set up a trust fund for children

set up a trust fund for children

Trust Fund Basics: Setting Up A Family Trust

From the days when I knew nothing about finance, I remember hearing the words, “Trust Fund.” Well, it wasn’t until recently that I took the time to learn more about this subject. I bet that if I were to ask 10 people to explain what it is, most wouldn’t really have much to say.

In their lifetime, many people will be recipients of a trust fund. As we all age and family members pass away, it’s important to be aware of what our family has done in terms of estate planning. We should have frank discussions with our loved ones — particularly with those members of our family who are upstanding, mature and able-bodied — about how the family inheritance is structured, and if it so happens that there’s a trust fund in your future, then you should be somewhat familiar with how it works.

Trust Fund Basics and Setting Up A Family Trust

1. A trust fund is simply an arrangement that allows for asset transfers to take place between parties. Often, your fund’s beneficiaries are your children but it could also be a charity or non-profit organization.

2. It can contain all types of investments. We think of these financial vehicles as consisting of only cash, but it can also contain stocks, bonds, or other investment classes.

3. You can set it up to produce cash flow. You can structure it to generate money so that the fund pays out dividends to the recipients, with the principal untouched. For this reason, most trust funds have a manager who is paid either a set annual fee or a percentage of the yearly profits.

4. There are rules and limitations to the fund. It’s important to note that a trust fund normally follows rules and limitations. For example, recipients must typically reach a certain age before collecting benefits. Or you can have fund rules which involve paying out a set amount as living expenses to the recipients. You can also bequeath larger amounts of money as large gifts to certain family members, but this must first be approved by the manager.

5. There is a misconception that trust funds are only for the rich. A trust fund can be established by anybody who has the financial discipline to save. Everything we’ve discussed here can apply to you!

There is one thing that I think we should address before leaving this topic. I have known more than one person in my life who ended up developing destructive financial habits because they anticipated a trust fund in their future. It’s important to realize that nobody cares about your money as much as you do! If you rely on somebody or something other than your healthy spending and work habits, you are setting yourself up for financial disaster.

It’s not a good idea to be relying solely on your trust fund for financial support. Why? Because the economic downturn could significantly reduce your dividend payments. Or some kind of family fallout can happen that may cause the terms of the trust to be changed in a way that has a negative impact on you. Something unthinkable or unforeseen could happen to the fund. Just ask those who had money invested with Bernie Madoff about this. In short, live your life as if that trust fund doesn’t exist. They work best if you can consider them as a secondary safety net.

It bears repeating: Never rely on anything or anybody other than yourself for financial security!

You can’t apply for a new Child Trust Fund because the scheme is now closed. You can apply for a Junior ISA instead.

If you already have a Child Trust Fund

All content is available under the Open Government Licence v3.0, except where otherwise stated

How to Set Up a Trust Fund for Your Child

by Fraser Sherman

Infants, toddlers and even teenagers can have trouble managing money. If you worry that dying early would leave your child too rich for his own good, a trust fund is one way to keep his spending under control. If you don't make some provision for managing his inheritance, the probate court will probably appoint someone to take care of it. It's better to make sure it's someone you and your child know and trust.

There are two ways to set up a trust fund for your child. One is to transfer property into a living trust and appoint yourself as trustee. That way you can manage the trust assets as if they were your own, then a successor trustee manages them for your child after you die. The alternative is to set up a testamentary trust in your will that activates upon your death. The testamentary trust takes less work to manage than a living trust, but doesn't allow the assets to bypass probate.

The first step to setting up a trust fund is to choose the trustee. If the trust holds substantial assets, managing it takes hard work. You need someone you can count on to do the job well, and who won't use the job to enrich herself at your child's expense. Your spouse or partner or a close relative might make good choices. The trustee has the right to refuse the appointment, so don't blindside her. Find out before your death whether she's willing to assume the role, and if not, pick someone else.

The trust declaration is the trust's governing document. Whatever authority you want -- or don't want -- the trustee to have, you should write it into the declaration. If the trust assets include real estate, for example, decide whether the trustee has the right to sell in a boom market, or if you want him to hang on to the property. Also specify at what age your beneficiary comes into full control of the trust assets.

To set up a living trust, research your state's requirements for a trust declaration. Your state government website, local attorneys' websites or a bookstore's legal section are good places for start. Draw up a declaration that meets state law, names you as the trust creator and trustee, and identifies your successor trustee. The declaration must also name the trust beneficiaries. When you finish, have a notary seal the document; then transfer your assets into the trust. For real estate, for instance, you'd make out a deed conveying title from you as owner to you as trustee.

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

An irrevocable trust is set up to avoid paying taxes by removing assets from the settler's taxable estate and transferring it to an irrevocable trust. The grantor, thus, is no longer liable to pay taxes on the income generated by the assets. Such a trust is meant for wealthy individuals, who are trying to reduce their tax liability. An exemption trust that can reduce or eliminate federal estate taxes for a married couple, is a good example of an irrevocable trust.

A living trust can be an alternative to a will, since the former is not subject to probate; moreover, the court does not address the grievances of the beneficiaries or the creditors. Again, a will is a public record, while a living trust ensures privacy. Tax savings are the same, in case of wills and living trusts. These provisions make a living trust an attractive alternative.

You may set up a trust fund to facilitate your children's education. Annual fees for educational institutes are forever rising. It is sapient to make arrangements for their future, so that their future aspirations are not compromised.

Life is uncertain, and it, precisely, is due to this reason that a financial buffer system is readied for your children, lest something unfortunate happens to parents. A trust fund may be set up to take care of your children and save them from enduring any financial upheavals in the future. People, who are suffering from debilitating illness, may create a revocable living trust to ensure proper asset management.

How to Set Up a Trust for Minor Children

A trust for minors is the same as a trust for adults with the sole exception that the testator--the person creating the trust--must appoint a custodian to manage the finances in the trust until the child becomes an adult. You may include provisions in the trust that limit how the custodian may use the funds, and even limit the ability of the child to withdraw the trust's funds when he becomes an adult. Trusts are complex, and you should enlist the aid of an experienced estate planning attorney to assist you.

Select a custodian. The custodian will manage the funds in the trust for the child until he becomes an adult. While the custodian will be subject to reporting requirements of the probate court that manages your estate, you should only choose someone you trust. In addition, many financial institutions have professional custodians who can manage the trust for a fee.

Transfer the funds or other assets you wish to be part of the trust. The account will be named "In Trust for [name of minor child]." Your financial institution will be able to take care of this step for you.

Draft a trust document that specifically identifies the minor child, the custodian you wish to appoint, a backup custodian in the event that the first is unwilling or unable to perform her duties, and the amount and location of the funds to be included in the trust. Consult an estate planning attorney if you need assistance with this step.

Outline any provisions if you wish to restrict the use of the trust funds. For instance, some testators will specify that the trust may only be used to tend to the basic health, safety and welfare needs of the child until he is an adult. You may also specify that the trust may be used only for educational expenses. Typically, a trust contains a provision explaining that the trust will dissolve, and directing that all assets be distributed to the child when he reaches a certain age, usually 25.

Sign and date the trust document following all laws and regulations required by your jurisdiction. For instance, some states require that the trust document's signing be witnessed by no fewer than two disinterested parties--individuals who are not named in the trust document. If you fail to follow these formalities, the stipulations you expressed in the trust may not be carried out.

Provide a copy of the trust document to the custodian, backup custodian, child or his parent or guardian, and the financial institution who manages the trust.

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