How Trust Funds Can Safeguard Your Children

A trust fund is a legal entity established for the purpose of holding assets for the benefit of specific people, or even for an organization. Children are frequent beneficiaries of trust funds because trust funds can safeguard your assets and make sure they are used for your children’s stewardship. How can a trust fund accomplish this?

Key Takeaways

• Setting up a trust fund for your children is not necessarily just for wealthy families.
• Children are often beneficiaries of trust funds by parents or grandparents who want to pass along their assets.
• A will can be challenged by third-parties making it a risker option for dispensing your assets. A trust will ensure your money reaches the intended recipient. 
• You can set the trust up to be dispersed when the child reaches a certain age, and you can set up a payment schedule or disperse it in one lump sum.

Guaranteeing Funds Are Available for Your Children

One of the primary benefits of having a trust is that the assets held within it are protected from legal claims. With the possible exception of retirement savings, any assets that you have are subject to seizure by courts and creditors. However, assets held in trust are legally protected.

This will be important if, after setting up targeted savings or investment accounts for your children, you are forced to file bankruptcy, or you experience business failure. Still another possibility is facing a lawsuit as a result of civil liability.

Important

Having your children’s assets in a trust will protect that money, and ensure it will be available when they need it.

Irrevocable Trust vs. Revocable Trust

There is an important distinction in regard to trusts, however. In order for assets to be protected, they have to be held in an irrevocable trust. This is a type of trust in which the terms of the trust are created at the outset, and then become permanent. You cannot change them, even if you are funding the trust. This means that you will give up a certain amount of control over the trust. But if you want the assets completely protected, that will be absolutely necessary.

The other type of trust is referred to as a revocable trust or living trust. You can retain control over the trust, but for that reason, it will remain subject to seizure by creditors and other parties.

Safeguarding the Money

A trust gives you the ability to name specific beneficiaries, and once you do, your intentions cannot be changed after the fact. This means that you will be able to specifically name your children as beneficiaries of the trust—and even exclude certain children if that is your choice—and your wishes will be carried out.

This is not true with regular investment accounts, and not necessarily true in the case of a will. Since a will disperses your general assets, any part of it can be challenged by unintended third parties. A trust will ensure that the money goes to the people listed in the trust, and no one else.

Ensuring Funds Are Available for the Long-Term

One of the biggest advantages of a trust is that you have control over how the money in the trust is dispersed to the beneficiaries. You can have it done in a lump sum, or you can have it parceled out over a period of several years. You can even set it up as an annuity to make payments to the beneficiary on any basis that you choose–monthly, quarterly, semiannually, or annually.

You can think of this as a kind of “spendthrift provision.” It will make sure that the money isn’t dispersed from the trust and then blown quickly by the beneficiary. This can be especially important with young children, when there may have to be a guardian appointed, or even for young adult children, whom you may not entirely trust in handling the money early in life.

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. You can even choose to make monthly or annual payments up to a certain age, upon which the remaining balance of the trust will be issued to the individual in a lump sum.

Ensuring the Money Is Used for Intended Purpose

A trust can be set up in such a way that you can even determine what the specific purposes of the distributions will be for. For example, you can include wording in the trust that requires that the money is disbursed only for major expenses, such as a college education, buying a home, starting a business, or even caring for a child or grandchild with a disability.

Though we may not like to think about it this way, if you have a child who has a substance abuse problem, a gambling disorder, or whose spending habits you do not condone, putting restrictions on the reasons for which it will be dispersed can be the perfect way to guarantee that the money will be available only for expenditures that will help to improve your child’s life.

Making Sure Money Is There After You’re Gone

While it’s true that you can use a will to bequeath your estate to your children, a trust will accomplish that goal much more efficiently and completely. This will be especially important in the event that you die before your children reach adulthood. A trust will guarantee that funds will be available during your children’s time of dependency, as well as when they are adults. In this way, you can create a method by which money will be available for their care, for their college educations, and to help them enter the adult world when they’re older

You may not be there to provide the funds for all of those essential needs, but the trust fund will help take care of them in your absence. An independent trustee can be appointed who will handle the disbursement of assets upon your death based on the terms you spelled out in the trust. This will guarantee that those disbursements will happen in an orderly fashion, and at the intervals that you consider to be appropriate.

The Bottom Line

You can use conventional investment accounts, or even a will, to distribute assets to your children. But a trust fund will do it safely, and in exactly the way you want it to occur.