Does Your Child Need a Trust Fund?

The prevailing notion is that trust fund babies are the teenagers who drive up to school in shiny new sports cars or the young piano virtuoso who attends a top-of-the-line music institute instead of public grade school. But CNBC indicates that change is in the air – trusts are no longer the exclusive domain of the wealthiest 1 percent of the population. 

Parents and grandparents are creating trusts more often to set aside money for the next generation. As Atlantic County, New Jersey, family law attorney Erika Appenzeller points out, “Although becoming a parent is a task in itself, it’s vital to take a few extra steps to have a financial plan in place for your children.”

 

Setting Up the Trust

Trusts can hold money or property, but they must hold something or they’re useless. That “something” can be as little as $100 to start – you can keep adding to the fund as the years progress. “It’s never too late to set up a trust fund for your child’s future,” says Appenzeller, “and you don’t have to be wealthy.” 

You can create one trust fund for all of your children, or give them each their own. If you choose the first option, each child can have a separate account within the trust. “You need the right person to help you set it up properly,” Appenzeller advises. The trust should achieve exactly what you intend, but plenty of pitfalls await if its not correctly set up.

 

What Can Go Wrong?

Trusts can dump a windfall on a child when he turns 21, which may invite disaster. Not all young adults are mature and responsible enough to handle a significant lump sum of money, so consider dividing the gift into segments. He might receive a portion at 21, another at 25 and the last at age 30. You might also hinge the gifts to certain events, tagging some for college, some for a wedding, or a portion toward the purchase of a first home. You can make these events discretionary – your child will still receive regular increments of money, but the trustee can distribute more for specially-tagged needs. 

Arranging all this can get costly, however. You’ll need someone to run the trust during your lifetime and if the trust is irrevocable — as it should be for the utmost tax advantage to you — that someone cannot be you. You might select a friend or family member, but if you rely on a lawyer or an institution, they’ll probably expect to be paid for their services. The funds for this typically come out of the trust, so you’ll want to put someone in charge with the experience to make sure the money and property in the trust continue to grow.

 

What Can Go Right?

You can give your child a solid head start on adulthood if you set the trust up properly. Many parents save for college anyway, so forming a trust can serve this purpose and act as a receptacle for the money. With the right legal guidance, you can ensure that the money cannot be diverted to your child’s creditors or a spouse in the event of divorce. Outright gifts don’t share this type of protection. 

You’re not limited to funding the trust with your own money and assets. Think of all those birthdays when friends and family give money to your kids that may or may not be saved for the future. Ask them to contribute to their trust account instead.

 

Benefits for Parents

Children aren’t the only ones to benefit from trust funds. The Internal Revenue Code provides that individuals can give away up to $14,000 a year as of 2016 without incurring a gift tax. Funneling $14,000 a year or so into the trust will ultimately decrease the value of your estate, potentially dodging the estate tax bullet. But speak with an attorney to make sure you structure the trust just right for tax benefits. 

The beneficiary — your child — must have a “present interest” right to the money to allow you to qualify for the gift tax exclusion – meaning he can take the money immediately if he wants to. But minors cannot hold property, so you would have authority as his parent or guardian to leave the money in place for maximum growth until he reaches adulthood.

Key Concepts

  • Advantages trust funds
  • Disadvantages trust funds

Trusts minor beneficiaries