You don't have to be very rich to set up a trust fund

IF YOU'VE heard of trust funds but don't know what they are or how they work, you're not alone.

For a large number of people, they may know one key fact about trust funds: They're set up by the wealthy as a way to give to their family, friends or entities after they die.

But only part of the conventional wisdom is true. Trust funds are designed to allow a person's money to continue to be useful well after they have died, but trusts aren't only reserved for the rich.

Middle-class citizens have the ability to set up trust funds too.

To understand how a trust fund works, let's look at an example. You've worked hard all of your life and built up a comfortable savings cushion.

You know that sometime in the future you're going to die, and you want your hard-earned savings to go to the people you love, or the charities or causes that you believe in.

Now, what about loved ones who are not as financially savvy as you? You could be concerned about leaving them a lump sum gift because they might use it irresponsibly.

Furthermore, you may even like to see your money carry over for generations to come.

If this is how you feel, then you should set up a living irrevocable trust fund. This type of trust can be set up to begin dispersing funds when certain conditions are met. There is no stipulation that you cannot be alive when that happens.

You can place cash, stock, real estate or other valuable assets in your trust.

You meet with an attorney and decide on the beneficiaries and set stipulations. Maybe you say that the beneficiaries receive a monthly payment, can only use the funds for education expenses, expenses due to an injury or disability, or the purchase of a first home.

Because it's irrevocable, you don't have the option of later dissolving the trust fund.

Once you place assets in the trust, they are no longer yours. They are under the care of a trustee. A trustee is a bank, attorney or other entity set up for this purpose.

Since the assets are no longer yours, you don't have to pay income tax on any money made from the assets.

Also, with proper planning, the assets can be exempt from estate and gift taxes.

There are some downsides to setting up a trust. The biggest downside is attorney fees. Think of a trust as a human in the eyes of tax law. This new person has to pay taxes and the mechanics of the trust have to be written with an extraordinary amount of detail.

In order to make it as tax-efficient as possible, it has to be crafted by somebody who has a lot of specialised legal and financial knowledge.

If you don't want to set up a trust fund, there are other options, but all of these don't leave you, the trustor, with as much control over your assets as a trust.

You could create a will for much less money, but your property is subject to a lot of taxes and it can easily be contested in a process called probate.