How to Open a Child Trust Fund

By Nola Moore

Few things strike more fear into a parent than the thought of a child fending for herself if the parent dies. While this may be the primary reason many parents begin to think about trust funds for their children, it's certainly not the only motivation. Whether you're looking for a tax-smart way to pass on an inheritance, caring for a special needs child or simply saving for college, a trust fund has a number of advantages, provided you take time to set it up carefully.

Few things strike more fear into a parent than the thought of a child fending for herself if the parent dies. While this may be the primary reason many parents begin to think about trust funds for their children, it's certainly not the only motivation. Whether you're looking for a tax-smart way to pass on an inheritance, caring for a special needs child or simply saving for college, a trust fund has a number of advantages, provided you take time to set it up carefully.

Preparation

Step 1

Determine exactly what the trust is for and who will benefit from it. You may be passing on an inheritance, protecting a child performer's assets or creating a nest egg for your child to use as an adult. You may be creating a trust to benefit all your children or only one. Each purpose has a specific set of laws and guidelines that govern trust operations, so it's important to be as specific as you can.

Protect your loved ones. Start My Estate Plan

Step 2

Decide how you will fund the trust. You may deposit a specific dollar amount all at once, or you may make deposits over time. Deposits may be uniform or variable. In some cases, it may be important to define who can make deposits -- if anyone may make them or only certain family members.

Step 3

Think about investments for the trust. While it is best to create an investment plan with a professional, you should know when your child is likely to use the money and how much you'd like to have in the account at that point. It's also important to know how long the child might need funds from the trust and in what increments. For example, a special needs trust might plan for 30 to 40 years of smaller monthly payments, while a college savings plan might have much larger distributions annually for four to eight years.

Step 4

Decide who will manage the trust as trustee and who will serve as a backup, or successor trustee, in the event that the original trustee cannot carry out his duties. In many cases, the original trustees are the parents, but that is not required and may not even be the best option, depending on the type of trust.

Step 5

Plan an exit strategy. It's important to know what should happen if the trust is no longer needed or is depleted. For example, if a child chooses not to go to college or receives a scholarship, what happens to the money in his college savings trust? How should trust funds be distributed if a child declines the trust or is no longer living when the trust matures?

Step 6

Meet with an attorney or use an online legal document preparation service to establish the trust. Once the documents are signed, the trust becomes a separate legal entity and is fully operational.

Funding and Investment

Step 1

Create an account for the trust at your chosen financial institution. This may be as simple as a bank account, or it might be a brokerage or investment account at a trust company or investment firm. Remember that this account is for the trust and must be kept distinct and separate from all other accounts you might have.

Step 2

Deposit your first contribution as outlined in the trust. It may be possible to set up additional contributions as automatic transfers from your checking account, just as you might pay a bill. Review this and any other maintenance options with your account administrator.

Step 3

Invest the trust funds as outlined in the trust document and discussed with your financial advisor. Review the investments on a regular basis -- semi-annually is a good schedule for most people -- to make sure they are performing as anticipated to meet trust needs.

Protect your loved ones. Start My Estate Plan
Advantages of Trust Funds for Children

References

Resources

Related articles

What Items Should Be Put Into a Living Trust?

A living trust is created during a person's lifetime and comes in two types: revocable and irrevocable. A revocable trust allows you to freely transfer your property in and out of the trust. By contrast, the maker of an irrevocable trust cannot serve as trustee or exercise control over the trust's assets, so irrevocable trusts are less flexible than revocable trusts. Many people fund their revocable trusts with their most valuable assets, which usually include the family home, bank accounts and investments.

What Is a Bank Trust Account?

Most banks offer trust accounts as an optional service. In a trust account, a trustee controls funds for the benefit of another party - an individual or a group.The bank trust account is a useful way to convey and control assets on behalf of a third-party owner. One such trust, a Totten trust, allows a trustee to control the assets of an estate, while a real estate trust holds funds for payment of costs associated with a property.

Can an Heir Be a Co-Trustee of the Trust?

An heir can be named as a trustee, even if he is a beneficiary. However, there are issues to consider when naming an heir as a trustee. The role of the trustee is to ensure that property is maintained and distributed for the benefit of the beneficiaries. As such, a beneficiary-trustee may be tempted to not share the trust property with the other beneficiaries and keep it all for himself.

LegalZoom. Legal help is here. Start Here. Wills. Trusts. Attorney help.

Related articles

Reasons to Set Up an Inheritance Trust

A trust occurs when property, in the form of money, real estate or some other valuable item, is overseen by one person ...

Maximum Duration of Trusts

Setting up a trust can be as simple as drafting a document that outlines how the trust is to operate, naming ...

A Comparison of a Living Trust to a Last Will

Both living trusts and wills are useful estate planning tools, but you must decide which option is best for you and ...

How to Manage a Living Trust

The trustee, who is bound by several legal requirements, manages a trust. For a living trust, the trustee is often the ...

Browse by category
Ready to Begin? GET STARTED