Paralegal Advanced Competency Exam (PACE) Practice Exam

What characterizes a funded trust?

1. A trust that has assets transferred to it

2. A trust set up merely on paper

3. A public trust held by the government

4. A trust that can only be funded with cash

The correct answer is: A trust that has assets transferred to it

A funded trust is characterized by the presence of assets that have been transferred into it. This process of transferring assets is essential, as a trust that is not funded merely exists on paper and does not serve its intended purpose of managing and protecting assets for the benefit of beneficiaries. In a funded trust, the settlor (the person who creates the trust) allocates specific assets to the trust, whether they include cash, real estate, investments, or other forms of property. This transfer of ownership is a critical step because it empowers the trustee to manage those assets according to the terms of the trust for the benefit of the beneficiaries. The other options do not accurately define a funded trust. A trust set up merely on paper lacks the necessary funding to be effective. While some trusts can be public, the term “public trust held by the government” does not apply to the general concept of a funded trust, as these are typically private agreements. Additionally, a trust is not limited to being funded exclusively with cash; it can accept a variety of assets, making the assertion that it can only be funded with cash incorrect.