Setting up a trust for a child isn’t exclusive to ultra high net worth families. In fact, creating a trust for a child may be one of the smartest things many parents can do for their children.

There are several very good reasons why parents of even modest means may want to consider establishing a trust for their child, including:

• Provide funding for children with special needs for after the parents are no longer around
• Maintain the parents’ ability to control distribution of income and assets to the child, which is especially important if the child is underage, a young adult or the child has addiction issues (e.g., gambling, drugs, alcohol)
• Protect assets from lawsuits and creditors
• Protect a child’s inheritance in the event of a divorce
• Keep assets out of the probate process
• Potentially reduce estate taxes in the future; this is primarily a benefit to wealthy households given the current gift and estate tax exemption of $12.92 million ($25.84 million per married couple)

Features of a Trust

A trust—which is different from a will—may be set up to fit the particular circumstances and goals of the parents. Payment options can be spelled out in the trust’s provisions at the time of creation. For example, they may dictate that distributions be made at one of the following:

• A rate of x%/year
• A set dollar amount/year
• The trustee’s discretion (e.g., to pay for child maintenance and support, such as food, clothes, education, etc.)
• The child’s discretion upon attainment of a prescribed age, but capped (yearly)
• Prescribed ages (for instance, one-third of the trust at age 25, one-half of the trust at age 35 and 100% of the remaining assets at age 45); it’s generally not a good idea to transfer large amounts of money to young adults since they may not have the experience to use it wisely or it may discourage starting a career

The method used for trust distributions may also differ by the size of an inheritance. For example, for assets under $300,000, the trust may pay out a lump sum at a certain age. For inheritances between $300,000 and $1.5 million, then perhaps there is a tiered approach based upon attainment of different ages (e.g., 50% at age 30 and 100% at age 40). Perhaps the age triggers are more thinly sliced and go higher for asset levels in excess of $1.5 million.

In any event, individuals should seek the counsel of an experienced trusts and estate attorney to determine what best works for their situation and involve their financial professional in the prudent investment management of the trust’s assets.

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