How to Set Up a College Trust Fund

If you are financially stable, setting up a college trust fund for your child can be a stress-free endeavor. However, there are many different types of trust funds to choose from. You will need to research the pros and cons of the different types, and understand how they will affect your child's taxes and ability to get financial aid from other sources.

Plan early. It is much easier to reach your trust fund goals if you start while your child is young. The younger your child is, the less money you have to contribute to the fund every year.

Research 529 plans. These plans are state-sponsored and are exempt from federal taxes. You can choose from different investment options, such as mutual funds and stocks, that will help your portfolio grow.

Consider taxable accounts. These accounts let you save money for your child in your name. This method will have less of a negative impact on your child's ability to receive financial aid, but the earnings are subject to income tax.

Evaluate UGMAs and UTMAs if you are considering securities or real estate. The Uniform Gift to Minors Act and the Uniform Transfer to Minors Act is a simple way for minors to own securities and, in the case of the UTMA, real estate and other property.

Research Coverdell Education Savings Accounts. These accounts are limited to contributions of $2,000 a year and distributions are tax free if used for education.

Consult a financial adviser. There are even more trust fund options and finding just the right one may require an expert's help.

Calculate how different college trust funds will affect your child's ability to receive financial aid. The 529 plans and UTGAs will strongly affect in a negative way your child's ability to get financial aid. Plans that remain in your name will have less of an impact.

Fill out the appropriate enrollment paperwork for the plan that you choose. This may include declaring your child as the beneficiary and, for some plans, appointing a custodian.

Contribute your initial deposit. Some plans will require you to make investment choices for your deposits.

Add more money to the college fund on a regular basis, keeping track of anything you add for tax purposes. Make sure your contributions are enough to substantially help your child by the time he is old enough to attend college.

Educate your child about his trust fund and any associated restrictions. For example, a 529 is exempt from federal taxes unless the money is taken out for non-educational purposes.