As a parent, you naturally want to ensure your child is provided for – not just today but into adulthood and beyond. Setting up a trust fund is one powerful way to secure their future finances for years to come.
But with complex legal and tax considerations around trusts, how do you set one up correctly?
In this guide, we’ll walk through the key steps so you can confidently establish a trust fund for your child.
Choosing the Right Trust for Your Goals
The first major decision is selecting what type of trust is right for your unique situation and intentions. Common options include:
- Revocable Living Trust: Allows you to control assets in the trust during life but have them transferred directly to beneficiaries upon death without probate. Offers flexibility to change terms later if needed.
- Irrevocable Trust: Once created, cannot be altered easily. However, protects assets from creditors and removes them from your taxable estate.
- Testamentary Trust: Created by instructions in your will rather than during life. Comes into effect when you pass away. Lets you set customized distribution rules for inheritance.
Factor like how much control you want to retain, your child’s age, estate tax considerations, and asset protection should guide which option works best. It’s wise to consult an estate planning attorney to match the type of trust to your specific goals.
Choosing the Right Trustee
The trustee oversees trust assets on behalf of beneficiaries based on the parameters you set. For a trust fund for your kids, common options include:
- Yourself – Especially with revocable trusts, you can manage assets directly during life. Gives maximum oversight and control. Transition instructions upon death or incapacity should be included.
- Spouse – Many married couples name their spouse first, children second in succession guidelines. Allows spouse to oversee investments to provide for household/kids.
- Adult Child – If children are older, you may want them to manage assets you leave for their own kids. Outline instructions and oversight rules clearly.
- Bank or Trust Company – Institution trustees offer professional management, but for significant fees. Often used in conjunction with a trusted family member or friend who can keep costs down.
Choose trustees carefully based on financial responsibility and aligning values/priorities. You can name multiple backups as well in case your first choice cannot serve.
Outlining Trust Rules and Guidelines
The power of trusts come from putting guidelines around inheritance in writing rather than simply leaving a lump sum. Critical issues to consider include:
- Distribution Schedule – When/how can beneficiaries access principal? Staggered ages (1/3 at 25, half the balance at 30, remainder at 35, etc.) encourages maturity.
- Incentives – Include incentives for positive behaviors like pursuing higher education or volunteering? Or penalties if caught using illegal substances? Outline enforcement policies.
- Oversight Rules – Require beneficiary communication with trustee by a certain age? Set policies limiting frivolous purchases among minor beneficiaries?
- Investment Expectations – Require the trustee to meet annual return benchmarks through prudent investing? Or use an institutional trustee obligated to established regulations?
Draft clear trust terms focused on your child’s needs and maturity level. Don’t be afraid to get creative incentivizing responsibility. The trustee simply administers what you outline.
Funding the Trust
A trust is useless if not properly funded with assets. Options like bank accounts, investment accounts, real estate, life insurance, and more can go into the trust while you’re alive.
Upon death, the trust can also be funded with assets that have named the trust as a beneficiary, like retirement accounts or additional insurance. Be specific about what should fund the trust vs what gets distributed directly to heirs.
Ideally, trustees should be provided ample assets to grow over time rather than just enough for short-term school expenses. This way the trust retains purpose through adulthood and the next generation.
Tax Considerations for Trust Fund Assets
One mistake that sinks many trust funds is not realizing all income distributed to beneficiaries may face taxation. Work with an advisor to position assets wisely and understand capital gains rules.
Trusts themselves face complex taxation if large enough. Consider things like:
- Generation-skipping tax when assets pass to grandchildren
- High trust tax brackets for undistributed income
- State trust taxes in certain areas
No one likes surprise taxes chipping away at hard-earned assets. So, do your homework on the tax implications beforehand.
Get Help From an Experienced NY Trust Lawyer
The many technical and legal aspects involved demonstrate why creating trusts with no guidance is playing with fire. Instead, work with an estate planning attorney to ensure everything aligned properly for your situation and jurisdiction.
This gives you personalized recommendations rather than a vague internet template. It also provides confidence through another set of expert eyes reviewing your trust agreement.
Finally, the right attorney can coordinate with your financial advisor, accountant, and even trustees. This unified effort is vital to execute seamlessly when assets ultimately transfer according to the trust’s instructions down the road.
For personalized guidance on structuring the ideal trust fund for your child’s needs, contact The Browne Firm in NYC to schedule a consultation. With years of experience setting up customized trusts for New York area families, their team can help ensure everything is structured properly from the start.
