Trust Funds for Children

Once upon a time, a “trust fund baby” was only the child of extremely wealthy parents.  These children stood to inherit vast sums of money, property, or other valuables, and it was a safe assumption that only the very rich would set up trust funds for their children.  Today, the annual gift tax exclusion and a variety of investing strategies make the establishment of a trust fund an attractive option for many parents who wish to invest wisely or reduce their tax burden by giving away sums of money.  For many, there are no better recipients of this money than their children.

The establishment of a trust fund is subject to both federal and state laws.  While a trust fund can be established for anyone, trust funds for children are exceptionally delicate because the child has no legal rights and can be easily taken advantage of by a third party.  Today, many child protective organizations deal in trust funds to ensure that proper rights are granted to the child and to eliminate the potential abuse and neglect that could plague a child standing to inherit a large sum of money.

With this backdrop, a parent looking to establish a trust fund for his or her child may easily find the process intimidating.  However, with proper education on the subject and sound financial planning, it is possible to initiate and maintain a trust fund that will ultimately ensure the financial health of both the parent and the child.  While details of trust funds for children can differ dramatically, there are certain basic terms and principles that are generally applicable.  Understanding these basic concepts is the first step to navigating the process of setting up a trust.

The person who is setting up the trust, frequently a parent, is the “settlor” or “grantor”.  This is the person who has something – money, stocks, property, or any other item of wealth – to give a child.  Sometimes it is a grandparent who wishes to establish a trust fund for a minor grandchild; in these cases, it is important to realize that the laws governing parent-to-child trust funds do not necessarily apply.

The beneficiary is the person who will inherit the goods.  When this beneficiary is a child, he or she is frequently not permitted to touch the money until he or she comes of age – this age can be 18 or 21, depending on state law.  In the meantime, the assets are managed by a fiduciary, called a trustee.  This person has received instructions from the grantor as to how the money should be handled or distributed and is required to adhere to those wishes.

Depending upon the type of fund, it is sometimes possible for distributions to be made to the child before he or she comes of legal age.  However, because a trust fund is established by parents who are still alive, and because those parents retain their child’s legal rights until he or she comes of age, it ultimately remains at the discretion of the grantor whether or not the beneficiary actually gets the money at this time.

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