How to Set up a Trust Fund for Your Child

As parents, we want the absolute best for our kids. We work hard to provide for them, to give them opportunities and advantages we may not have had ourselves. But have you thought about how to protect what you’re leaving behind, not just after you’re gone, but later in life or even right now?

Setting up a trust for your child is one of the smartest financial moves you can make as a parent. Simply put, it’s a way to make sure the money and assets you’ve earmarked for your kids are safely tucked away until they really need them.

Maybe you envision that trust fund covering college tuition and helping them become debt-free grads. Or maybe it’s a safety net to fall back on if they run into tough times as an adult. Unlike a UTMA account where funds are visible, a properly designed trust can shield the assets and provide confidentiality in addition to other sought-after and unique benefits tailored to your child’s future needs. Either way, a trust ensures what’s meant for your child’s future actually benefits them when that time comes.

What is a Trust?

A trust is a legal arrangement in which you (the grantor) transfer assets to a trustee, who can be yourself, a co-trustee, or an outside party, to hold and manage those assets for the benefit of your designated beneficiary (in this case, your child).

To be clear, we are talking about a trust which is carefully designed by a qualified attorney, not found online and definitely not a “trust account” at a bank or brokerage firm where an attorney did not specifically draft an agreement for you.

Think of it as a secure vault, carefully guarded by a trustee, ensuring that your child’s inheritance remains intact and accessible when the time is right.

Now, trusts come in two types: revocable and irrevocable. When assets are transferred to a revocable trust, you can choose to maintain more control over the assets and the terms of the trust, while assets transferred to an irrevocable trust provide stronger asset protection with the tradeoff of limiting certain powers or flexibility the revocable trust offers.

Types of Trusts

Underneath the overarching revocable and irrevocable trust types, there are several ways you can structure a trust for your child’s benefit. Let’s explore a few:

• Living Trusts: These trusts take effect during your lifetime and can be revocable or irrevocable. They’re particularly useful for managing assets while you’re alive and ensuring a smooth transition of ownership of ownership and/or benefits to your child directly or for his or her benefit indirectly if kept in a trust.
• Testamentary Trusts: These trusts are created through your will and become effective after your death. They’re often used to provide for minor children or those with special needs.
• Supplemental Needs Trusts: Designed specifically for children with disabilities, these trusts ensure that your child’s inheritance doesn’t disqualify them from receiving essential government benefits while still providing supplemental care and support where the government program does not fully or partially cover certain expenses, amounts or other usages of funds.
• Generation-Skipping Transfer Tax Trusts: These trusts are designed for tax planning purposes to transfer assets to grandchildren, skipping over the children’s generation to take advantage of certain exemptions and minimize estate taxes.

Each type of trust has its own nuances and advantages, and our experienced attorneys can guide you in selecting the right one for your family’s unique circumstances.

Why Set Up a Trust for Your Child?

While the idea of setting up a trust may seem daunting, the benefits it provides for your child’s future are invaluable.

Protecting Assets and Minimizing Taxes

One of the primary reasons to establish a trust is asset protection. By transferring assets into a trust, you’re shielding them from potential creditors, lawsuits, or even your child’s future divorce proceedings. It’s a proactive measure that ensures your hard-earned wealth remains intact and benefits your child as intended.

Additionally, trusts can offer significant tax advantages. In New York, properly structured trusts can help minimize estate and gift taxes, ensuring that more of your assets are preserved for your child’s financial security.

Providing for Special Needs and Ensuring Lifetime Care

For families with children who have special needs or disabilities, a trust can be a lifeline. Supplemental Needs Trusts are designed to provide supplemental care and support without jeopardizing your child’s eligibility for essential government benefits like Medicaid or Supplemental Security Income (SSI).

Moreover, if your child requires long-term care or support, a lifetime trust can ensure that their needs are met throughout their life, providing a sense of security and peace of mind for you as a parent.

Planning for Their Future

Setting up a trust is a powerful way to plan for your child’s financial future. You can structure the trust to cover important milestones and expenses, such as college tuition, a down payment on a first home, or even starting a business.

By carefully crafting the terms of the trust, you can ensure funds are distributed in a way that provides financial security while instilling valuable money management skills. Key considerations include whether to keep assets in an ongoing trust versus full distribution, making distributions mandatory or discretionary by the trustee, releasing funds in a lump sum, staggering over time, or tying to specific ages or life events.

Many choose to create “incentive trusts” that distribute only when beneficiaries reach defined goals, using the money as a meaningful reward for achievement rather than an entitlement. This facilitates responsibility, avoiding the risks of beneficiaries undervaluing freely given funds or wasting the inheritance.

The Process of Setting Up a Trust for a Child

Now that you understand the importance of trusts and their potential benefits, let’s dive into the process of setting one up for your child.

Step One: Choose the Right Type of Trust

The first step is selecting the appropriate trust type based on your child’s specific needs and circumstances.

• Are they a minor? Do they have special needs?
• What are your long-term goals for their financial security?
• Are they likely to be influenced by others to give or spend the money in a wasteful or nonproductive manner?
• Do you want to be proactive for you and/or your child to be eligible for government assistance in the future? Medicaid for example has a 5 year look back rule on transfers or gifts.

These are just a few of the factors our experienced attorneys will consider when guiding you through the selection process.

Remember, choosing the right trust is crucial because it will determine how the assets are managed, distributed, and protected. It’s a decision that shouldn’t be taken lightly, and our team is here to ensure you make an informed choice that aligns with your family’s best interests.

Step Two: Fund the Trust

Once you’ve selected the appropriate trust, it’s time to fund it. This involves transferring assets into the trust, such as cash, securities, real estate, or other valuable possessions. Our attorneys will guide you through this process, ensuring that all legal requirements are met and that the trust is properly funded to achieve its intended purpose.

Step Three: Manage and Administer the Trust

Next comes the management and administration of the trust. This is where you or someone else acting as trustee ensures that the trust assets are managed and distributed according to the terms you’ve established.

Our team can assist you in selecting a trustee – whether it’s a family member, a trusted friend, or a professional trustee – and provide guidance on their roles and responsibilities.

Step Four: Review and Update the Trust

Regularly reviewing and updating the trust is also crucial as your family’s circumstances evolve or unexpected life events occur. Our attorneys will ensure that the trust remains aligned with your goals and adjusts to any changes in your child’s needs or the legal and financial landscape.

Working with an Estate Planning Attorney

Estate planning laws in New York can be intricate and ever-changing. Our team of attorneys stays up-to-date with the latest regulations, ensuring that your trust is structured in compliance with all legal requirements. From properly transferring assets to minimizing tax liabilities, we’ll navigate the complexities on your behalf, providing you with peace of mind and ensuring that your child’s trust is rock-solid.

Every family is unique, and so are their needs and goals. At Katz Law Firm, PLLC, we understand this, which is why we pride ourselves on our ability to customize trusts to fit your specific circumstances and work in tandem with your other estate planning documents and non-trust financial planning. Whether it’s incorporating distribution schedules, incentives, or other provisions, our attorneys will work closely with you to craft a trust that truly reflects your family’s values and aspirations.

Communication is key in this process. We encourage open and honest dialogue, ensuring that we fully understand your goals and can adjust the trust accordingly, design and create flexibility in the trust agreement, or use other estate planning tools to accommodate.

Are you ready to take the first step in protecting your child’s financial future and securing peace of mind for your child and the rest of your family? Contact Katz Law Firm, PLLC, today to schedule your consultation.