The term "trust fund" might conjure up images of spoiled rich kids living high on their parents' money, but there's more to trust funds than that. Whether you're considering setting up a trust for your children or hoping a long-lost relative will set one up for you, our quiz will test your knowledge of how these funds really work.
Fact or Fiction: Trusts are governed by federal law.
Trusts are governed by state laws. In the case of real estate, the law of the state where the property is located usually applies; personal property (such as money, jewelry, etc.) is generally subject to the law of the state in which the trust was created.
Fact or Fiction: There are two main roles to be fulfilled in any trust: grantor and beneficiary.
A trust also must have a designated trustee, who holds the property and controls how it is managed. The grantor is the person or entity establishing the trust, and the beneficiary is the recipient.
Fact or Fiction: Trustees are not liable for financial losses incurred from mismanagement of assets in a trust.
In addition to doing work of administering a trust, a trustee is liable for any mismanagement of the trust's assets and property. Because of the responsibility involved in being a trustee, trustees are usually paid to take on the role.
Fact or Fiction: Trusts are more complicated than wills.
Compared to wills, trusts take more time to set up, require more maintenance and are more difficult change.
Fact or Fiction: A trust does not protect assets from creditors.
Assets placed in trust can be seized to cover the grantor's debts, with the remaining amount then distributed to beneficiaries.
Fact or Fiction: Assets in a trust for a child must be distributed when the child turns 18.
The grantor can designate the age at which the child gains access to the assets. Ages 18 and 22 (when many beneficiaries complete their college education) are common, but the grantor may choose any age.
Fact or Fiction: If you create a trust for a child and put assets in the child's name, you can't get them back.
Once the assets are in the child's name, they no longer belong to the grantor. This is true of all assets transferred to a trust -- the trust becomes the owner.
Fact or Fiction: An individual cannot put assets in a testamentary trust while he or she is alive.
A testamentary trust is set up as a provision in a person's will, so it take effect only after the grantor's death. Before then, the grantor maintains the title to the property.
Fact or Fiction: A charitable trust can last indefinitely, but a private trust cannot.
Trusts that provide a public benefit -- such as those that fund Rhodes Scholarships or the Pulitzer Prize -- have no set end point. A private trust, however, usually can't extend far beyond the life of the beneficiaries.
Fact or Fiction: The grantor of a living trust can also be its beneficiary.
The grantor of a living trust can actually take on all three roles -- grantor, beneficiary and trustee.
Fact or Fiction: Revocable trusts are much more flexible than irrevocable trusts, but offer fewer tax benefits.
With a revocable trust, you can make changes to the terms or even end the trust. Because of this flexibility, the income from the trust is considered yours for tax purposes and must be included on your personal tax return. With an irrevocable trust, you file a separate tax return for the property in the trust.
Fact or Fiction: In relation to trusts, the term "property" refers mainly to real estate.
Property refers to any assets placed in a trust, and can include cars, money, stocks and bonds, and personal possessions.
Fact or Fiction: If you receive income from assets in a trust, you must pay taxes on it.
Placing assets in a trust does not exempt the assets from income tax.
Fact or Fiction: If the beneficiary of a living trust dies, the property and assets must go to a contingent beneficiary.
When a beneficiary dies, the property and assets revert back to the grantor of the trust, unless a contingent beneficiary has been named.
Fact or Fiction: Transferring a car into a trust can create problems.
When a grantor puts a car into a trust, the trust holds the title to the car. This can make it difficult for the grantor to insure the car, as it is no longer in the grantor's name.
Fact or Fiction: A living trust written in one state will still be valid in another state.
The trust will still be valid, but it's a good idea to check the laws that govern trusts in the new state, as the laws vary.
Fact or Fiction: Most living trusts are revocable.
While irrevocable trusts may be attractive for the tax savings they offer, they are often less desirable because they give the grantor little control over assets once the trust is established.
Fact or Fiction: A living trust makes a will unnecessary.
Even with a living trust, a will is still necessary to provide for the distribution of assets that haven't been transferred to the trust, such as those acquired right before the grantor's death.
Fact or Fiction: Trusts can help people avoid probate.
Unlike a will, a trust doesn't go through the time-consuming and costly probate -- the process by which the courts determine a will's validity. Because the trust owns the assets, there's nothing being inherited, so probate doesn't apply.
Fact or Fiction: A trustee may be charged with distributing income to a beneficiary, but is never responsible for making decisions about how the income should be distributed.
Trustees may have a great deal of control over how income is distributed to beneficiaries, which is why financial planners advise that grantors choose their trustees carefully.
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