Setting up a Trust Fund for a Minor
The thought of having your children grow up without you is enough to make any parent stop in their tracks. You plan to be with your children to see them grow and enjoy life, but it’s important to consider that something might happen to both you and your spouse. I’m sure you have planned to leave money or your children through life insurance, but have you thought about how your child would handle becoming wealthy in the wake of grief?
Trust me, they would need help.
Don’t worry, it’s not too late to set up a trust. You can take that critical step now and create a trust fund that will be distributed to reflect your wishes to leave assets to your children or grandchildren to set them up for future financial success, and it’s important to know that these plans are not just for the wealthy. A trust fund can easily work to specify how your loved ones manage and distribute your assets in certain ways regardless of your net worth.
What is a trust fund?
Before we go any further, it is important to understand what a trust fund is. A trust fund is an estate planning tool that establishes a legal entity to hold property or assets for a person or organization until the time comes to pass those assets on to your chosen recipients.
How does a trust fund work?
There are three parties involved when it comes to a trust fund: the grantor, the trustee, and the beneficiary. The guarantor is the person who sets up the trust, the trustee is the individual who holds or manages it, and the beneficiary is the person who has been chosen to receive said funds.
Assets that may be held by a trust includes: cash, stocks, mutual funds, bonds, real estate, and other valuable property. When you place assets in a trust you are able to pass trusts to someone in a structured way, and can even impose rules for the assets acquired.
Should I set up a trust for my child?
A trust fund offers a solid estate planning tool for those who want more control over their assets than a will can provide. Assets of minor children should always be held in a trust. You do not want children under 18 to inherit assets, but instead, ensure there is a conservator who is able to control the money for them as a qualified trustee.
Trust funds differ from most other estate planning tools as they enable the grantor to specify how children will receive funds, and allow for funds to even by designated towards significant expenses such as college tuition or a down payment on a house.
4 Mistakes parents make when setting up a trust fund.
Trusts require foresight on the part of the person drafting them. To avoid falling victim to common mistakes when drafting a trust for minors, pay close attention to our 4 mistakes parents often make.
- Being 18 is not easy.
In most states, a conservator must turn over control of assets when a child is 18. However, when you are eighteen a large sum of money makes one feel as though it will last a lifetime. The money is then spent living a lifestyle that they cannot afford to maintain forever. If you were able to flash forward twenty years you will more than likely find an individual who has little money left and is incapable of supporting himself.
- Create separate shares for your children.
At Trust Company of Oklahoma, we recommend dividing a trust into separate shares for each child. That way when you are gone there is no need for arguing about who gets how much of what. It is thus laid out for them requiring no questions to be asked.
- Plan for a child’s death.
What happens to the trust money in an event that a child died and there is still money left in a trust? This is something that often parents do not take into consideration when setting up a trust fund, but they most definitely should. You have the ability to designate any money left over to go to their future children, if any, or even your remaining children.
- Consider distributing trust funds in stages known as a Lifetime Trust.
If you are confident in your child’s ability to handle money, consider allowing them access to trust money in stages. For example, a quarter when they turn 18, a quarter at 25, a quarter at 30, and the final quarter at 35. In the same realm, consider bringing a child on as a co-trustee at the age of 25 so that he is able to get used to managing trust money. This tactic is especially helpful if you have a child who has a substance problem such as drug addiction or gambling addiction.
What happens without a trust?
If you and your spouse die without a trust, a court will select a guardian to oversee your assets. The law will then determine how your money will be spent and require anything outside of those parameters to need court approval. Then at 18, your child will be given full control of the money, which is you can imagine is a huge responsibility for a child.
Take the next step.
There is a lot to consider when setting up trusts for children, but it is important that you not let the considerations overwhelm you and keep you from planning. Building and protecting your assets is our top priority at the Trust Company of Oklahoma. Our Trust Services team is ready to help you ensure that your assets are not squandered at your death or incapacity. Connect with us today to discuss creating a trust fund for your child.