It’s a question we’re hearing more and more: “Should we set up a trust fund for our kids?” It’s a good question, and not just for wealthy families. When many people hear “trust fund,” they think of spoiled, entitled young people who live lavishly without having to work. That stereotype is no longer accurate, if it ever was.
Trusts are an increasingly common way for many families to provide for their children and ensure they have the resources they need for a bright future. Is a child trust fund right for your family? Read on to find out.
What is a Trust Fund?
A trust is a legal relationship between three parties: the grantor (also called settlor or trustmaker), who creates and funds the trust; the trustee, who manages the assets in the trust; and the beneficiaries, for whom the assets are managed and who receive trust income and/or assets. Simply put, a trust is a way of holding property for someone else’s benefit.
Benefits of a Trust For Your Children
There are many benefits of creating a trust for your child. First, doing so allows you to set aside assets to provide for their future needs, especially if you are no longer around to do so. When you think of your child’s future, what are the things that you envision? Chances are you want them to have a safe home, security, and a good education. A trust can help you achieve those goals and lift the burden of financial worry from their shoulders.
Another advantage of a trust is that it avoids the probate process. After your death, your family won’t have to go through a months-long process to receive the assets you have left behind. They will already be safely in the trust, under the management of a reliable trustee that you have selected, with distributions made as you have directed.
Assets that go through the probate process are distributed to heirs or beneficiaries in full at the conclusion of probate. That means if your eighteen-year old son or daughter has an inheritance of hundreds of thousands of dollars, they receive it all at once, with no oversight, since they are legal adults. If that idea makes you nervous, you may want to consider a trust. What if your child is a minor at the time they come into their inheritance? In that case, it will be necessary for the probate court to establish a conservatorship and appoint a conservator to oversee the child’s assets until they turn eighteen. At that point, they are entitled to full control of their inheritance.
Avoidance of probate or conservatorship and sound management of your child’s assets aren’t the only benefits of a trust. A properly-designed trust can protect your child’s assets from creditors, minimize estate tax, or provide for a child with special needs without jeopardizing their eligibility for needed government benefits. Talk to your estate planning attorney about what you want to achieve with a trust fund for your child.
How to Set Up a Trust for Your Kids
Setting up a trust fund for your child is not difficult—so long as you have the right guidance. It’s important to avoid the risks of DIY estate planning, since any mistakes you made might not be apparent until you’re gone, and it’s far too late to fix them.
The first step is to decide the purpose of the trust. Do you want to benefit one child, or multiple children? Do you want the trust to pay for their education, to protect their assets from creditors, or something else? Under what circumstances should they receive income from the trust? How old should they be when they receive control of the trust’s assets? All of these questions and more should be discussed with your estate planning attorney.
Step two is selecting a trustee. The trustee is the person who manages the trust for the benefit of the beneficiaries—in this case, your child. For some types of trusts, you may be able to serve as the trustee during your lifetime, and will need to appoint a successor trustee to serve after your death or incapacity. For other types of trust, you will need to appoint an independent trustee. Remember that this is not an honorary role; your trustee will be managing your children’s assets, so choose wisely.
After you have decided what you want the trust to do and who you want to manage those assets, it’s time for your estate planning attorney to draft the trust document. The trust document sets forth the terms of the trust, so make sure that you and your attorney have established how the trust will operate and when it will terminate. Then it is time for the critical last step in setting up your child’s trust fund.
This final step is “funding” your trust. You title your bank accounts, stocks, bonds, real estate, gold, or other investments in the trust. Assets like retirement accounts, annuities and life insurance are funded into your trust by way of beneficiary designation.
It is not sufficient to state in the trust document what assets you intend to hold in the trust. You must take steps to place those assets in the name of the trust, and the way to do that depends on the type of asset. Funding a trust is simpler with some assets than others, but don’t let this crucial last step hang you up; if you are at all confused about how to place an asset in the trust, contact your attorney’s office for guidance.
Avoid Common Trust Fund Mistakes
Having a trust as part of your estate plan can offer you and your family great peace of mind—if you avoid the following common mistakes:
- Failing to be clear about your goals for the trust. A trust can only do what it is designed to do; if you’re not clear about your goals, you may not get the trust that you need. You don’t have to have it all figured out before you make an appointment with an attorney; your attorney’s job is, in part, to help you clarify your goals.
- Failing to plan for asset protection. Even if your children don’t run up big credit card bills, they may still have creditors who want to come after trust assets, including divorcing spouses or victims of a car accident in which your child was at fault. Ask your estate planning attorney about asset protection in your trust.
- Choosing the wrong trustee. You are essentially placing your children’s financial future in the trustee’s hands. You should select someone trustworthy, with the time and knowledge to do the job, and ideally someone in good health who lives relatively near your children.
- Failing to fund your trust. It seems crazy to go to the trouble and expense of creating a trust and then leave it unfunded, but a surprising number of people do, either because their attorney didn’t instruct them well, they found the process confusing, or because they put it off until it was too late.
- Creating your trust, then ignoring it. As your children grow and your life changes, you should review your trust to see if it needs to be changed, too. You may have another child, acquire new assets that should be included in the trust, or decide your successor trustee is no longer the right choice. You should review your trust at least every year or two.
To learn more about trust funds for children, contact Estate Planning & Elder Law Services to schedule a consultation.