How to set up a Trust for a child?

How to set up a Trust for a child?

Trust is a crucial instrument in estate and legacy planning. However, people associate trust with the affluent class. Also, people believe trust is a vehicle for privacy. But trust is a versatile tool that helps to manage the assets and directs them into the right hands upon the owner’s death.

Setting up a living trust secures your estate with a safety net from the intrusion of third parties such as creditors. This blog explains the significance of trust, the types of trust, how a trust works, and guides how to open a trust.

What is Trust?

A trust is a fiduciary relationship in which the trustor gives the trustee the ownership of a property or title for the benefit of the beneficiary. Moreover, a trust is a legal entity with distinct rights similar to a person or an organization. Generally, an individual creates a trust to provide legal protection to the estate. Furthermore, it also helps to avoid the complex probate process and reduce the size of the taxable estate.

Besides managing the assets, you can set up a trust for your minor children or an older child with special needs in your absence. Setting up a trust fund can be a wonderful thing you can do as parents. However,  setting up a trust in the correct way is essential.

How do Trusts for children work?

Regardless of the type of trust, the three entities involved in a living trust are the trustor, trustee, and beneficiary. The “trustor” is the trust grantor who transfers the property’s ownership to a “trustee.”

The trustee manages the assets following the grantor’s wishes as stated in the trust’s agreement for the beneficiary’s benefit. A “trust fund” is the property or the asset transferred from the grantor to the trustee for a specific purpose. A trust fund is the core of trust.

The beneficiary is the entity that profits from the trust fund. Moreover, children are the beneficiaries of a majority of trust. The beneficiaries receive the fund during the grantor’s lifetime or after the grantor’s death. Furthermore, the distribution of the funds might be on a particular condition – the attainment of a certain age, for a specific purpose, or an event.

The grantor might limit the usage of funds to a specific purpose or leave it to the beneficiaries’ choice. Besides, the primary benefit of setting up a family trust is that it protects the asset from a legal claim.

What are the 3 types of Trust?

Before knowing how to open a trust fund, it is essential to understand the basic types of trust. There are different categories of trust established for different purposes. Hence, determining the type of trust appropriate for your purpose is essential. The following are the three primary types of trust:
  • Revocable Trust
In a revocable or living trust, you cannot modify the terms at any time, according to the grantor. Hence, it provides flexibility and income to the grantor. Moreover, the grantor can change the terms, remove assets, and terminate the trust in a revocable trust. However, since there is considerable control over the trust, a revocable trust is subject to seizures from creditors and third parties.   Generally, a revocable trust is helpful to avoid the lengthy and complex probate process. Also, a revocable trust does not provide estate tax exemption. In brief, this kind of trust helps in estate planning.
  • Irrevocable Trust
On the other hand, you cannot change a revocable trust. And you cannot remove the assets in the trust for any reason. That said, an irrevocable trust provides tax exemption as the assets cannot be altered. Also, it protects your assets from creditors. The disadvantage of this trust is that you cannot revoke the assets and terms. But it provides absolute protection for your assets.
  • Testamentary Trust
A testamentary trust is effective upon the grantor’s death. You can create it through a will, which includes the terms of the trust. A testamentary trust is an excellent instrument to establish trust for minor children and a surviving spouse. They can inherit a portion of the estate through a testamentary trust upon the grantor’s death.   Besides, in a testamentary trust, an estate goes through the probate process, and the executor probates the will and creates the trust. Also, you can create it through a will, and you don’t need to pay for stamp duty. Other trusts Besides the three types of primary trust, you can create a few other trusts for specific purposes.
  • Special needs trust
A special needs trust provides financial assistance for an individual with disabilities. Besides,   setting up a special needs trust for an individual doesn’t reduce their eligibility for government benefits (Social Security, Supplemental Security Income, Medicaid). The beneficiary’s eligibility for the trust is below 65 years of age. Furthermore, the trust should function for the benefit of the beneficiary. Also, the trust pays for costs excluded from Medicare or Medicaid.
  • Family trust for real estate
Setting up a family trust for real estate is a preferred choice for numerous reasons. The primary reason is to avoid probate. When you inherit property through a will, the probate process is inevitable unless it is a “small estate.” Further, the beneficiaries and heirs must wait for several months or even years for the bestowal of the estate. A trust saves time and money involved in probate. Besides the distribution of assets upon the decedent’s death, setting up a trust also covers your wishes when incapacitated.

What type of Trust is best for the kids?

When you set up a trust, you secure your child’s financial future. But, considering the different types of trust, choosing the one that fits your requirement is essential. Moreover, deciding the type of trust depends on your financial situation.
Value of assets Trust fund
Less than $2,50,000 One-shot fund
$2,50,000 – $1,000,000 Two-tier approach
$1,000,000- $3,000,000 Three-tier approach
Over $3,000,000 Lifetime or dynasty trust

How to create Trust for a child?

The following are the steps to create trust for your child:  
  1. Mention the purpose of the trust.
The first and foremost step while creating trust is to determine your purpose. Answer these questions before you open a trust account:
  • Why are you creating trust?
  • Who will benefit from the trust?
  • What do you accomplish after creating the trust?
  Your purpose molds your direction. Moreover, when you know the trust’s purpose, choosing the type of trust becomes easier.  
  1. Choose the type of trust.
Next, choose the right kind of trust for your child. There are different categories of trust intended for various purposes. The two primary categories are revocable and irrevocable trust. Moreover, the type of trust you choose decides whether you can remove your assets intermittently once the funding starts.  
  1. Decide on the trust funds.
Before you create a trust, determine how you will fund it. Moreover, funding a trust means transferring the ownership of your assets to the trust. The trust fund can be from bank accounts, investments, real estate, life insurance, and artwork. Furthermore, depending on your goals of investments and financial situation, you can determine whether to transfer all the assets in a single trust or create separate trusts for them.  
  1. Decide who will manage the trust.
The most crucial step is to decide who will manage your trust. A trustee is an individual who manages your trust. So, choosing someone trustworthy is essential as they are responsible for managing your trust for your beneficiaries(your children).  
  1. Legally open a trust account and create the trust documents.
The next step after determining the purpose, asset, and beneficiary is legally opening a trust account. So, how to open a trust account? You can open a trust account through the traditional route with the help of an attorney or an online service.    ​​
  1. Transfer the assets into the trust.
The last step in creating the trust is to transfer the ownership of the assets into the trust. Once you have transferred the assets, you have technically funded the trust. Afterward, the trustee can step forward to manage the trust. If you are transferring a real estate property, have a new deed in place. On the other hand, if it is a bank account, investment, or life insurance policy, retitle it in the name of the trust.   Further, the trustee’s responsibility is the management and distribution of the trust following the trust’s agreement.  

Can you set up a Trust without an Attorney?

Setting up a trust is a significant life decision. So, how to set up a trust for a minor? You can set up a trust without an attorney if your estate is simple and consists of a few assets without significant complications. However, you need to consult an attorney when:
  1. Your estate is large and owes an estate tax.
  2. Your estate has conditions.
  3. You need clarification regarding the assets to include in the estate and will.
  4. One of the beneficiaries has special needs and is receiving government benefits.
 

Cost of setting up a trust

Setting up a simple trust through an attorney is about $1,500 to $2,000. For complex trusts, the cost ranges from $2,500 to $5,000. Furthermore, drafting the document may incur additional costs.

Conclusion

Trust is a valuable instrument in estate planning. Trust has many benefits, such as managing assets for your beneficiary and avoiding probate and tax exemption. Moreover, there are different types of trusts under the “umbrella” of trust, each intended for a specific purpose. Once you nail the impending question of “how to set up a living trust,” you are one step closer to giving a secure future for your children or other beneficiaries. We at Clocr help you to create an authentic will to complete your estate plan. A last will is the fundamental legal document for estate planning. Clocr’s exceptional services help you to enlist your assets, assign beneficiaries, and nominate executors hassle-free in 10 minutes. Moreover, it guides you through creating your legacy for your loved ones. Besides, Clocr’s digital estate services secure all your digital assets in one place. In the end, you can save your will in our digital vault. So, to secure the future of your loved ones; Join Clocr today!

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