How To Set Up A Trust Fund For A Child | 7 Steps To Setting Up A Trust For A Child

How To Set Up A Trust Fund For A Child - Setting Up A Trust For A Child - Trust Fund For Kids - How To Start A Trust Fund For A Child

Wondering how to set up a trust fund for a child?

In this article, you’ll learn about: 

  • how to set up a trust for your child
  • the types of trust funds for children
  • alternatives to trusts for kids
  • how to manage a trust for a child
  • mistakes to avoid when setting up a trust for a child

Let’s dig in.

Table of Contents

The Hive Law Has Been Featured In

Get A FREE Consultation!

We run out of free consultations every month. Sign up to make sure you get your free consultation. (Free $350 value.)

Types Of Trust Funds For Kids

The different options for trust funds for kids are:

  • revocable trusts
  • irrevocable trusts 
  • custodial accounts
  • 529 plans
  • special needs trusts
  • life insurance trusts

We’ve also thrown in other options besides just trusts for children.

What Is A Trust Fund For A Child?

A trust fund for a child allows the grantor to set aside assets for the benefit of the child. 

The person setting up the trust for a child is called a grantor. 

These assets can be money, real estate, stocks, or other types of property.

The child’s trust fund is managed by a trustee. 

This person or institution is legally responsible for:

  • handling the assets 
  • following the instructions in the trust agreement

The child will receive the assets according to the terms set by the grantor. 

This can be at a specific age, or it could be tied to certain milestones (i.e, graduating from college).

Trust funds for kids can offer benefits such as:

  • control over how and when the child receives assets
  • potential tax advantages
  • protection of the assets from claims by creditors

They are a common tool used in estate planning to provide for the financial future of a child.

Read More: How Much Money Do You Need To Start A Trust Fund For A Child?

Revocable Trusts

A revocable trust for a child is a trust that can get modified while the grantor is alive. 

The person who creates the trust maintains control over the trust while they’re alive.

In a revocable trust, the grantor can make changes at any time

The grantor can:

  • add or remove assets
  • change the terms of the trust
  • even cancel the child’s trust entirely 

This flexibility can be very helpful if circumstances or intentions change.

When the grantor dies, the revocable trust usually becomes irrevocable

This means no more changes can be made. 

The assets then pass to the child, as per the terms set out by the grantor.

A key person in this process is the trustee. 

The trustee of a child’s trust fund:

  • manages the trust
  • follows the grantor’s instructions
  • ensures the child’s needs are met

The grantor can act as the trustee during their lifetime

Revocable trusts have several benefits, like: 

  • they avoid probate
  • they provide privacy (trust details are not made public) 

However, they don’t protect assets from the grantor’s creditors.

And the assets are considered part of the grantor’s estate for tax purposes.

Irrevocable Trusts

An irrevocable trust for children is a trust that cannot get modified once it’s created. 

Irrevocable trusts hold assets, like money or property, for the child’s benefit.

Once set up, this type of trust cannot be easily changed or canceled. 

The person who creates the trust cannot change the trust without the permission from:

  • the beneficiary (the child in this case) 
  • the probate court

The assets in an irrevocable trust aren’t owned by the grantor anymore. 

They belong to the trust itself. 

A trust for a child can reduce estate taxes for the grantor. 

This is because these assets are no longer part of the grantor’s taxable estate.

A trustee manages the trust. 

This can be the parents, the grandparents, siblings, or our trust attorneys

This person is responsible for:

  • overseeing the assets 
  • following the trust’s instructions (about the distribution of the assets to the child)

This structure provides a high level of asset protection.

It ensures the money set aside will be there for the child’s future.

Even if the grantor faces financial difficulties later on.

However, because of its irrevocable nature, setting up this kind of trust for kids needs careful thought. 

Once it’s established, it’s difficult to undo.

The grantor’s creditors cannot come after the assets in an irrevocable trust for a child

This is because the grantor no longer owns the assets. 

Since the grantor does not own the assets, they are no longer a part of their taxable estate. 

Custodial Accounts (UGMA/UTMA)

Custodial accounts are financial tools used to hold assets for a minor’s benefit. 

The names UGMA and UTMA come from:

These laws allow adults to transfer assets to a minor without creating a trust fund for kids.

Here’s how a custodial account for minors works:

  • An adult opens the account for a minor (the beneficiary) and manages it. This person is the custodian.
  • Money, securities, or other property gets placed into the account by the custodian or other contributors. These are considered irrevocable gifts to the child.
  • The custodian manages the account until the child reaches the age of majority, typically 18 or 21, depending on state law.
  • At the age of majority, the beneficiary gains control of the account and can use the assets as they wish.

UGMA and UTMA accounts have some tax advantages

The first portion of the account’s income is tax-free, and the next portion is taxed at the child’s tax rate.

The child’s tax rate is typically lower than the custodian’s rate. 

However, larger amounts may be taxed at the custodian’s rate.

One potential drawback is that custodial accounts can impact a child’s eligibility for financial aid for college. 

The assets in a UGMA or UTMA account are considered the child’s assets.

Therefore they can reduce the amount of aid the child qualifies for.

529 Plans

A 529 plan is a type of savings account that helps parents save money for their child’s future education costs. 

This includes tuition for K-12, college, and even postgraduate studies.

These plans are unique because they offer tax advantages. 

Any money you put into the plan will grow tax-free.

And when you withdraw the funds to pay for education costs, you won’t have to pay taxes on the earnings.

There are two main types of 529 plans:

  1. Education Savings Plans: These allow you to invest your contributions in mutual funds or similar investments. The account value can go up or down based on the performance of the chosen investments.
  2. Prepaid Tuition Plans: These let you pay for units or credits at participating colleges and universities in advance, effectively locking in the current rates.

But, a child’s trust fund assets are managed by a trustee for the benefit of the child. 

Trusts can be more versatile than 529 plans as they aren’t just for education costs. 

They can also be set up to provide for:

  • a child’s living expenses
  • healthcare
  • even to transfer wealth to future generations

Special Needs Trusts For Kids

A Special Needs Trust is designed to benefit a child with special needs. 

The trust holds and manages assets for the child’s use. 

It’s structured in a way that allows the child to still qualify for government assistance like:

  • Medicaid 
  • Supplemental Security Income (SSI)

Here’s how it works:

  1. You set up the kid’s trust and fund it with assets. These assets can include cash, investments, real estate, or other property.
  2. You appoint a trustee. This person manages the trust assets and uses them for the child’s benefit.
  3. The trustee has the power to use the trust assets to provide for the child’s needs, over and above what government benefits cover. This can include expenses like education, recreation, personal care, and more.
  4. Since the trust technically owns the assets, they aren’t counted when determining the child’s eligibility for government benefits.
  5. After the child’s passing, any remaining assets in the trust can be distributed to other beneficiaries, as specified in the trust agreement.

Life Insurance Trust For Children

A life insurance trust for a child is a specific type of irrevocable trust. 

It’s designed to hold a life insurance policy. 

Here’s how it works:

  1. You, as the parent, create the trust and name it as the owner and beneficiary of your life insurance policy.
  2. You name your children as the beneficiaries of the trust.
  3. You appoint a trustee to manage the trust. This person will be responsible for managing the life insurance proceeds if you pass away.
  4. Upon your death, the life insurance company pays the policy’s death benefit directly into the trust.
  5. The trustee then manages these funds according to the trust’s terms, distributing them to your children as specified.

The main benefits of this setup include:

  • avoiding probate (the legal process that transfers assets upon death) 
  • controlling over how and when your kids get the life insurance proceeds

Next, let’s talk about how to start a trust fund for a child.

How To Set Up A Trust Fund For A Child

Let’s look at everything you need to consider when setting up a trust fund for a child.

Understanding Your Goals

Here are the steps to understanding your goals when setting up a trust fund for a child:

  1. Evaluate Your Financial Status: This initial step involves assessing your total income, assets, and liabilities to understand your financial health. It’s essential because it helps determine how much you can allocate towards the trust fund initially and over time.
  2. Define The Purpose Of The Trust Fund: Here, you identify the reason for setting up the child’s trust fund. It could be to support your child’s education, to ensure their future financial security, or to protect their assets from potential creditors. This purpose will guide you in choosing the right type of trust and its subsequent management.
  3. Determine The Beneficiary: The final step is to decide who will be the recipient of the trust assets, typically your child. However, it’s also important to consider who will benefit if unforeseen circumstances occur. Deciding the beneficiary requires careful planning to guarantee that your wishes for the trust fund are fulfilled.

Our trust attorneys can help you figure out how to set up a trust for your goals. 

Choosing The Right Type Of Trust Fund For Your Child

Choosing the right type of trust fund for a child involves careful consideration. 

Here’s what to take into account:

Factors to Consider

  • Control: Some trusts offer more control over the assets than others. For example, revocable trusts allow you to change the terms or dissolve the trust entirely.
  • Tax Implications: Different types of trusts can have different tax consequences. An irrevocable trust, for example, can help minimize estate taxes.
  • Purpose Of The Trust: If the trust’s purpose is to fund education, a 529 plan or an education trust might be most appropriate.
  • Beneficiary’s Needs: Consider if the beneficiary has any special needs. A special needs trust can be set up to provide for a beneficiary with a disability without disqualifying them from receiving governmental assistance.

Read More: How Much Money Can You Inherit Without Paying Taxes On It?

Comparisons of trusts for kids and your other options. 

  • Revocable Trusts: Flexible and can be changed during your lifetime. Best for those who want control over the trust assets and aren’t as concerned with tax benefits.
  • Irrevocable Trusts: Once established, they generally cannot be changed. This type is beneficial for those seeking to minimize estate taxes or protect assets from creditors.
  • Custodial Accounts (UGMA/UTMA): Simple to set up and manage, but the beneficiary gains control of the assets at the age of majority (usually 18 or 21). Good for smaller amounts of money and when you want the beneficiary to have control when they reach adulthood.
  • 529 Plans: Specifically designed for education savings. They offer tax advantages but are less flexible regarding how funds can be used.

Setting Up The Trust For A Child

Let’s look at how to set up a trust fund for a child.

Setting up a trust fund for a child ensures that funds are available for them for specific uses like:

  • education
  • housing
  • general well-being 

Here’s a general guideline for setting up a trust fund for a child:

  1. Determine The Purpose Of The Trust: Are you setting up the trust to pay for education, to provide for a child after you’re gone, to manage assets until the child is of age, or for another reason? Your goals for the trust fund will affect the type of trust you choose.
  2. Decide On The Type Of Trust: Trusts can be revocable (changeable or cancelable by the trustor at any time) or irrevocable (cannot be easily changed or canceled). They can also be set up to start immediately (an inter vivos or living trust) or to begin after death (a testamentary trust). A trust lawyer can help you decide which type is best for you.
  3. Choose The Assets To Include: You can put a variety of assets in a trust, including cash, stocks, bonds, property, life insurance policies, and more. The assets you choose to include may depend on what you have available, the purpose of the trust, and the advice of your trust lawyer or financial advisor.
  4. Select A Trustee: The trustee will be responsible for managing the trust and its assets, distributing the assets according to the terms of the trust, and potentially other duties as well. You might choose a trusted family member, a professional trustee, or a financial institution.
  5. Draft And Sign The Trust Agreement: This is the document that makes the trust official. It should detail the terms of the trust, the trustee, the beneficiary (in this case, the child), and how the assets should be managed and distributed. You will likely need a trust lawyer to help with this.
  6. Transfer Assets To The Trust: After the trust agreement is signed, the assets can be transferred into the trust. This process varies depending on the type of asset. For example, cash can be transferred to a bank account held in the name of the trust, while transferring real estate would require a new deed.
  7. Continually Update The Trust As Necessary: Circumstances change, and your trust should reflect those changes. Regularly review the trust and consult with your estate planning lawyer or financial advisor to make sure it still aligns with your goals.

Choosing A Trustee

Choosing a trustee for a child’s trust is a critical decision. 

The trustee of the trust fund for your child:

  • manages the trust assets
  • makes investment decisions
  • distributes funds according to the trust terms

Consider these steps:

  • Understand The Trustee’s Role: A trustee is responsible for managing the trust, investing assets wisely, and making distributions to beneficiaries.
  • Identify Potential Candidates: You might choose a trusted family member, a close friend, or a professional trustee, like a bank or trust company. Each choice has benefits and drawbacks.
  • Evaluate Their Financial Acumen: The trustee should be financially savvy, comfortable with investment decisions, and capable of managing assets responsibly.
  • Assess Their Trustworthiness: The trustee will have control over significant assets, so you must trust them implicitly. Their integrity should be beyond question.
  • Consider Their Longevity And Commitment: The trustee’s role may span decades, especially when the trust is for a child. Make sure your chosen trustee is committed to the long term.
  • Contemplate The Use Of Co-Trustees: If you want to involve family but also desire professional oversight, you could name a family member and a trust company as co-trustees.
  • Ensure They Are Willing To Serve: Before finalizing your decision, talk to the individual or institution to make sure they’re willing to take on the trustee’s duties.
  • Review Your Decision Regularly: Life changes can affect your choice of trustee. Regularly reassess your choice, especially when there are significant changes in your or the trustee’s life.

Managing A Trust Fund For Kids

Let’s talk about managing a trust fund for your children. 

Funding A Child's Trust Fund

Funding a trust fund for a child involves these steps:

  1. Identify Assets: List all the assets you want to place into the trust. These could be cash, stocks, real estate, or other valuable property.
  2. Create Trust Document: Write up a trust document. This includes details like the type of trust, who the trustees and beneficiaries are, and how the trust assets should be managed and distributed.
  3. Transfer Ownership: Change the legal ownership of the assets from your personal ownership to the child’s trust. This could involve changing titles or deeds for assets like houses or vehicles, or changing the named owner on bank or investment accounts.
  4. Fund The Trust: Physically transfer the assets to the trust. For cash, this might mean writing a check from your personal account to the trust account. For physical assets, you might need to physically deliver them to the trustee.
  5. Verify the Transfer: Make sure the assets are properly placed in the trust. This might involve checking account statements or property records to confirm the trust is listed as the owner.
  6. Maintain the Trust: Regularly review the trust and add assets as needed over time. The trust should reflect your current situation and wishes, so it might need to be updated if things change.

Investing Trust Fund Assets

The trustee needs to make wise investment choices to increase the value of the trust fund. 

They must consider the risk tolerance, income needs, and financial goals of the beneficiaries. 

They also have to adhere to a legal principle called the “Prudent Investor Rule.” 

This rule requires them to make careful, balanced investment decisions.

Certain investments might not be allowed depending on the trust document and local law. 

Generally, risky or speculative investments are not permissible.

Distributing Trust Assets

Trust assets are distributed based on the terms set out in the trust document. 

This could mean regular payments, one-time payments, or conditional payments.

In distributing assets, the trustee must consider the current and future needs of the beneficiaries. 

They must also consider tax implications as distributions may be taxable to the beneficiary.

Trustees also have to abide by legal rules when distributing assets. 

They cannot favor one beneficiary over another unless the trust document allows for it. 

They can face legal consequences if they don’t follow the trust’s terms.

Read More: Does Your House Have To Be Paid Off To Put It In A Trust

Common Mistakes to Avoid When Setting Up A Trust For A Child

Here are some common mistakes to avoid when setting up for kids:

  • Not Properly Identifying Beneficiaries: It’s crucial to clearly name and identify all beneficiaries. Vague or incorrect details could lead to disputes, delaying fund distribution.
  • Failure To Fund The Trust: Assets must be transferred into the trust. If they are not, the trust is considered “empty”. This can render the trust useless and expose assets to probate or creditors.
  • Choosing The Wrong Trustee: Picking an inexperienced or untrustworthy trustee can lead to mismanagement of funds. This can diminish the value of the trust and harm beneficiaries.
  • Neglecting To Specify Successor Trustees: If a trustee can’t continue in their role, a successor must step in. Without a successor, court intervention may be necessary, which could lead to unnecessary costs and delays.
  • Ignoring Tax Implications: Trusts have tax consequences. Misunderstanding these can lead to unexpected tax burdens, potentially reducing the trust’s value.
  • Overlooking Changes In Personal Circumstances: Changes like marriage, divorce, or the birth of a child should trigger a review of your trust. If not updated, the trust might not reflect your current wishes, leading to unintended distributions.
  • Setting Inflexible Terms: Life is unpredictable and trust terms should account for this. Rigid terms can cause problems, especially if beneficiaries’ needs change over time.
  • Failing To Communicate With Beneficiaries: Keeping beneficiaries informed prevents misunderstandings and disputes. If they’re left in the dark, they may feel confused or suspicious, causing conflict.
  • Not Reviewing And Updating The Trust: Laws and personal situations change over time. If a trust isn’t updated regularly, it might not serve its intended purpose or could even become invalid.

Consequences of these mistakes can include:

  • Reduced Asset Value: If the trust is poorly managed, the trust’s assets may decrease in value.
  • Legal Disputes: Misunderstandings about the trust’s terms can lead to legal disputes among beneficiaries.
  • Unexpected Taxes: If the trust’s tax implications aren’t considered, you or the beneficiaries might face high tax bills.
  • Invalid Trust: If the trust is not properly set up, it could be declared invalid. This would mean the assets are not protected as intended.

Read More: The Biggest Mistake Parents Make When Setting Up A Trust Fund

Set Up A Trust Fund For A Child

If you want help setting up your child’s trust fund, fill out the form below. 

At The Hive Law, we understand the importance of:

  • protecting your hard-earned assets 
  • ensuring your family’s future
  • not losing everything to creditors and lawsuits
  • properly (and legally) distributing assets 

We only accommodate a limited number of clients each month.

So don’t miss your opportunity to work with our trust fund lawyers.

Benefits of our trust services:

  • Tailored solutions to fit your unique needs and goals
  • Expert guidance in navigating complex tax and legal matters
  • Preservation of your wealth for future generations
  • Streamlined asset distribution according to your wishes

Avoid the pitfalls of inadequate estate planning strategies:

  • Creditors seizing your assets
  • Lawsuits jeopardizing your family’s financial security
  • Family disputes over inheritance
  • Costly and time-consuming probate processes

Talk soon.

Get A FREE Consultation!

We run out of free consultations every month. Sign up to make sure you get your free consultation. (Free $350 value.)

Share This Post With Someone Who Needs To See It