You may have heard the term “trust” thrown around in discussions about savings options and investment plans, but may not know exactly what a savings trust is. Some people mistakenly assume that trusts are exclusively for very wealthy people, causing them to feel out of reach or even intimidating to some. This is a common misconception, as trust funds are an ideal option for individuals with diverse income levels and savings goals.
Here’s a quick primer on the basics of this amazing tool – a trust is a type of legal entity (kind of like a company) that is comprised of three persons: the grantor, the beneficiary (who may also be the grantor), and the trustee. The grantor is the person who establishes the trust and contributes funds to the account. The beneficiary is ultimately the one who receives the benefits of the invested assets. The trustee is the third party who is responsible for managing the funds and maintaining the terms of the trust as established by the grantor. To put it simply, a trust is a way for a person (the grantor) to set up an account for a beneficiary. There are several advantages to choosing to save this way.
Assets are Protected
One major way a trust is beneficial is that it’s considered a separate entity by law, similar to how a corporation is treated as a separate “person” in business. This means the funds are not attached to an owner or considered possessions of any individual person. For this reason, the assets cannot be seized regardless of the grantor’s personal financial situation. If you, as the grantor are sued, have to claim bankruptcy, file for divorce, or find yourself in any other legal situation where debtors are seizing your assets, the funds in the trust are fully protected from all of this. This especially makes a trust an attractive option as a secure way to save money for yourself, for family members, or for other loved ones without the risk of losing everything because of some unpredictable unfortunate financial circumstances.
For the purposes of college savings, a trust is extremely advantageous because it has no effect on eligibility for financial aid, grants, or scholarships. The funds are not considered assets of either the parents or the child, so they are not factored into the expected family contribution (EFC) when applying for federal financial aid. This is not the case with other college savings accounts, such as 529 plans or Coverdell Education Savings Accounts.
Control of Funds
One concern facing those who wish to set up a college savings account is not having control over how the funds are spent. With some types of accounts, such as UGMA/UTMA custodial accounts, all funds are irrevocably transferred to the beneficiary once he or she becomes of age. If you were depositing money for a specific reason, such as a college education, these types of accounts offer no guarantee that the money will be used for that explicit purpose. The child (the beneficiary) has full legal control over the money, and how they choose to use it may not be in line with your initial intent.
This is not the case with a savings trust, as the grantor maintains a level of control over the funds by designating a clear set of distribution terms at the time the account is set up. That leaves the age of distribution flexible to whenever the grantor believes the beneficiary can responsibly handle the funds alone. It doesn’t necessarily have to be the age when the beneficiary legally becomes an adult. Until that set time, the grantor can approve or deny disbursement requests to be sure the funds are only being used for appropriate expenses.
Professionally Managed Funds
As mentioned earlier, trusts are maintained and managed by a licensed, chartered trust company as the trustee. The trust company, as a regulated financial institution oversees and protects the funds. This ensures that your trust assets are protected and available to you when you need them. The trust company is tasked with professionally managing trust operations, security best practices, and government filing and regulations to stay on top of all facets of your trust.
With your trust being professionally managed, the trustee will focus on investing your money to grow your gains in accordance with your preferences for risk and time horizon. When setting up your account, you define how conservative or aggressive you’d like the trustee to be with your investment preferences. From there, the funds are invested in numerous ways, including in stock market index funds, real estate, corporate bonds, government-issued securities and FDIC-insured cash. These investments allow your money to grow over time with the security of knowing there are professional financial advisors and trust officers behind it.
A College Savings Trust, by Prime Trust, LLC, is set up specifically for the purpose of contributing towards a child’s educational future. Even those who can only make smaller contributions are able to open an account with as little as $25 to take advantage of all the benefits a trust has to offer. In addition, a College Savings Trust has the option of sharing the account with family and friends so they can make gift contributions whenever they’d like, as often as they’d like, in just a few minutes. More and more parents are realizing the status quo of college savings planning doesn’t always offer everything they’d hoped. A College Savings Trust is the perfect choice for parents looking for a smart, comprehensive, and secure way to save for their child’s college education.