This article provides an overview of children's trusts in estate planning, including reasons to make a trust for children, examples of trusts commonly used to provide for children in an estate plan, issues to consider when making a trust for children, and alternatives to children's trusts. Providing for minor children is an excellent reason to make a will or trust. Before you decide which estate planning method to use, it is important to understand the different options, limitations, advantages, and disadvantages of children's trusts.
Types of Trusts for Children
Estate planning trusts can be used to provide for children in a myriad of ways. Some trusts can be used to provide for adult beneficiaries as well as minor children, while other types of trusts are used exclusively for children. The following are examples of trusts commonly used to provide for children in an estate plan:1. Testamentary Trusts2. Special Needs Trusts3. Section 2503c Minor's Trusts4. Crummey Trusts
5. Silent Trusts or Quiet Trusts6. Living Trusts7. Life Insurance TrustsThis is only a short list of types of children's trusts. Your estate planning attorney may recommend a different form of trust or an alternate method of setting aside funds to meet your unique objectives. To choose the best type of estate planning trust, your lawyer may need to consider many different factors, including the following:a. the child's health and medical needsb. the child's personality or behavior patternsc. the child's age d. the intended duration of the truste. the marital status of the child's parents or legal guardianf. the financial resources available to the childg. any substance abuse issues experienced by the childh. whether the child may need to qualify for governmental benefits such as Medicaid for childrenI. whether the child may need to qualify for financial assistance for college or other educational programsj. anticipated educational costs that may need to be funded by the trustk. anticipated medical expenses that may need to be funded by the trustl. the type of assets that will be used to fund the trustm. whether the trust is intended to be established now or only upon the death of the grantor or settlorn. the value of assets that will be placed in the children's trusto. whether the trust is intended to have one beneficiary or multiple beneficiariesp. the impact of any estate, gift, and generation-skipping transfer taxes that may applyIn preparation for making an estate planning trust for your children, it may be helpful to have this information available when you meet with your attorney. You can also use our free
Estate Planning Worksheet to gather the information necessary to make a trust.
Alternatives to Children's Trusts
If you do not want to go through the process to set up a children's trust, there are alternative methods of setting aside funds for a minor child. These include accounts such as UTMA accounts, also known as Uniform Transfers to Minors Act accounts, and UGMA accounts, also known as Uniform Gifts to Minors Act accounts. Also, see
Gift Stock to Children.What you can accomplish with these types of accounts is very limited compared to the options available with an estate planning trust. For example, a trust can be structured to continue in effect after the child becomes an adult, whereas Gifts to Minors UTMA accounts are designed to end when the child attains the age of 21 or the age of majority under state laws. If you are interested in reviewing your options to provide for a child's financial, educational, and medical expenses as part of your estate plan, speak with your financial planner and a lawyer.
Reasons to Make a Children's Trust
If you have minor children, it is essential to make a will and other estate planning documents. However, you may be unsure whether you also need to make a trust, especially since trusts can be expensive. The following is a list of the top reasons for making a children's trust:1. To provide funds for a child's living expenses, medical care, and education.2. To prevent the child from receiving a Lump Sum Inheritance.3. To arrange for the child's inheritance to be managed by a professional trustee.4. To control the timing or amount of distributions of trust funds to the child.
5. To keep the amount of an inheritance private or confidential.6. To avoid delays in estate administration associated with probate and have funds immediately available so your child's current standard of living and health care can be maintained.7. To utilize tax-saving strategies when making gifts or transfers to children.8. To have the proceeds of a life insurance policy managed by a trustee until the child reaches a certain age.9. To ensure children will be provided for financially when a spouse or partner has concerns about use of an inheritance by a surviving spouse, partner or other heirs.If you want to make a children's trust as part of your estate plan, consult an attorney.
Disadvantages of Children's Trusts
Before taking the steps required to make a children's trust, be aware of the following disadvantages:1. You may need the children's trust for a relatively short period of time. But the cost to set up and maintain a trust for your children can be expensive, especially if changing tax laws require frequent updates to your estate plan.2. To the extent a child is able to receive distributions from a trust, it may make the child ineligible to receive educational financial aid and government assistance for medical expenses.3. If you make irrevocable transfers to a trust to gain certain tax advantages, you may be unable to get the property back even if you need it later. This is one of the disadvantages of irrevocable trusts.4. Title changes to property are often required to fund a trust. This can be difficult to deal with if you need to make other changes to title in the future, such as when refinancing.5. Certain types of trusts, such as special needs trusts and Crummey trusts, require compliance with complex rules and regulations. This can increase the legal fees and expenses to set up and maintain your estate plan.6. You will need a trustee to administer the children's trust. The trustee will typically need to be paid for these services and reimbursed for expenses associated with work performed for the trust. For an overview of trustee compensation, see Fees Trustees Bill Charge.
Key Issues When Making a Children's Trust
If you already started making an estate plan, you know there are many difficult decisions involved. Here is a list of decisions that are typically required to make a children's trust:1. What are your goals and objectives for making the trust?2. Do you want the trust to be managed by a friend or relative or do you want to pay a trust company or financial institution to manage the trust?3. Who do you want to serve as the trustee and the successor trustee? You may want to consider whether the person named as child guardian should be the same person as the trustee of your child's trust and how any financial conflicts could arise. For more, refer to our section on
Note: It is possible to name two or more individuals to serve as co-trustees of a trust.4. Who are the beneficiaries of the trust and who should receive the trust property if the intended beneficiaries die or are otherwise unable to receive the trust property?5. Do you want to establish and fund the trust now or only have the trust take effect when you die?6. Do you want the trust to be revocable or irrevocable?7. When do you want the trust to end?8. How much do you want to spend to create, maintain, and administer a trust?9. How will you fund the trust? What assets will you transfer to the trust? Discuss with your attorney the legal issues that arise when a minor child inherits cash, real estate, stock, life insurance proceeds, and other types of assets. 10. When do you want distributions made from the trust?11. Do you want the trust to end when the child reaches the age of majority or continue until the child is much older?12. Are you willing to give up control over the property you transfer to the trust?Before taking steps to set up a children's trust, consult a
tax professional about the tax ramifications to your estate.Copyright 2020 Pennyborn.com. ALL RIGHTS RESERVED. Published October 23, 2018. Updated December 23, 2019.
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