I recently realized I should set up a trust fund for each of my children. There is a strong stigma with a “trust fund baby”, but a trust fund for kids is actually extremely common and does not necessarily mean the family is wealthy or the child is spoiled. The trust fund is set up so that if the parents are not around for the child, the child has assets to survive.
The goal is to give your children money the right way and not to spoil good kids.
A major trust benefit is that the money held in trust for your children can be protected from a lawsuit against you or if you go bankrupt. However, this is money you cannot touch again – it legally belongs to your children. To gain this legal protection, the trust must be irrevocable.
I am going to try to put this together myself using a template. I have had pretty extensive legal experience, but I am not an attorney and this is not legal advice. This is me documenting my journey.
Things to think about:
- Pick the right trustee (a parent while one or both are alive, have clauses in there to adjust for divorce, and someone trusted if parents are dead)
- Limit what children can withdraw money for before the age of 25 to survival needs, education… not for toys or trips. Or I could use a lifetime trust to protect again “problem” children… those who have a drug or gambling problem for whom a cash amount could be fatal.
- How to handle the death of a child… direct to that child’s children or if they have none to my other children.
- Make the trust irrevocable to protect it from your own bankruptcy or legal judgement against you.
- The IRS legally allows you to gift up to $15,000 per year per child in 2020 tax free. You still pay taxes on your own income, but you do not need to pay gift taxes.
An interesting alternative to a trust fund is a gift under the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA. These allow you to transfer property to a child and for the donor to retain control and handling of the property for the benefit of the child. It does not require a legal document. Accounts need to have the child’s social security number.
It looks like the Crummy Power Trust might be the way to go from the previous article. It allows the trust to circumvent the need to distribute principal at age 21 and the mandatory annual income distribution by giving the beneficiary the power to demand the trust property when transferred to the trust for a specific time period.