Setting up a child trust fund provides the opportunity for parents or grandparents to purchase stocks, bonds, mutual funds, and life insurance policies that can be transferred to minor children when they reach legal age.
Assets are placed into a child trust fund because minor aged children are not allowed to enter into contracts. The most common type of trust for children under 18 years of age is a custodial account.
Custodial accounts are governed under the Uniform Gift to Minors Act (UMGA) or the Uniform Transfer to Minors Act (UTMA). UGMA lets minors own securities while UTMA lets minors own other kinds of property including real estate.
With custodial accounts, children are allowed to withdraw funds at trust termination. The age varies by state, but ranges between 18 and 21. Once funds are contributed to custodial funds they become irrevocable and belong to the child.
Another popular child trust fund is the 529 Plan which is used as a college trust fund. This type of trust is not subject to gift tax and oftentimes offers unsurpassed tax breaks for donors.
529 Plans are education savings accounts operated by the state in which it is opened. Some states offers different kinds of college savings trusts, so it’s recommended to talk with a lawyer to determine which kind of trusts are best suited and applicable in your state of residence.
There are two types of 529 Plans which include savings plans and prepaid plans. Savings plans are similar to a retirement plan because contributions are invested in mutual funds or other types of investment products.
Prepaid plans let donors pre-pay all or part of educational costs for in-state college tuition. These plans can be converted if funds are used for out-of-state colleges. Additionally, a Private College 529 Plan can be established to pre-pay tuition at private colleges.
Testamentary trusts can be established to hold property and cash until the child reaches legal age. This type of child trust fund is referred to as a minor’s trust, or a 2053(c) trust. Minor’s trusts let parents contribute up to $13,000 of tax-free income which does not have to be reported to theIRS.
With that said, minor’s trusts have to be qualified by making the minor the only beneficiary. Distributions do not occur until the child reaches age 21. However, the trust can be gifted to others in the event the beneficiary passes away prior to turning 21 years of age.
It’s recommended to appoint a Trustee other than the parents to oversee the trust. When parents are Trustees of minor’s trusts and pass away prior to distribution, funds in the trust could be included in their estate and subject to estate tax.
Creating trusts for children offers parents and grandparents opportunities to provide tax-free money while obtaining tax deductions for their self. However, it can also lead to tax consequences if trusts are not qualified.
It is always a good idea to consult with an estate attorney to learn how to maximize distributions and lessen taxes assessed on trust income and capital gains. Professionals can advise of ways to setup trusts to cover costs of college education or provide funds when children reach milestones throughout their life.
At Craton, Switzer and Tokar we work closely with clients to help them establish the best type of child trust fund for their financial situation. Providing funds for children’s education and to improve their long-term financial status is one of the greatest gifts any parent or grandparent can give. Call us today and let us show you how easy it is to get started.
FAQs
You can access the money in your Child Trust Fund when you turn 18. Your provider will usually write to you a month or two before to ask what you'd like to do. Here are your main options: Move the money to a new savings account and carry on saving – see how to find the best savings account for more help.
Can I withdraw money from a Child Trust Fund? ›
No. The money in your child trust fund can't be withdrawn until you turn 18. Only the child it was opened for will ever be able to withdraw any money. The only exception to this is if the child passes away or is diagnosed as terminally ill.
Is a trust fund better than a savings account? ›
Note that a trust fund can involve both savings and investment but typically, it is invested in various financial instruments so it can yield significant returns. If you are risk averse, then you should take the savings option.
Is a trust fund a good idea for a child? ›
A properly structured and managed trust can provide you peace of mind, knowing your child will be financially taken care of long into the future. Trust funds are often used for things like education funding, financial support during adulthood, special needs planning, and general inheritance/wealth transfer.
How long does it take to withdraw money from a trust fund? ›
It may happen quickly or it could take years or even decades for assets to be distributed. It's important to point out that the longer it takes to distribute the assets, the more money it will cost to keep the trust active since you must pay for maintenance and trustee fees.
How much is a child trust fund worth? ›
Over the course of the scheme, 6.3 million accounts were opened, and the Government paid £2.0 billion into CTFs. As of April 2022, the market value of Child Trust Funds either not yet matured, or matured but unclaimed, stood at £10.7 billion.
Can I withdraw money from my child's account? ›
However, there are many accounts held on behalf of children with one of their parents as trustee. Here, providing the trustee can prove they are using the monies for the benefit of the child, they can withdraw funds from the child's account.
How do trust funds pay out? ›
The trust can pay out a lump sum or percentage of the funds, make incremental payments throughout the years, or even make distributions based on the trustee's assessments. Whatever the grantor decides, their distribution method must be included in the trust agreement drawn up when they first set up the trust.
Which banks offer trust accounts? ›
Best Banks For Trust Accounts In September 2024
| Company | Products | Fees |
|---|
| Fidelity | Trust investment and cash management accounts | Investing fees and (optional) personal trust service fees |
| Synchrony Bank | Trust savings, CD and money market accounts | No monthly maintenance, overdraft or low balance fees |
3 more rowsWhile some may hold millions of dollars, based on data from the Federal Reserve, the median size of a trust fund is around $285,000. That's certainly not “set for life” money, but it can play a large role in helping families of all means transfer and protect wealth.
The grantor relinquishes control over the assets, providing more asset protection and potential tax benefits. Income generated by the trust may be distributed to beneficiaries at specified intervals, which could be monthly, quarterly, annually, or as otherwise outlined in the trust agreement.
What type of bank account is best for a trust? ›
A Trust checking account makes it easy for your Trustees to pay off debts and distribute inheritances without draining other assets or relying on outside funds. It also makes it easy to track the money going out and its Beneficiaries.
What is the disadvantage of a trust fund? ›
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
What's the best Child Trust Fund? ›
Top-paying Child Trust Funds. While there are a few Child Trust Funds paying decent interest rates, you'd actually get the top savings rate by transferring to a Junior ISA. For example, the top junior ISA rate is currently 4.95%, while One Family's CTF pays just 2.3% and Nationwide's CTF pays 4%.
What age do trust funds pay out? ›
You can set the trust up to be dispersed when the child reaches a certain age, say 25, 30, or even 50 years old. That will allow you to delay turning the assets of the trust over to your child until they reach an age at which you believe they will be financially responsible.
How do trust fund babies get money? ›
What is a trust fund baby? A trust fund baby is someone whose parents or grandparents have placed assets in a trust fund for them. They can start accessing the money once they hit a certain age, typically at age 18, or once a certain event occurs, such as the death of the individual who set it up.
Does the US have a Child Trust Fund? ›
Children's trust funds for child abuse prevention generate money through surcharges on marriage licenses, birth certificates, divorce decrees, other documents, or specially designated checkoffs on State income tax returns. Since 1980, 38 States have created this new source of funds for child abuse prevention.
How do I set up trust funds for my grandchildren? ›
First, determine the type of trust you intend to establish so that you can move forward with the administrative side of setting up your trust fund. Follow it up with identifying the assets to be included, appointing the trustee, choosing beneficiaries, and subsequently drafting and executing the trust document.
