How to Create a Trust for a Child

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When people hear that a child has a trust fund, they often assume that the child is incredibly rich. That isn’t always the case. There are many reasons why parents and guardians would want to create a trust fund, even if they have modest wealth. Knowing how to start and finish this process correctly can be fairly complex, though. There are also a number of mistakes you’ll want to avoid when doing so. If you’re considering making a trust for a child and have questions, consider enlisting the help of a financial advisor.

Four Reasons to Create a Trust for a Child

Families create trust funds for their children for many different reasons. While it’s good to pass along a lifetime of savings to the next generation, some trusts are created to protect children and take care of their financial, health and wellness needs. These are a few of the most common reasons to create a trust for a child:

  1. Minimize or reduce taxes: Through proper structuring of a couple’s estate, you’re able to effectively double the estate tax exemption for assets passed on to your beneficiaries. Also, certain trusts enable investors to avoid taxes on gifts that exceed the annual gift tax exclusion amount.
  2. Avoid probate: When you have a trust, it removes eligible assets from probate court supervision and the fees that the court charges.
  3. Care for disabled children: Disabled children often need care long after caretakers pass away. Certain trusts can take care of them financially, while also preserving their eligibility for government benefits.
  4. Asset protection: It’s possible to shield your assets from judgments and collection efforts with a properly funded trust.

How to Create a Trust for a Child

If you’ve decided to create a trust, here’s how to create a trust for a child in seven simple steps:

  1. Specify the purpose of the trust: What is your primary reason for creating the trust and what do you hope that it will accomplish?
  2. Choose which type of trust: There are many different types of trusts that are effective at handling a variety of financial concerns. They generally fall under the categories of revocable or irrevocable. This decision determines whether or not you can withdraw assets once they’ve funded the trust.
  3. Decide who will manage the trust: The creator of the trust often manages the trust during his or her lifetime, but who will manage the trust once you pass away? It’s a good idea to name alternate trustees in case your first choice declines or passes away before you do. The executor carries out the wishes outlined in the trust. They don’t have to be the same person.
  4. Select assets that will fund the trust: Depending on your goals and financial situation, you may not put all of your assets into one trust. Some investors have multiple trusts based on how they intend to use their assets.
  5. Create the trust documents: When creating the trust documents, think about specific provisions you want to govern when and how your estate is distributed. For example, you may release specific amounts at ages, and life milestones like marriage, pregnancy or earning a degree.
  6. Legally create the trust: Once the trust documents have been created, you’ll formalize the document by signing it and having the appropriate witnesses. Having a third-party notary verify signatures is often a good idea.
  7. Transfer assets into the trust: The trust is not complete until the appropriate assets are transferred into the trust. In most cases, this is a simple title change at the bank or investment company. However, for some trusts, you may have to create new accounts, transfer assets or quitclaim deeds in the name of the trust.

Seven Mistakes to Avoid When Creating a Trust for a Child

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Because creating trust is not something that most investors do regularly, it can be easy to make mistakes. A few of the mistakes you’ll want to avoid are:

Bottom Line

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Creating a trust for a child is fairly simple and quick. However, deciding what you want to accomplish with the trust may be more complex and take more time. Investors can use trusts to meet different types of goals, so it’s important to discuss them with a competent attorney so they can create the right trust documents. As you’re creating the trust, watch out for mistakes that can derail your carefully crafted estate plan.

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