Many parents want to provide for their children financially but may be reluctant to allow a teenager or young adult unfiltered access to the money. They may be concerned that a child or young adult may lack the maturity to make sound financial decisions. At the same time, the parents may want the money to be available for the child for things like education and healthcare.
In these situations, a trust may be the best way to provide money to the children. The many benefits of a trust include tax benefits for the person who creates the trust, management of the funds on behalf of the beneficiary and, financial security for the beneficiary.
In order to take advantage of these benefits, a trust must be set up according to the requirements set forth in state law. A local attorney can help you establish your trust according to the state requirements. The first thing that you, as the creator of the trust, must decide is what type of trust you want to create for your children.
Generally, one of the following three types of trusts can be created:
- A Living Trust: as the name implies, a living trust is one that you establish while you are living. You may maintain control over the assets for the benefit of the beneficiary. A living trust may have probate and tax advantages depending on how the trust is set up.
- A Testamentary Trust: a testamentary trust is part of a person’s will. The trust does not exist until the creator of the trust dies and his will is probated at which time, if everything has been executed correctly, the trust will be funded for the beneficiaries. It is common to use this type of trust if you have minor children whom you wish to provide for when you die. The money that you want to leave for your children, who may be too young to manage the money, will be held in trust for them until the reach the age specified in your testamentary trust.
- A Special Needs Trust: a special needs trust may be created to leave money to a person with disabilities. It is especially important that this type of trust be drafted correctly so that the trust assets do not threaten the disabled person’s ability to collect social security or Medicaid assistance.
- A Uniform Transfers to Minors Act Trust: this type of trust typically consists of securities and is set up at the time that the assets are purchased.
For many families, a trust is part of a comprehensive estate plan that is created with the help of an estate planning attorney. An estate planning attorney can advise you on how to legally avoid estate and gift taxes and provide assets to your children in the most appropriate way for your family.
If you are interested in establishing a trust then you should be prepared to provide your attorney with an inventory of your assets and your personal goals and expectations regarding the trust so that your attorney can advise you on the most appropriate way to meet your family’s short term and long term financial goals.
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