What is a trust fund? How trust funds work, types, and benefits
A trust fund is a legal arrangement where one person — the grantor — transfers assets to a trustee, who manages them for designated beneficiaries. Trust funds can hold cash, stocks, bonds, real estate, and other property.
They are commonly used in estate planning to control how and when assets pass to the next generation, potentially reduce estate taxes, and may help beneficiaries skip the probate process.
A trust can also be set up as part of a retirement plan or to manage assets during the grantor’s lifetime. The types of trusts available and the rules governing them vary by state.
How does a trust fund work?
A trust fund has three key roles:
- Grantor: The person who creates the trust and transfers assets into it.
- Trustee: The person or entity appointed to manage the trust assets and hold legal title to them.
- Beneficiaries: The people or entities who benefit from the trust, either by being specifically named or by meeting eligibility requirements.
The terms of a trust determine how assets will be invested, managed, and distributed. Some states require guardian appointments to administer trust fund assets for child beneficiaries.
What assets can a trust hold?
A trust fund can hold a wide range of assets, including:
- Cash and cash equivalents
- Stocks and ETFs
- Mutual funds
- Bonds
- Real estate
- Life insurance policies
- Other valuable property
You can open a trust with M1 today, beginning your family’s journey to building wealth and preserving your hard-earned assets.
Types of trust funds
Trusts are categorized in two ways: by whether they can be modified (revocable vs. irrevocable) and by when they take effect (living vs. testamentary). Many specific trust types fall under one or more of these categories.
Revocable trusts
A revocable trust is created during the grantor’s lifetime, and the grantor retains the right to modify, amend, or revoke the trust at any time. If all assets are held in a revocable trust, the estate may not have to go through the probate process.
However, because the grantor retains control, the assets in a revocable trust are generally still accessible to creditors during the grantor’s lifetime. Revocable trusts typically do not provide tax advantages on their own.
Irrevocable trusts
An irrevocable trust transfers ownership of assets out of the grantor’s estate and into the trust. Once established, the grantor generally cannot change or modify the terms unless all beneficiaries agree.
Because the grantor no longer owns or controls the assets, irrevocable trusts may offer protection from creditors and legal judgments. Depending on how the trust is setup, the grantor may or may not have tax liability for income generated by trust assets. However, giving up control is a significant tradeoff — the grantor cannot easily reclaim the assets or change the terms.
Living trusts vs. testamentary trusts
Trusts can also be classified by when they take effect. A living trust is created and may become active during the grantor’s lifetime. A testamentary trust is written into a will and only comes into existence after the grantor dies — which also means it must go through the probate process before it can be funded. See how they compare in the table below.
| Feature | Living trust | Testamentary trust |
| When created | During the grantor’s lifetime | After the grantor’s death, through their will |
| Revocable? | Can be revocable or irrevocable | Always irrevocable once activated |
| Avoids probate? | May avoid probate if properly funded | Does not avoid probate — created through the will |
| Can be changed? | Yes, if revocable | Can be changed before death by modifying the will |
Types of trusts for children
If you are setting up a trust as part of an estate plan to benefit a child, there are several types to consider. The right structure depends on the child’s age, needs, and the grantor’s goals. Consult an estate planning professional to determine which type may be appropriate for your situation.
| Trust type | Key feature | Best for |
| 2503(c) minor’s trust | All income and principal used for child’s benefit until age 21; assets must be distributed at 21 unless child extends | Straightforward gifts to minors that qualify for the annual gift tax exclusion |
| 2503(b) trust | Annual income distributions to the child; can extend past age 21 | Ongoing income payments to a minor with longer-term flexibility |
| Crummey trust | Restricts when beneficiaries can access assets; qualifies for gift tax exclusion provided it is properly structured | Lifetime gifts with controlled access |
| Spendthrift trust | Distributions based on needs, not lump sums | Protecting a beneficiary who may have difficulty managing money |
| Special needs trust | Provides for a child with special needs without disqualifying government benefits | Ensuring care for a child with disabilities |
| Irrevocable life insurance trust (ILIT) | Named as beneficiary of a life insurance policy; proceeds managed by trustee | Keeping life insurance proceeds out of the taxable estate |
| Family pot trust | Trustee has discretion to distribute based on each child’s needs | Families with multiple children with different needs |
Other trust types come up in estate planning as well — like IRA trusts, asset protection trusts, and Totten trusts (payable-on-death accounts). These serve different purposes and are not specific to child beneficiaries. An estate planning professional can help determine whether any of these structures may be appropriate.
Benefits and limitations of a trust fund
Potential benefits
- Probate avoidance. Assets held in certain trusts may pass to beneficiaries without going through the probate process, which can take months or years and involves court costs and legal fees.
- Privacy. Unlike a will, which becomes public record when probated, the terms of a trust are generally private.
- Control over distribution. A trust allows you to specify how and when beneficiaries receive assets — for example, at a certain age or for specific purposes like education.
- Potential creditor protection. Depending on the trust type, assets may be protected from creditors’ claims against the grantor or beneficiaries.
- Potential tax advantages. Certain irrevocable trusts may help reduce estate tax liability, though the tax implications depend on the trust structure and applicable laws.
Limitations
- Cost. Setting up a trust involves legal fees, and ongoing maintenance fees may apply. Complex estates may have higher costs.
- Trustee fees. A trustee may charge fees to manage the trust, which could come out of trust assets.
- Irrevocability tradeoff. Irrevocable trusts offer stronger protections but require giving up control of the assets.
- Legal complexity. Trust laws vary by state and change over time. Periodic review with a legal professional may be necessary to keep the trust current and valid.
- Potential legal costs. If claims are filed against the trust, legal defense costs may be incurred.
When does a trust fund end?
A trust terminates based on the terms set by the grantor — typically when all beneficiaries reach a specified age or milestone. At that point, the trustee distributes any remaining principal and accumulated income according to the trust terms.
A trust can also terminate upon a beneficiary’s death. In that case, the remaining assets generally pass according to the beneficiary’s will or the intestacy laws of their state.
Trust accounts at M1
M1 offers trust accounts that support revocable and irrevocable trusts investing in securities. Testamentary trusts and foreign trusts are not supported. When you open an M1 trust account, you can build a portfolio from over 6,000 stocks and ETFs, including low-cost index funds.
How to open an M1 trust account
- Have an active personal M1 account.
You must have an existing M1 account before applying.
- Gather your documents.
You’ll need a photo ID, SSN/W-2, certified copies of your Certificate of Trust and supporting legal documents, the trust name and creation date, the trust’s EIN, and information on all trustees.
- Submit your trust account application.
M1 will review your submission within 7–10 business days.
- Fund your account.
A minimum initial deposit of $5,000 is required to open an M1 trust account.
For full details on eligibility and required documentation, read our Help Center Article, Open an M1 Trust Account.
Frequently asked questions about trust funds
A will is a legal document that takes effect after death and generally must go through probate — a court-supervised process that can take months or years and becomes public record. A trust can take effect during the grantor’s lifetime, may help beneficiaries avoid probate, and generally remains private. Many estate plans include both. The right approach depends on individual circumstances, asset complexity, and state laws. Consult an estate planning professional to determine what may be appropriate for your situation.
The cost of setting up a trust varies depending on the complexity of the estate, the type of trust, and legal fees in your area. There are also ongoing costs — trustee fees, potential tax preparation fees, and periodic legal reviews to keep the trust current as laws change. The total cost depends on individual circumstances.
While some simple trusts can be created using online legal services, trusts involve complex legal and tax considerations that vary by state. Errors in trust documents can lead to unintended tax consequences, invalid provisions, or disputes among beneficiaries. Estate planning professionals generally recommend working with a qualified attorney, especially for irrevocable trusts or estates with significant assets.
The trustee controls and manages the assets in a trust fund according to the terms set by the grantor. For revocable trusts, the grantor often serves as their own trustee during their lifetime. For irrevocable trusts, an independent trustee typically manages the assets. Beneficiaries receive distributions according to the trust terms but do not directly control the assets unless the trust specifies otherwise.
Trust funds are not exclusively for high-net-worth individuals. While complex trust structures may involve significant legal costs, basic revocable living trusts are used by people across a range of financial situations — particularly to avoid probate, maintain privacy, or control how assets pass to beneficiaries. Whether a trust makes sense depends on your estate planning goals and the laws in your state, not solely on the size of your estate.
M1 does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
Brokerage products and services are offered by M1 Finance LLC, Member FINRA / SIPC, and a wholly owned subsidiary of M1 Holdings, Inc.
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