One of the ways parents and grandparents can help take care of children for the long term is through a trust fund. However, trust funds are complex financial instruments. How to set up and manage one to best benefit children may seem confusing to newcomers. To help, below are five facts about kids’ trust funds you should know.
How a Trust Fund Works
This kind of trust fund is a fund set up with a child or children named as the beneficiaries. The one who places the assets into the fund is known as a grantor. The funds are then managed by a person named a trustee as guided by the grantor’s instructions. More than one trustee is also possible. The fund will then pay out to a beneficiary or beneficiaries as either a single lump sum payment or as installments. Property other than money can be similarly placed into the fund.
Timing Matters
A very important component of children’s trust funds is when they are set up to pay out. There are different options. Do you want the children to receive the assets in the funds while you are alive or after you die? This is something you need to decide. Whether or not the money is given in one amount is another option. For many grantors, they decide to phase the payments out. For example, the child could be paid a set sum every five years instead of given a lump sum. This could lead to wiser spending of the funds.
They Can Promote Certain Expectations
Some trust funds are set up with certain expectations in mind. A common one is requiring the beneficiary to first obtain a college degree before receiving access to the funds. Another option is the trust fund may require a child to take a role in the family business. Some trust funds even require drug and alcohol tests to insure that the beneficiary is living a moral and healthy life style.
Taxes Are Important
In the US, trust fund payments are routinely taxed far higher than the tax rates given to other taxpayers that received their income through regular employment. This is why changes in the tax code are extremely important for trust funds. One way to avoid some of the taxes associated with trust funds is to set up an irrevocable trust that pays its own taxes.
It Gives You More Control
One of the key reasons to set up a trust fund for children is to exert more control over how your assets will be used after you’re gone. The alternative is the process of probate. Probate is the legal process of interpreting a will to determine how a person’s assets will be divided between beneficiaries. Without a will, the government will decide. A trust fund can give you much stronger control over the entire process and save the beneficiaries the trouble of any legal fees or family in-fighting.
