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What is a trust?

A trust is an arrangement created by one person (the "grantor") where assets of the grantor are transferred to another person (the "trustee") to be held for the benefit of a third person (the "beneficiary"). The grantor may also be the trustee or the beneficiary of the trust. 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 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. The trust may be managed by the benefactor, a third party, or the child after time.

What are the benefits of a trust fund?

Trust funds 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.

How to set up a trust for a minor

  • Select a custodian and a trustee. The custodian will manage the funds in the trust for the child until they are old enough to handle things on their own. You will also need a trustee to run your trust and oversee distribution of its assets according to the details in your trust documents.
  • Decide when and how you want the child to receive the funds from the trust. You can set this up for the child to receive all of it at once or break it up into increments throughout major milestones in their life.
  • Start drafting your trust documents. Outline any provisions you have that restrict the use of the trust funds.
  • Consult with a trust fund attorney.

What sorts of people set up trusts?

There was a time when setting up a trust for a child was 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 of 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. 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 their trust?

Generally, a child can access their trust at the age of 18. 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 their 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 they have a little something put away in an account that they can access when they're 18. Establishing a trust for a child 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 your 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. If you have any questions about trusts or estate planning, don't hesitate to reach out to a Rocket Lawyer network attorney for affordable legal advice.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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