Setting up a trust fund for your child is an important step in their financial security, allowing you to set them up for future success while maintaining some control over how the assets are distributed. It also keeps them away from potential legal complications, including creditors. Here are a few essential tips to remember when setting up a personal trust for a child.
1. Know the Purpose of the Trust
Before you set up a new trust, consider why you want to do it in the first place. The reason for the trust you set up for your child matters quite a bit because it shapes the rest of the plan thereafter.
The purpose of any trust is to serve as a structured mechanism to manage your assets, ensuring that they’re only distributed to help your child according to the letter of the law. It also prevents your children from having to deal with the long probate process before they can benefit from your contributions. You should also make sure that people in your life know about the trust in case something happens to you.
2. Decide on a Type of Trust
When you have an idea of why you’re establishing a trust, the next thing to do is decide on the type of trust. Each one has its own features and benefits, so you need to spend time researching your options. Here are 3 popular types of trusts:
- Revocable Living Trust: With this structure, the grantor retains ownership and control of the assets. They also specify how the assets should be managed once they pass. You can change it as circumstances do, thanks to its flexibility.
- Irrevocable Trust: This structure transfers the assets away from the grantor, creating even more protection from legal claims and creditors. However, once this trust is established, it cannot be modified from its original purpose. Despite the lack of control, it’s a favorable structure for long-term asset preservation.
- Special Needs Trust: Children with special needs necessitate a special needs trust. It allows you to fund their well-being without endangering their ability to receive government assistance.
3. Don’t Forget Tax Obligations
Working with a tax professional can help you understand the tax and legal implications of setting up a trust fund. They can help you minimize potential liabilities while ensuring that you’re in full compliance with state and federal laws, all of which leads to significant savings and ensures the long-term benefit for your children.
4. Prepare to Review the Trust Regularly
It’s always a good idea to review the terms of your trust every so often. Unless you set up an irrevocable trust, you may want to make adjustments based on your children’s evolving needs and other circumstances. Keeping the lines of communication open with your trustee is essential for keeping an eye on their progress and adjusting the trust as necessary.
The Bottom Line
When you’re ready to know more about setting up a trust for a child, or if you still have questions that you would like answered, get in touch with a financial expert. They can give you advice that will guide you down the right path.
