How to Set Up a Trust Fund for a Child

A trust fund is a great way to set your child up for financial success. It provides a safety net for their future, money for their education, ownership of family property, and more. You are in control of the rules and timeline under which the assets of the trust are distributed, allowing you to choose what is best for your child.

Consider the benefits of a trust for education. According to the Education Data Initiative, the average cost of college has more than doubled in the 21st century, with the current average cost per year being $38,270. If you establish a trust with appreciated assets, such as investments, the returns could pay for a significant portion of your child’s education.

When creating a trust, many important considerations must be made, from the type of trust itself to the rules for distributing assets.

Key Takeaways

• A trust fund for your child can provide them with easier access to inheritance after death, avoiding probate.
• You choose how the assets are distributed (over time or in a lump sum) and what the money can be used for.
• Trusts can be revocable or irrevocable, providing different benefits depending on the situation.

What is a Trust Fund?

A trust fund is an estate planning tool that maintains and holds assets for the grantor (the individual or organization that sets up the trust) on behalf of one or more beneficiaries, frequently children or relatives. The trustee, typically a neutral third party, maintains the trust fund. 

A trust fund can include money, physical property, stocks, bonds, a business, or a combination of different assets. Trust funds are either revocable or irrevocable, and there are several ways to organize a trust within those designations. Living trusts may be preferred over a will because they are not subject to probate after the grantor’s death, allowing for privacy and a more timely distribution of assets.

Types of Trusts

A trust created while the grantor is still alive is a living trust, and one established upon the individual’s death is a testamentary trust or will trust. Living trusts can be revocable or irrevocable, while testamentary trusts are not established until after death and are therefore irrevocable.  

Living Trusts

Living trusts are established for estate planning while an individual is still alive. They can be revocable or irrevocable. A revocable trust allows the grantor to change the terms or dissolve the trust at any time. This is beneficial if planning for incapacitation, at which time a successor would take over the management of assets. Assets in revocable trusts are still considered property of the grantor and, therefore, subject to estate tax and creditors.

Irrevocable Trusts

Irrevocable trusts are extremely difficult to change, requiring the consent of all beneficiaries. The grantor sets the terms of the trust and beneficiaries, but once the trust is established, the grantor has given up ownership of the assets to the trust. Once an asset is given to this type of trust, it is no longer owned by the grantor and, therefore, is not subject to estate tax and is safe from creditors or legal judgments.

Testamentary Trusts

Testamentary trusts are created when someone dies, and they are defined in their last will and testament. These trusts are irrevocable by nature, as they are not established until after the grantor’s death. However, since this type of trust is written in a will, the will must go through probate before the trust can be established.

How to Set Up a Trust Fund for a Child

Creating a trust fund for a child is a worthwhile way to ensure their financial future is secure. Setting up a trust fund requires careful planning, taking into account several legal and economic considerations. It is best to consult an estate planning professional to assist with drafting the trust documents and establishing and maintaining the trust.

Define Goals

Define the purpose of the trust and what you hope to accomplish by creating it. For example, do you want to specifically pay for your child’s (or grandchild’s) education? Or pass on your property after death? With these goals defined, a professional can begin the process of establishing trust.

Choose Type of Trust

There are many different types of trusts, all of which fall under the revocable or irrevocable categories. It is important to consider whether you need to be able to access the assets in the trust after it has been established.

Choose a Trustee

A trustee is the individual or entity responsible for managing and distributing the trust’s assets. A trustee can be anyone, but is best served by a neutral third party. This is typically an independent business specializing in trust management or a service offered by a large financial institution. Horizons Wealth Management can assist with your estate planning and trust management needs.

Draft Trust Document

Outline the trust document with all the necessary information on asset distribution and beneficiaries. You can create the trust document on your own, but it is best to consult a professional to avoid legal errors. This ensures your trust will be honored by the courts and serve its intended purpose. 

Legally Establish a Trust

Once the trust documents are completed, you still need to legally establish the trust by signing the documents. This should have witnesses and be notarized.

Transfer Assets

Your trust is not complete until the correct assets have been transferred. Depending on the trust’s contents, transferring assets could require changing the title or creating a new account specifically for the trust. 

Mistakes to Avoid When Setting Up a Trust

Since people do not often create trusts, avoiding these common issues can help the process go smoothly. Choosing the wrong trustee could lead to complications managing the trust, and a lack of clear (or overly restrictive) instructions could cause difficulties during asset distribution. 

Choosing the Wrong Trustee

Choosing a family member or friend as your trustee could lead to complications down the road. Someone involved in your personal life is more likely to be biased and therefore unable to fulfill their fiduciary responsibilities to the beneficiary or beneficiaries. 

Not Clarifying Goals

Trusts without clear goals could create issues when it comes time to distribute the assets. Be sure to fully understand your trust’s goals and ensure they are clearly laid out in the trust documents. 

Not Reviewing Trust Annually

Reviewing your trust annually ensures future spouses, children, or grandchildren aren’t left out. Amending your trust depending on different life events also involves other considerations. This is more complicated with an irrevocable trust, so it is best to ensure the language allows for certain situations.

Bottom Line

Setting up a trust fund for your child is a worthwhile way to ensure their financial future and set them up for success in adulthood. There are many considerations when creating a trust, but a professional can help you choose the right option for your goals. Set up a discovery call with Horizons Wealth Management and learn unbiased, professional financial advice on everything from wealth management to retirement planning. 

Trust Fund FAQ

Is it worth setting up a trust for my child?

If you have financial or real estate assets you want to pass on, it may be worth setting up a trust fund for your child. You can relax knowing the trust will ensure your assets are distributed under your terms.

Does your money grow in a trust?

Yes, but it is not the trust itself that earns money. Assets within the trust, such as investments and real estate, can appreciate. The growth is then managed based on the terms of the trust.

Do I pay taxes on trust fund money?

If you have a revocable trust, the assets are still considered to be in your possession and subject to taxes. With an irrevocable trust, you are deemed to have given up ownership of the assets to the trust and therefore no longer owe taxes on assets within the trust.