How to Invest Children’s Trust Fund
A trust fund for a minor child can be a solid component of a wise overall investment strategy for any parent. As with any investment, an important consideration with respect to where and how the money will be invested is whether the investment is short or long term. With this question in mind, the first rule for the grantor of a trust fund to understand is that once you place money in a child’s trust fund, it belongs to the child. Assets designated into a child’s trust fund are legally considered gifts; thus, you cannot remove them from the trust once you have placed them there, even if you find that you need them for yourself.
Trust funds for children are intended to hold the assets until the child comes of age, which can be 18 or 21, depending upon the state. Thus, the first major consideration in deciding how to invest this money is the child’s current age at the time the fund is established. Just as you would with other investments, you will choose short- or long-term investments based on how long the money will be in the trust.
One of the most popular child trust investments among parents is a college fund. Also called a 529 plan, a college investment plan is a tax-advantaged investment option that permits parents to set aside funds that can only be used for tuition and other “qualified” education expenses by the designated beneficiary. These can be sponsored by state programs or educational facilities and are authorized by section 529 of the Internal Revenue Code.
There are two major types of college plan. The first is a pre-paid tuition program, in which the grantor buys tuition, board, and other education items in advance and generally pays in installments until the child enters college. These programs are frequently state-operated and the child’s expenses can be guaranteed. The other type of college plan is a more traditional investment plan in which funds designated for a child’s tuition are allocated into stocks, bonds and money market funds for the duration of the child’s pre-college years. As with any investment of these types, these are not guaranteed and can hypothetically gain or lose money over time.
Other child’s trust options include a Section 2503 trust or a Section 2503 (b) trust. These trusts invest the money until the child comes of legal age. The primary difference between the two is as follows. A Section 2503 trust allows money and income to be used for the minor child; when he or she comes of age, the remainder is distributed to him or her. With a Section 2503 (b) trust, income from the investment must be distributed annually to the child. However, this income can still be placed into a “custodial” account, with the child only accessing the money on permission of his or her parent or legal guardian. Both types of Section 2503 trust permit the grantor to exercise the gift tax exemption, as the money invested is a gift to the child and is technically being “given” over the course of that year.
<< Back to Trust Fund Articles