How to Set Up a Trust for Your Child in 5 Steps
09 Jan How to Set Up a Trust for Your Child in 5 Steps
You don’t have to be rich to set up a trust fund for your child. In fact, it’s a move every parent should make. Setting up a trust fund can help secure your child’s financial future by protecting their inheritance from taxes, probate, and creditors. It also gives you more control over when and how their inheritance will be distributed. We explain the basics in this step-by-step guide.
How to Set Up a Trust for Your Child
Step 1: Decide on the type of trust.
There are two main types of trusts: revocable and irrevocable. A revocable or “living” trust allows you to make changes during your lifetime, as you see fit. But with an irrevocable trust, the assets cannot be removed or altered at any time, and the terms of the trust are set in stone.
Most people prefer a living trust, however, in certain situations, an irrevocable trust has its advantages. For example, the assets in an irrevocable trust are safe from lawsuits, and an irrevocable special needs trust can protect your child’s eligibility for government benefits.
Step 2: Decide who will manage the trust.
Name a trustee who can manage the trust and distribute its assets according to your instructions. This could be your lawyer, a relative, your financial advisor, or a trust management agency. Whether you are setting up a revocable or an irrevocable trust, you can be the trustee during your lifetime. However, you’ll need to appoint a successor trustee who can take over those responsibilities if you pass away.
You’ll also need to appoint a custodian who can manage the funds on your child’s behalf until they come of age. This can be the same person that you named as guardian in your will, or anyone else that you trust to manage your child’s finances.
Step 3: Decide on the terms.
When do you want the funds to be distributed? How much do you want each distribution to be? Do you want to stipulate certain amounts for milestones like graduating from college, having a child, buying a house, or getting married?
It’s not always wise to make the entire trust fund available to your child as soon as they come of age. Young adults are not always financially responsible, and inheriting a large sum of money all at once could have other financial ramifications as well. Talking to your financial advisor or an estate planner can help you decide on the right strategy for distributing your child’s inheritance.
Step 4: Prepare the documents.
Next, you’ll need to draft your trust documents. Much like a will, you’ll need to sign the trust documents in the presence of witnesses. You might also want to have the signatures notarized by a third party. But before you proceed, it’s important to make sure that your documents are legal and valid.
DIY estate planning is extremely risky—it’s far too easy to make a mistake or leave out an essential piece of information. If you establish a trust, the best thing you can do is consult an estate planning lawyer. They can advise you on the best type of trust to choose, which stipulations to include, and which assets to fund the trust with, based on your goals and your plans for your child’s future.
Step 5: Fund the trust.
Decide which assets you want to use to fund the trust. Until you actually transfer ownership of those assets to the trust, it will be useless. Many types of assets can be included in a trust, from investment accounts and shareholdings to real estate, cars, or even jewelry.
To fund your trust, you may need to set up a new bank account, change the beneficiary designation on your life insurance policy, or use a quitclaim deed to transfer ownership of titled property. Your estate planning lawyer can help you make sure that your trust is properly funded and that all of your documents are in order.
Estate Planning Made Easy for Every Parent
Setting up a trust fund for a child can be complicated, but you don’t have to do it on your own. Whether you’re a new parent, a grandparent, a single parent, or the parent of a special needs child, the team at Phelps LaClair will be with you every step of the way. We’re a family firm that’s dedicated to helping Arizona families create and manage sound estate plans. We can help you leave a legacy and secure your child’s financial future—give us a call to schedule a free consultation today.
Photo by Guillaume de Germain on Unsplash used with permission under the Creative Commons license for commercial use 1/4/2024.
