Get Smart: Could yours be a trust fund baby?

Trust funds: They're strictly for the rich and famous, those with old family money, right? Not necessarily. Simply put, a trust is a long-term option for providing money for a child. Trust funds can give parents a lot of control over money they give to their children.

Like wills, trusts are legal documents that hold property or assets for the child (or other beneficiary) to receive sometime in the future. You can designate that the money be given in a lump sum or at intervals. Trust funds can be established at banks, credit unions, and savings institutions and through some mutual funds. Interest, capital gains and dividends are all taxed at the child's lower rate.

Get advice, help from an attorney

If you want to really investigate whether a trust fund is right for you, see an attorney. There are attorneys who specialize in estate planning and in setting up trust funds. An attorney can make sure the terms of the trust are clear and can help you decide whether the trust will be irrevocable or revocable. The difference is very important because an irrevocable trust cannot be changed after it becomes a legal document. With a revocable trust there is some wiggle room in how much money can be transferred.

Factors to consider will include:

Your assets and whether they are held in your child's name

Your net worth

The number of years until your child is of college age

Your current tax bracket

The predicted cost of college

Parents can use trust funds to reward children for graduating from college or for other events like marriage. For example, a trust can designate that money for a home or cash gift will be given. Parents can also control when the principal of the trust will be given. That way you can be sure your wild 18-year-old doesn't come into a large sum of money if he isn't ready for the responsibility.

Uniform Gift to Minors: A simple type of trust

This kind of trust is often used for education. A parent will give up to $10,000 per child per year to take advantage of a tax exemption on gifts of up to $10,000.

Where the child goes to college can affect the trust. The choice of the trust's home state can also have a big impact on heirs. The choice of a state doesn't necessarily have to be where the donor or the child lives. Sometimes putting money in a trust out of state may save on taxes.
Trusts are very complicated matters. It's important to see an attorney if you think a trust fund might be the right choice for you.

Date last reviewed: October 2002.

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