How to Set Up a Trust Fund for a Child: Things You Need to Know

Trust Fund

People frequently assume that a child who has a trust fund is extraordinarily wealthy when they learn of it. That isn’t always the case. Even if they have modest wealth, parents and guardians might want to establish a trust fund for a variety of reasons. Here are seven mistakes to avoid and instructions on how to establish a trust fund for a child. Consider consulting a financial advisor if you’re thinking about creating a trust fund for a child.

Five Reasons to Create a Trust for a Child

For a variety of reasons, families establish trust funds for their children. While it is admirable to leave a generation with a lifetime’s worth of savings, some trusts are established to safeguard children and take care of their financial, health, and wellness needs. These are a few of the most common reasons to create a trust for a child:

  • Minimize or reduce taxes. You can effectively double the estate tax exemption for assets passed on to your beneficiaries by structuring a couple’s estate properly. In addition, some trusts allow investors to defer paying taxes on gifts that are greater than the annual gift tax exclusion.
  • Avoid probate. A trust shields eligible assets from the oversight of the probate court and the associated costs.
  • Care for special needs children. Special needs children frequently require care long after you are gone. They can be financially looked after while still maintaining their eligibility for government benefits with the help of specific trusts.
  • Asset protection. With a trust that is adequately funded, you can protect your assets from court rulings and collection efforts.

How to Create a Trust for a Child

If you’ve decided to create a trust, here’s how to create a trust for a child in seven simple steps:

  1. Specify the purpose of the trust. What was the main impetus behind the trust’s formation, and what do you anticipate it will achieve?
  2. Choose which type of trust. Trusts come in a wide variety of forms and can be used to address a wide range of monetary issues. They typically fall into the revocable or irrevocable categories. Whether you can take money out of the trust after it has been funded depends on this choice.
  3. Decide who will manage the trust. Often, the trust’s creator manages it while still alive, but who will do so after your passing? You should designate backup trustees in case your first choice declines or dies before you do. The executor executes the instructions specified in the trust. The two could be different people.
  4. Select assets that will fund the trust. You might not place all of your assets in one trust, depending on your objectives and financial situation. Depending on their intended use for their assets, some investors have a variety of trusts.
  5. Create the trust documents. Consider the specific clauses you want to control when and how your estate is distributed when drafting the trust documents. For instance, you might release particular amounts at certain ages or major life events like getting married, having a child, or finishing school.
  6. Legally create trust. When the trust documents are finished, you must formalize them by having the right witnesses sign them. It’s frequently a good idea to have a third-party notary check the signatures.
  7. Transfer assets into the trust. Until the appropriate assets are transferred into the trust, it is not complete. This is typically just a straightforward title change at the bank or investment firm. For some trusts, though, you might need to open new accounts, transfer assets, or execute quitclaim deeds in the trust’s name.

Seven Mistakes to Avoid When Creating a Trust for a Child

Trust Fund

Making mistakes is possible because most investors don’t create trusts on a regular basis. A few of the mistakes that investors make are:

  • Not working with a professional. While many situations can be complicated and call for an estate planning lawyer, some can be straightforward. Keep your estate plan from falling apart because the template or software failed to comprehend your circumstances or local laws.
  • Making provisions too restrictive. What now seems like a good idea could turn out to be overly restrictive later. Less is sometimes better.
  • Choosing the wrong trustees. Make sure the trustee you choose is trustworthy and will act in the best interests of your beneficiaries. Be certain they won’t be overly generous and quickly exhaust the assets.
  • Giving children full access too early. Many young people, especially children, are not prepared to handle large amounts of wealth at a young age. Think about delaying your access to them until a later age or after they’ve accomplished certain objectives.
  • Designating the wrong beneficiaries. Verify that the beneficiaries are named appropriately on retirement accounts and life insurance policies. The trust should typically be named as the beneficiary of any life insurance policies, while your spouse or children should be the beneficiary of any retirement accounts. The wrong beneficiaries could result in a tax bill or nullify the advantages of estate planning.
  • Not reviewing the trust annually. To make sure that future spouses, children, and other family members are not forgotten, update your beneficiaries at every significant life event. If you use the wrong words, a child who dies before you could be denied your grandchildren.
  • Forgetting about college planning. If children receive money too early, it might be taken away from them if they apply for financial aid. They might not be eligible for loans, grants, or scholarships because of it. Talk to your lawyer about this situation.

Parents must make difficult choices about how to leave their assets to their children when establishing trusts. There are a few general issues that everyone should take into account, even though each person must take into account their own circumstances and their particular children.

7 Tips for Setting Up a Trust for Your Children

Assets of minor children should always be held in trust. You don’t want your minor children to inherit anything. When a person is under 18, their guardian or conservator will manage their finances. If you’ve already decided that your sister Sally will make an excellent guardian for your children because she enjoys spending time with them and has a comfortable home, carefully consider whether she will also be a responsible steward of their finances. It is best to leave the kids’ inheritance in the hands of a more qualified trustee if her afternoons are spent shopping and her finances are in disarray.

Being 18 is not easy. Most states require guardians to relinquish control of the children’s assets once they turn 18 years old. An inheritance of $3 million seems to last forever when you’re 18 years old. And if you are wise and frugal, it might. However, the majority of 18-year-olds will blow through the trust fund on a lifestyle they cannot afford. With little money left and no way to support himself, the 18-year-old is now approaching 40 years old. Fast forward 20 years.

For children in their 20s, create separate shares. The majority of parents of young adult children will divide the trust funds into separate shares for each child. Each child will then receive their own portion and be able to withdraw funds as required. Every child has different needs, and this equitable approach takes that into account. Why should the other kids foot the bill if one kid wants to go to medical school?

Think about creating a lifetime trust. If you should give the children the money in full when they reach a certain age is another crucial decision. First of all, if you grant your children the right to withdraw trust funds, they become their own property and are liable for any debts they incur as well as any divorce-related expenses. For better liability protection, keep the funds in trust for the duration of the child’s life. The trustee would have the freedom to decide how much money to give each beneficiary, but the child would never be able to make cash demands. If you’re worried that a child has debts or that their parents might divorce, this is the best course of action. If your child inherits $5 million, for instance, and there is no prenuptial agreement, the money will be considered a marital asset that must be divided.

Protect your “problem” child. Giving a child with a problem with drugs, gambling, or other substances a sizable sum of money) could have fatal consequences. A lifetime trust is the only way to shield a child from himself.

extending the leash on your children. The best course of action is to give the money to your child in stages if you are sure she can manage it and want to give it to her at a certain age. Giving the child a quarter of the assets at age 25, half of the remaining amount at age 30, and the remaining amount at age 35 is a common scenario. You can choose any ages or percentages for this distribution. A different recommendation is to appoint the child as a co-trustee when he turns 25 so that he can get accustomed to handling the trust’s funds.

the preparation for a child’s death. What happens to the trust funds if the child dies and there are still funds held in trust? You can specify that the funds go to her children, if any, or to your other children. Some parents will grant their children special authority over the distribution of funds in the event of their passing. These are called “powers of appointment.” Your child should have the freedom to decide how to divide the trust funds among their own children after you are long gone, according to this line of reasoning. After all, some of the same problems you took into account when making plans for your children—creditors, divorcing spouses, and addictive behavior—might affect your grandchildren in the future. Your child ought to have the freedom to alter the trust’s distribution if necessary. You can also allow your child to leave his spouse a portion of the trust funds. Many people strongly oppose this, but if your child has a loving spouse and they are living frugally, perhaps you would want her to be able to live in the same lifestyle she enjoyed while your child was alive.

When putting money in a trust for your kids, there are many things to think about. Do not let your planning be hindered or overwhelmed by your considerations. You can always follow your attorney’s advice and then modify the trust as necessary after making your final decisions.

The Bottom Line: Set Up a Trust Fund for a Child

Knowing how to set up a Trust Fund for a child can be a surefire way to provide for their financial future. And as you’ve seen, a Trust Fund can be helpful even if you don’t have a fortune. All you need is the desire to safeguard your kids and the drive to prepare them for a life of financial responsibility. If you have these things, setting up a trust fund might be the best course of action for you. Watch out for mistakes you should avoid when establishing the trust because they could cause your meticulously thought-out estate plan to fail.


What is the Best Age to Set Up a Trust?

There is no Ideal Time to Consider a Living Trust

Unfortunately, there is no real answer to the “right time” to create a living trust because it is not solely based on your age. Instead, wealthy individuals with expensive assets, regardless of age, ought to think about using one of these documents.

How Long Does a Child Trust Fund Last?

On your child’s 18th birthday, the Child Trust Fund matures. This implies that your child will automatically take over the account. no more money can be added.