Should You Set Up a Trust Fund For Your Children?
If you have children, you likely want to make sure you do everything your power to protect them, and that can include financially.
If you were to be injured or pass away prematurely, you might want to make sure you leave a way for your children to be taken care of and one way to do that is creating a trust fund. A trust fund is something some people shy away from because they think they’re only for wealthy people, but that’s not necessarily the case. Trust funds can be a valuable financial tool for many people.
What Is a Trust Fund?
A trust fund is a legal entity that holds property to benefit another person, or a group or organization.
If you have a family and you want to manage your assets, the benefits of a trust fund can include distributing assets to your heirs without probate court and reducing gift and estate taxes.
Trust funds are also an option for families who want to make sure that their children or even their grandchildren who are minors under the age of 18 will be beneficiaries of their estate, but they want to have rules set on the distribution and use of assets.
There are two main types of trusts to be aware of, although there are many others that are less commonly used.
First, there is a revocable trust, which is known as a living trust.
A living trust is created during a grantor’s lifetime and it can be changed or revoked anytime. Irrevocable trusts can’t be modified or changed once they’re created, and the benefit of this type of trust is the fact that creditors can’t access it. Beneficiaries are guaranteed access to the trust, regardless of financial issues the family may face.
The Parties Involved In a Trust
The parties involved in a trust include:
- The Grantor: A grantor is the person who creates the trust fund and puts the asset in it. The grantor also decides the terms of management for the trust.
- The Beneficiary: This is the person who will receive the assets in the trust. The assets don’t belong to the beneficiary, but they are managed to benefit the person, thus the term beneficiary.
- The Trustee: This can be a bank or an individual, or several advisors who ensure the trust keeps up with the duties that it’s intended to adhere to.
What Are the Benefits of Creating a Trust for Your Child?
If you set up a well-planned trust, it can help provide them with guaranteed financial security later on in adulthood.
It can also make sure your assets are distributed in the way you see fit.
Some parents will set up a trust specifically to pay for the child’s college education, or there may be an outline for how assets are distributed incrementally.
Parents often like the idea of a trust fund because they can create a strong financial future for their child without worrying they will squander whatever assets they leave them.
What Are the Downsides of a Trust Fund?
There are some downsides to creating a trust fund to be aware of. One major one is the fees.
If you set up a trust, you have to pay a lawyer in almost all cases, because you want it to be set up in the most tax-efficient way.
It can cost upwards of a few thousand dollars, at a minimum, to set up a trust fund.
What about UTMA?
Another option that you have to transfer assets to your child is a Uniform Transfers to Minors Act or UTMA.
A UTMA is an ownership agreement that’s created as a way for a minor child to own property.
An asset is titled for a child under a state’s UTMA statute, so then the child is the owner of said asset.
Once the child is no longer a minor or reaches the age specified in the UTMA documents, they can then access or manage the funds.
UTMAs can be used for almost all asset types, including real estate, stocks, bonds, and mutual funds.
You can open a UTMA custodial account using a broker-dealer’s services.
One reason a UTMA is better than something like a 529 Savings Plan is that if the parent or custodian files bankruptcy, the assets aren’t part of the bankruptcy estate because they technically belong to the child.
These aren’t the only options for securing your child’s financial future, but it’s important to know options are available, and they aren’t just for the wealthy.