Term trusts are closed-end funds with a fixed maturity date, allowing management of assets for a specific period. They offer protection from legal action and can be used for a specific purpose, such as college expenses. At the end of the term, assets are returned to the settlor.
Term trusts are closed-end funds that are established with a firm maturity date. Sometimes called a limited-term trust, the fund allows management of the assets held in the trust for a fixed period of time. At the end of this specified time period, the assets are returned to the settlor. The settlor is free to use the assets in any way he sees fit.
During the term of the trust term, there is generally no way to make use of the assets other than for a specific purpose named at the time the fund is established. That’s one reason financial advisers often recommend that you only include assets that aren’t expected to be needed for the life of the trust. For example, someone who has accumulated a significant amount in a savings account and does not anticipate needing to withdraw either interest or principal from the account may wish to transfer those funds to a term trust as a way to save for retirement.
One of the benefits of a long-term trust is that, in the event of any type of legal action, any assets that are in the trust are exempt from being seized. This can be helpful in the event of a lawsuit or when a person files for bankruptcy. However, a trust term should not be seen as a way to divert assets into some type of safe trust right before you file for bankruptcy. The intent of a trust term is to provide protection for funds that are set aside for specific purposes.
Another benefit of a trust is that the assets of the fund can be used for a purpose specified at the time the trust is established. For example, parents can place assets in the trust term, with an eye toward funds that are used to help a child or children with college expenses. During the term of the trust, a trustee will issue periodic payments for college tuition and fees, and other college-related expenses as described in the terms of the trust term. At the fixed termination date, any funds remaining in the trust term revert to the parents, who at that time can use the resources in any way they choose.
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