How to Set Up a Trust Fund for Your Child

by David Carnes

    You can set up a trust to distribute assets to your child gradually.

    parents with child sit at table in room image by Pavel Losevsky from Fotolia.com

    Establishing a trust fund is one way to transfer assets between generations. With the right type of trust, you can distribute assets to your child both before and after you die, without subjecting your child to the expenses and delays of the probate process. Depending on how you set it up, you may also enjoy significant tax benefits.

    Parties

    The creation of a trust requires at least three parties -- the grantor, the trustee and the beneficiary. If you own trust assets jointly with your spouse, you should name both yourself and your spouse as grantors -- the property owners who are transferring assets to the beneficiary, your child. The trustee is the person who manages the property for the beneficiary. If you prefer, you can name yourself as trustee. If you name yourself as trustee and you want the trust to continue after you die, however, you need to name a successor trustee. Alternatively, you can name another individual or even a trust company as your trustee. If you plan to distribute assets to your child before he reaches the age of majority, you might appoint someone to manage his distributions from the trust until he becomes an adult.

    Documentation

    A living trust is established by creating a declaration of trust, a document that takes trust assets out of the jurisdiction of the probate court. The declaration of trust should name all parties to the trust as well as any successors. Most importantly, it should set out specific instructions that tell that trustee what to do with trust assets. Trusts are quite flexible instruments -- you might have your trustee distribute assets all at once, distribute them gradually both before and after you die, or even invest trust assets and distribute only investment profits to your child. You should also state whether the trust is revocable or irrevocable during your lifetime.

    Assets

    Transfer the titles to titled trust assets such as real estate, automobiles and bank accounts into the name of the trustee in a form such as "John Doe, Trustee of the Smith Family Living Trust." This format makes it clear that the trustee is holding trust assets for the beneficiary rather than for himself. You might also make a list of untitled trust assets, such as household furnishings, to attach to the declaration of trust as an appendix.

    The Testamentary Trust

    A testamentary trust differs from a living trust in two ways -- it doesn't take effect until you die, and it is created by the terms of your will. Testamentary trusts contain the same terms as living trusts, but can be quite complex in some cases. The probate court will have jurisdiction over your trustee until the trust terminates. Because the trust doesn't take effect until you die, it is necessarily irrevocable. In many cases, the grantor will provide that the remaining assets of a testamentary trust are to be distributed to the beneficiary as soon as he reaches the age of majority.

    Getting Help

    Creating a trust can be tricky. For this reason, you might hire a local lawyer to set up a trust for you if you will contribute substantial assets to it. Alternatively, you might take advantage of online resources (please see Resources section) that offer templates, or software that allows you to create a declaration of trust. Since every trust is different, be sure to individualize your declaration of trust to fit your needs and your state's laws.

    Photo Credits

    • parents with child sit at table in room image by Pavel Losevsky from Fotolia.com

    About the Author

    David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.

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