How to Set Up a Trust for a Child
Trusts are crucial instruments in estate and legacy planning, often associated with the affluent. However, trusts are versatile tools that help manage assets and ensure they go to the right hands upon the owner’s death. Setting up a living trust secures your estate from third-party intrusions like creditors. This blog explains the significance of trusts, the types of trusts, how they work, and how to set up a trust for a child.
What Is a Trust?
A trust is a fiduciary relationship where the trustor gives the trustee ownership of a property or title for the beneficiary’s benefit. Trusts are legal entities with distinct rights, similar to a person or organization. Typically, individuals create trusts to provide legal protection to their estate, avoid the complex probate process, and reduce the size of the taxable estate.
Besides managing assets, you can set up a trust for minor children or older children with special needs in your absence. Setting up a trust fund can be a wonderful thing parents can do. However, it’s essential to set up the trust correctly.
How Do Trusts for Children Work?
Regardless of the type of trust, three entities are involved: the trustor (grantor), trustee, and beneficiary. The trustor transfers ownership of the property to a trustee, who manages the assets according to the grantor’s wishes as stated in the trust agreement. The trust fund is the property or asset transferred from the grantor to the trustee for a specific purpose.
Children are often the beneficiaries of trusts. They receive the funds either during the grantor’s lifetime or after their death. Distribution of funds might depend on specific conditions, such as reaching a certain age or for a specific purpose.
Types of Trusts
Understanding the basic types of trusts is essential before setting up one. Here are the three primary types:
- Revocable Trust:
- Allows modification of terms at any time.
- Provides flexibility and control to the grantor.
- Subject to creditor claims due to considerable control.
- Useful for avoiding probate but does not provide estate tax exemption.
- Irrevocable Trust:
- Cannot be changed or revoked once established.
- Provides tax exemption and asset protection from creditors.
- Offers absolute protection for assets but lacks flexibility.
- Testamentary Trust:
- Effective upon the grantor’s death.
- Created through a will, specifying terms and conditions.
- Suitable for minor children and surviving spouses.
- Estate goes through probate, but the trust doesn’t require stamp duty.
Other specific trusts include:
- Special Needs Trust: Provides financial assistance for individuals with disabilities without affecting their eligibility for government benefits.
- Family Trust for Real Estate: Avoids probate and ensures timely distribution of property.
Choosing the Right Trust for Your Child
Selecting the appropriate trust depends on your financial situation and goals. Here’s a guideline based on asset value:
- Less than $250,000: One-shot fund
- $250,000 – $1,000,000: Two-tier approach
- $1,000,000 – $3,000,000: Three-tier approach
- Over $3,000,000: Lifetime or dynasty trust
Steps to Create a Trust for Your Child
- Determine the Purpose:
- Identify why you’re creating the trust, who will benefit, and what you aim to achieve.
- Choose the Type of Trust:
- Decide between revocable and irrevocable trust based on your needs.
- Decide on the Trust Funds:
- Determine how to fund the trust, including bank accounts, investments, real estate, life insurance, and artwork.
- Select a Trustee:
- Choose a trustworthy individual or entity to manage the trust.
- Open a Trust Account and Create Trust Documents:
- Open a trust account with the help of an attorney or online service.
- Transfer the Assets:
- Transfer ownership of the assets to the trust, officially funding it.
Can You Set Up a Trust Without an Attorney?
You can set up a trust without an attorney if your estate is simple and lacks significant complications. However, consult an attorney if:
- Your estate is large and subject to estate tax.
- Your estate has specific conditions.
- You need clarification on which assets to include.
- One of the beneficiaries has special needs and receives government benefits.
Cost of Setting Up a Trust
- Simple trust: $1,500 to $2,000
- Complex trust: $2,500 to $5,000
Additional costs may apply for drafting documents.
Conclusion
Trusts are valuable instruments in estate planning, offering benefits like asset management and probate avoidance. Understanding the different types of trusts helps in choosing the right one for your needs. Once you set up a living trust, you secure a future for your children or other beneficiaries.
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