Setting up a trust fund might just be the answer to all your parenting woes. But is this a good choice for your family? Find out here…
Every parent thinks about their kids’ future, leaving them settled and ready for anything life throws at them. For some parents, the best way they feel they can do this is to set money aside for them until they reach a certain age.
Of course, this can be set up in a will, but this only reaches your kid’s bank accounts when you die. So, some find that setting up a trust fund is the best way to give them the head start they need in life.
But, what is a trust fund, and is it the best way to hold money for your children? Find out the many advantages and disadvantages of it all, right here…
What is a Trust Fund?
A trust fund allows a person, usually a parent or grandparent, to set aside assets for a beneficiary over time. These assets could come in the form of investments, real estate, or just plain cash.
Ultimately, trusts act as a way to manage and control family affairs instead of a will. They’re a way for older family members to manage money for children who are too young to handle their own affairs. They’re also a great way to pass on assets whilst you’re still alive.
The trust is managed by a trustee, who could either be a financial advisor, a financial institution like a bank, or an attorney. These trustees manage the investment to make sure it is administered as and when the grantor wishes.
Types of Trust
There are two types of trusts which affect the grantor’s control of the assets in the trust. A trust is not subject to taxation, so these will also determine how much inheritance tax you’ll pay. The two types include:
These allow the grantor complete control over the trust, allowing them to change beneficiaries and amounts, and even revoke the trust altogether. A successor should be appointed to the trust so that decisions can be made on behalf of the grantor if they become incapacitated.
Unless the trusts are deemed irrevocable on the grantor’s deathbed, they are still deemed to be part of the grantor’s estate, so are subject to inheritance tax. Also, if the grantor is in debt when they die, the trust will be used to pay off any of these outstanding payments, unless otherwise stipulated.
These types of trusts can’t be undone; once the terms of the trust come into play, i.e. the beneficiary comes of age, the grantor loses all rights to this money. This means the trust is not subject to inheritance tax when the grantor passes away.
What Are the Terms of a Trust?
The terms of a trust are determined by the grantor, with the help of their advisor. They will be asked the following questions to help them organise everything effectively:
- Will assets be distributed to beneficiaries while the grantor is still alive, or after they pass away?
- Will the grantor maintain the right to continue making changes to the trust, or will they give up all ownership of the assets placed into the trust?
- Will the trust pay out a certain sum of money to charities in addition to a beneficiary?
The decisions made when answering the questions above will be taken into account when the grantor passes away. It’ll determine whether they are included as part of their estate on death, and therefore whether they’re subject to estate taxes as a result.
How Are Trust Funds Paid Out?
There are a few ways the trust will be paid to the beneficiary or beneficiaries when it’s ready to be distributed. These include:
- A one-off lump-sum: this is the most straight-forward type of trust, and is when the recipient will receive a pay-out of the assets in one go. The grantor may stipulate a certain time for the trust to be granted, for example, when the beneficiary hits a certain life milestone.
- Several large pay-outs: the money can also be doled out at separate times, as and when the grantor has stipulated. For example, they might dish out a certain amount to pay for university fees, and then when the person reaches certain age milestones. This can encourage the beneficiary to responsibly take care of the money, using it more wisely.
- Getting small payments: the grantor may even choose to distribute the trust in small payments over time instead. For example, it could be a monthly pay-out over the course of the beneficiary’s life. This then becomes more of a source of income, providing even further control and encouraging the beneficiary to use the money strategically.
The Advantages and Disadvantages of a Trust Fund
If you have the money available to support your child in this way, it might seem like a no-brainer to set one up. But, before you make this decision, let’s first take into account both the advantages and disadvantages:
Benefits of a Trust Fund
- No tax on some versions of the trust, as we’ve seen above
- Helps you support your family members before your death
- You have more control over who receives your estate
- Can help pay for a child’s education
- You can have more control over how and when the money is paid
- You can add limits, timings, and stipulations on almost every aspect of the fund
- You can set up a business or property you own in a trust, specifying who in the family you want it to go to
- You can protect your privacy, as a trust won’t go through probate court like a will
- Can be set up as a charitable trust to donate to a charity after your death
- Helps to eliminate family feuds about inheritance, unlike a will which is subject to contentious probate
- Prevents claims against your estate, thus protecting valuable assets and making sure they go to the right people
Drawbacks of a Trust Fund
- Creating a trust can cost a lot in terms of administration
- It’s sometimes inconvenient and complicated
- As we’ve seen above, some trusts don’t have the tax benefits of others
- Loss of ownership to your assets with certain types of trust
- Any changes to trust law may affect your trust without your knowledge or wishes
Want to Set Up a Trust?
In this article, I’ve talked more about what a trust is, how it’s paid out, and the advantages and disadvantages of such a fund. As you can see, there are many advantages to setting up a trust fund, so it’s something worth thinking about. That said, there are also a few major drawbacks to consider before diving right in.
I hope this article has given you food for thought. Feel free to leave your own thoughts and advice in the comments down below.