A child trust fund isn’t just for the Rockefellers and the Rothschilds of the world. They’re also for normal moms like you and me who want to leave a legacy for our children and our grandchildren, but you also need a child trust fund guide.
What Is A Child Trust Fund
Trust funds are a financial tool associated with estate planning. They represent a separate legal entity that holds assets such as cash and property for the future benefit of a child.
Three terms that are helpful to understand are:
- Trustee – the beneficiary of the trust, or the child
- Grantor – the person who set up the trust
- Trustee – the person or company that manages the assets of the trust
Why Do You Need One And How Does It Differ From A Will
The primary benefits of a trust include tax savings for the grantor and asset protection for the beneficiary.
A trust allows for the distribution of funds over time for a specific event, for example, monthly distributions to pay for a grandchild’s college expenses. With a trust, this is possible before the grantor’s death. A will does not go into effect until a person dies.
With a trust, the specific conditions set by the grantor are met. Where this is different than a will, is the property passed on through a will must enter probate, which can get messy, can cause delays, and can cost extra money. A trust is done outside of the court system so that you can avoid probate.
Types of Child Trust Funds
The most popular type of Child Trust fund falls under the term, Irrevocable Trust Funds (ITF). There are two major types of ITFs – Section 2503 (b) and Section 2503 (c).
Section 2503 (b) Minor Trust Fund – Qualifies for the annual gift tax exclusion based on current limitations. Distributions of the trust income to the child or a custodial bank account must be made on a yearly basis or more frequent basis. Access to the principal at the age of 21 is not required.
Section 2503 (c) Minor Trust Fund – Qualifies for the annual gift tax exclusion. All the money (both principal and income) in the trust must be transferred to the child at the age of 21.
How To Set One Up
There is a lot to consider when setting up a trust fund for your children. Not only are there legal and tax issues to consider, but you’ll also have an emotional impact to think about. For example, you’ll need to consider the individual personalities of your children. Do you believe they will be mature enough to receive a significant distribution of assets at the age of 21? If the answer is no, you’ll want to avoid the Section 2503 (c) fund.
Seek out the counsel of a qualified estate attorney during the process of setting up your trust. Their experience with the federal and state laws will ensure you, your children, and your assets are adequately protected.
Do you have any experience setting up a trust fund for your kids? Tell us about it in the comments below.
Kate Fox is a former CPA, with twenty years of experience in public accounting and corporate finance. Born and raised in Alaska, Kate is currently based out of southeastern North Carolina. She loves coaching others on personal finance and spends her free time traveling with her family or relaxing by the pool with a good book, probably about money.