While we all know the stereotypes, it’s not as if every trust fund baby is taking a few years off to study minimalist art, hang out in a commune, or complain about the square footage of his free apartment.
In fact, there are millions of Americans with trust funds and millions of parents out there setting one up for their children. And many business owners utilize trusts to keep their companies from falling into the wrong hands and to minimize estate taxes when passing business assets to their heirs.
Trusts can be a smart way to shield certain assets from the costly (and sometimes heavily taxed) probate process, though it’s important to note that wills and trusts are different documents with different purposes.
Here’s what you need to know to make your kid a trust fund baby:
What can you put in your child’s trust fund?
Trusts are pretty flexible. Typically, you can include real estate, the cash in certain bank accounts, insurance policies, jewelry, and even your business assets. While a Will covers all property you own, in a trust, you must actively note what property you’re including in the trust. If you want your family home or that old Mustang you love included in your trust fund, you have to designate that.
What sort of people set up trusts?
There was a time when trusts were mostly for the very wealthy. That’s not really the case any longer. More and more Americans are setting up trusts every year and you certainly don’t have to think of a trust as something your child will live off for the rest of their life. Instead, think of it as part of your estate plan, a way to give your child something. Since trusts aren’t tied up in probate, you can rest assured that your children will receive their trust soon after your passing (or during your life, if you’ve decided to set up a living trust) without the hassle or public nature of the probate process.
Sometimes we don’t realize just how many assets we have. Just because you’re not living high on the hog doesn’t mean you don’t have plenty to pass down. This goes double for small business owners.
What if you own a small business?
Your company or your ownership share of a company can often be included in your trust. This is an especially important point for family-owned businesses, as over 70% of them don’t make it to the second generation. Since you can maintain control over the business while you’re alive and, since trusts don’t go through the probate process, you can transfer your ownership share much more smoothly and avoid onerous estate taxes by utilizing a trust.
If you own a share of a company (as opposed to the entire thing), things get a little more complicated. Before setting up a trust, you and your co-owners will want to create a Buy-Sell Agreement so you agree on the ownership transfer rules for your business. After all, you wouldn’t want your co-owner to pass his share on to someone you’d hate to work with. Have a frank discussion with your business partners about heirs and make sure everyone’s on the same page about the future of your company.
Whether you own your business outright or with partners, setting up a trust for your business assets also helps you avoid family disputes and allows you to appoint a professional who’s versed in these matters. They can help navigate the process with your business heirs to keep your company running smoothly during the transfer. It’s always a good idea to talk to an attorney to make sure you’ve covered all of your bases.
When can your child use his or her trust?
Generally, a child can access their trust at the age of eighteen. It is sometimes possible to create different age restrictions, but the default is that a child can use their trust once they’ve become a legal adult.
When should you tell your child about his or her trust?
If you set up a living trust (or if your parents set up a trust for your child), you should know there’s no legal requirement to tell your child at any certain time. After all, it’s not as if your eight year-old is going to understand the ins and outs of an estate plan. If you choose you could tell your child that he or she has a little something put away in an account that they can access when they’re eighteen. It can give you peace of mind if your child is thinking about college and you can start teaching them about managing money early on.
In the end, setting up a trust is a personal choice. Do you want to see you children enjoy their trust while you’re alive? Do you have a special item you want to transfer? Do you want to keep part of your estate plan private? Do you want to make sure your small business legacy is preserved for future generations?
Only you can answer these questions. But if the answer to any of the above is “yes,” a Trust can help you make that a reality.
But don’t forget: a Trust is just a part of a complete estate plan and every estate plan should start with your Will. April is Make a Will Month here at Rocket Lawyer and we want to hear what’s important to you. You can enter our Facebook contest for a chance to win $500 or a complete estate plan, one that includes everything you need to make your child a trust fund baby and take care of the people and things that matter. Directions to sign up can be found right here, and we hope to hear from you!