Advantages of Trust Funds for Children

By Cindy Hill

Establishing a trust fund for your minor children is a way of passing money to them that differs from handing them a gift of money during your life -- or leaving them the money outright in your will. Trust funds enable you to have greater control over how and when the money is disbursed to your child -- and it may also save on taxes and probate costs.

How a Trust Works

A trust is a legal arrangement by which a grantor establishes a fund, into which she puts money or other assets that a trustee will manage for a beneficiary. In the trust instrument -- the document creating the trust -- the grantor can give the trustee explicit instructions on how to invest or manage the trust, as well as detailed directions as to how, when and why the trust funds are to be paid out or expended for the beneficiary. For example, a parent as grantor may establish a trust with her children as beneficiaries and can appoint a friend, relative or her bank's trust department as the trustee.

Types of Trusts

Testamentary trusts -- or trusts established in a will to leave an inheritance to a minor child -- have distinct advantages over leaving the money outright to the child. In most cases, if a minor child inherits assets outright, he must have a financial guardian to handle his finances until he reaches 18 years old. At 18, the money or other assets becomes his to manage -- as he wishes. Including a testamentary trust in a will requires that the will go through probate, which may entail probate expenses and may cause a delay. Other types of trusts, including an irrevocable children's trust, are created and funded during the parent's lifetime and may help avoid probate costs and delays.

Protect your loved ones. Start My Estate Plan

Outright Gifts

Placing money in a savings account or in a Uniform Gifts to Minors Act account for your children means that by law, the funds become property of the minor, with no restriction, when the child reaches 18 years old, or 21 in some states. Once the money passes to the child -- whether the money is physically given to the child at any age or when the child reaches the age of majority and receives the money from a minor's savings account -- the parent has no further control over how that money is spent. If the child would rather buy a sports car or concert tickets with the money than pay for college education or rent, he's free to do so. Either parent who places more than the annual exclusion amount in any one year into a minor's savings account or who hands it directly to the child will need to pay a federal gift tax.

Trust Terms and Benefits

Establishing a trust fund to pass assets from parent to child enables the parent to choose the trustee and to control the terms of disbursing the trust, even after her death. For example, a testamentary trust might limit trust disbursements to living and college expenses until the child graduates college (or turns 25, or even older), at which point the child can receive all the assets of the trust. This can help prevent the child from squandering the trust assets on inappropriate expenditures. Trust fund terms can provide the child with financial and parental guidance well into adulthood. Parental guidance can include requirements for drug or alcohol testing, for example, or the disbursement could be tied to positive behavior, such as graduating from college, starting a business or engaging in support activities for charities.

Protect your loved ones. Start My Estate Plan
Reasons to Set Up an Inheritance Trust
 

References

Related articles

What Age Do You Need to Be to Inherit a Trust From a Will?

People cannot legally inherit money or other property from you until they reach the age of adulthood. You can, however, provide ways for a minor to have access to some of the money while she is underage to provide for her needs; later, when she is older, she can inherit outright. Your will or trust can also set a specific age for your beneficiary to take control of the assets -- for example, if your trust documents say that your beneficiary must wait until age 30 to inherit, that becomes the age she needs to be to inherit. Setting up a trust in your will is one way to safeguard a minor's inheritance.

Blind Trust Vs. Revocable Trust

A trust is a legal structure used to safeguard assets. Revocable trusts and blind trusts serve distinctly different functions. Trust law is very state-specific; those with questions about setting up a particular trust should enlist a local legal professional or an online drafting service.

How to Leave an Entire Estate to Various Charities

Without an estate plan or will, your state’s laws determine how your assets will be distributed upon your death, typically giving your property to close relatives. However, with the right planning, you can donate your entire estate to charity using tools like a will or trust. A will gives gifts outright, and trusts manage your assets while giving periodic payments to the charities of your choice.

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

Related articles

How to Set Up a Living Trust Fund

A trust can be a solid, safe way to send your assets where you want them to go. The grantor -- the individual who ...

Differences Between a Trustee & a Guardian in New York

If both parents of a minor child die, that child will need someone to take care of him until he becomes an adult, and ...

How to Open a Child Trust Fund

Few things strike more fear into a parent than the thought of a child fending for herself if the parent dies. While ...

Education for Grandchildren in a Testamentary Trust

When grandparents begin the estate planning process, they may first think of leaving money to their grandchild in a ...

Browse by category
Ready to Begin? GET STARTED