50,000 or more.
Trust funds also need ongoing maintenance. You'll need to transfer assets into the trust and update beneficiary designations. Some people hire attorneys for annual reviews, while others handle simple updates themselves.
The investment returns often justify the costs over time. Money sitting in probate court for 18 months can't be invested or used productively. Trust funds allow immediate investment management and distribution according to your wishes, potentially generating significant additional value for beneficiaries.
Common Misconceptions
Trust funds aren't just for rich people. Any California family with assets worth more than $184,500 can benefit from avoiding probate. That includes most homeowners in our expensive housing market.
Trust funds don't save income taxes while you're alive. You still report all trust income on your personal tax return. The tax benefits come from avoiding probate and potentially reducing estate taxes for very wealthy families.
You don't lose control of your money. With a revocable living trust, you're typically your own trustee. You manage everything exactly like before, just with different paperwork. Many people worry unnecessarily about giving up control when the reality is much more flexible and manageable than they expect.
Getting Started with Trust Planning
The first step involves gathering information about your assets and family situation. Consider your goals. Do you want to avoid probate? Protect against creditors? Provide for minor children? Plan for incapacity?
Starting your estate plan from scratch can feel overwhelming, but breaking it into manageable steps makes the process much more approachable. Most families discover that addressing these important decisions brings peace of mind and strengthens family relationships through open communication about the future.
Bottom Line
Trust funds are tools that help your money get to the right people at the right time with minimum hassle. They're especially valuable in California because of our high probate costs and long court delays.
If you own a home in California or have significant assets, a trust fund probably makes sense. The key is working with an experienced California estate planning attorney who understands our state's specific laws and requirements. Don't let complexity intimidate you – the benefits far outweigh the initial effort for most families.
