How to Set Up a Trust Fund for a Child
As a parent, you naturally want to ensure your child’s future well-being and success. One option many parents consider is setting up a trust fund.
Trust funds can be powerful tools, but they involve some complex legal and financial considerations. In this article, our estate planning lawyers will walk through the key steps involved in setting up a trust fund for your child in an easy-to-understand way.
What Exactly is a Trust Fund, and How Does It Work?
Simply put, a trust fund is a legal structure that allows you to set aside assets for another person’s benefit – in this case, your minor child. Here’s how it works: you transfer cash, investments, property, or other assets into a trust. These assets become the property of the trust. You designate a trustee who is responsible for managing those assets on behalf of your child, the beneficiary.
As trustee, it is their duty to administer the trust in the best interest of your child. This includes tasks like investing the assets wisely, preparing accountings, filing tax returns, and making distributions to your child according to the rules you outline in the trust documents. The trustee has a fiduciary duty to carry out the terms of the trust.
A properly structured and managed trust can provide you peace of mind, knowing your child will be financially taken care of long into the future. Trust funds are often used for things like education funding, financial support during adulthood, special needs planning, and general inheritance/wealth transfer.
Why Should Parents Consider Setting Up a Trust Fund?
There are several reasons parents choose to establish trust funds for their children:
- You want to provide funds for education – A trust lets you set aside money for future education costs in a structured way. You can instruct the trustee to disburse funds directly to the educational institutions.
- You want to supplement your child’s income as an adult – The trust can give your child an extra financial cushion and flexibility with things like buying a home, starting a business, following unconventional career paths, etc.
- You want to transfer wealth in a tax-efficient manner – Trusts may have income, estate, and gift tax benefits compared to gifting assets directly. An estate planning attorney can advise on the tax implications.
- Your child has special needs – Special needs trusts can provide financial resources and security for a child with disabilities without affecting government benefits eligibility.
- You want to protect assets – Trust assets may be shielded from creditors, divorce proceedings, lawsuits, and other financial risks compared to assets owned directly.
- You want to exert control over distributions – You can place restrictions on how and when your child accesses the trust funds.
How Do You Actually Go About Setting Up a Trust Fund?
If you decide moving forward with a trust fund aligns with your family’s goals, here are the main steps involved:
- Choose a trust structure – With input from your estate planning attorney, decide on the best type of trust for your needs – revocable, irrevocable, education, special needs, or other. Each has pros and cons to weigh.
- Select a trustee – Choose a trustee who is financially responsible, trustworthy, willing, and able to serve. Potential options include family, friends, professional, or corporate trustees. I’d be happy to discuss trustee options that may work well for your family’s situation.
- Draft the trust documents – Work closely with your attorney to create customized documents that outline all the trust provisions, distribution rules, beneficiaries, and more. Proper drafting is crucial.
- Fund the trust – Decide what assets to transfer into the trust. This is where financial planning is invaluable to ensure adequate funding levels based on the trust’s goals. The designated trustee will open accounts in the name of the trust fund to hold and manage the assets. I can refer you to financial firms I work with frequently on trust investments.
- Administer and manage the trust – The trustee handles important ongoing tasks like recordkeeping, investing, accounting, tax filings, and distributions to ensure smooth trust operation per your guidelines. It’s an involved responsibility. Meet with your advisors over time to review the trust and confirm it continues meeting your child’s evolving needs. Make amendments as necessary.
While the basic process may sound straightforward on paper, properly structuring and managing a trust fund for your child requires very careful planning, drafting, and experienced legal counsel.
There are many complex legal, tax, investment, and beneficiary factors at play. Our estate planning lawyers at Cary Estate Planning would be happy to evaluate trust options for your family and ensure optimal preparation for your child’s future.
Please don’t hesitate to contact us with any questions. We look forward to helping give your child a lifetime of financial security through effective trust planning.