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.

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.

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.

Protect your loved ones. Start My Estate Plan

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

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 Choose an Administrator for My Living Trust

A living trust is a trust formed and funded during your lifetime, as opposed to a testamentary trust, which is created as part of your will. A living trust is managed by a trustee, or administrator, who is held to strict standards of fiduciary responsibility, which requires that the administrator employ fair dealings toward all beneficiaries and prudent investment of the trust's funds. Choose a skilled, efficient financial administrator to ensure that your intentions for your living trust are fulfilled.

What Is a Non Testamentary Trust?

A trust is a legal document that allows a trustee to hold property for the benefit of others, known as beneficiaries. Trusts are created when a grantor or settlor asks the trustee, which can be a company or a person, to hold and distribute money or property to beneficiaries. The grantor names beneficiaries in the trust documents, and the money and property in the trust will be distributed based on the grantor’s instructions. For example, a grantor can designate that no money is to be distributed to beneficiaries unless it relates to their health, education or welfare. Trusts typically fall into one of two large categories: testamentary and non-testamentary trusts.

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 ...

How to Fill Out an SS-4 for a Special Needs Trust

A special needs trust is used to provide for the needs of an individual with a disability. It ensures that government ...

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 ...

How to Name a Trust as Successor Beneficiary of an Inherited IRA

When someone creates an Individual Retirement Account, she names a beneficiary to inherit whatever remains in the ...

Browse by category
Ready to Begin? GET STARTED