Be it Mutual funds or insurance these are two of the most preferred investment methods and the reason for their popularity is their benefits or returns being bigger and better than that of other assets. Not only are these two instruments considered to be safe but it is also believed that investment in them by one generation may come to benefit other generations in the future. On that scale you also have options to go for trust funds, they too would help out a future generation if needed or set up that way. In this article, we will inform you how to start a trust fund for a grandchild and how to get money out of a trust fund.
What is a trust fund?
Unlike insurance or mutual funds, the trust fund is not an investment vehicle but it is rather a place where you can put aside your investments for future generations. A third party, that is, a trustee or other entity is responsible for holding your assets or part of your assets which can include anything like money, stock holding, real estate, etc., and then pass it on to your legal heir or nominee when the time comes.
In a way, trust funds are similar to a will but the only difference is that a will can be known by the public but a trust fund is only known by the trustee and the beneficiary. Also, a will may not end up being executed as per your wish but that can’t happen with a trust fund. And also these assets of yours get a tax benefit and are protected from legal actions as well. Now let us learn how to start a trust fund for a grandchild.
How to Start a Trust Fund for a Grandchild? Full Guide
Before starting the trust fund in your mind, justify the reason for setting up the fund first and plan how you want it to be realized. You could give away all your assets to your grandchild at once or you can lay out instructions for a part of assets being released at certain milestones and also guidance as to how you would suggest they use the assets.
If you just want to do something good for your grandkids then you can simply pay off their tuition fees or take care of their medical expenses but a trust fund is a serious commitment so be sure of it before you proceed.
A gift trust is an irrevocable trust and once set up can’t be canceled and so we say plan it nicely before you look out for how to start a trust fund for a grandchild. Also, a trust fund involves getting an attorney so you should realize how serious this is. Once you have made your decision you now have the most important job to do and that is to go ahead and select a trustee. You can either opt for a family member to fulfill the role or get in a third party individual or corporate.
Now since we are talking about a grandchild it makes more sense to go with individual trust rather than creating a family pot which is preferable for a larger family wherein you create a trust fund for multiple grandkids or various people from the family. Even if you have more than one grandchild you could still set up individual funds for each of them just keep in mind that it does not eat into your pocket based on trust administration and other costs.
Now you inform the trustee of your intentions for this trust fund. You can ask them to distribute it at specific ages or for specific purposes like first homes, marriage, etc. Taking the help of your estate planning attorney might be a good idea in this matter. Lastly, make sure to involve the grandchild’s parents in the process.
Your kids or the parents of your grandkids need to know about the trust fund so that they can plan on revealing this kind of information to the beneficiary in a way that feels fit to them. Inheriting money or assets can have a huge impact on anyone’s life and so it is only right that you prepare your kids and they prepare their kids for the same in a way that feels appropriate to each party.
So that is how to start a trust fund for a grandchild by considering all corners and covering all bases. Now we move on to set one up after all these necessary points for consideration are out of the way.
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How to Set up a Trust Fund for a Child?
So we know how to start a trust fund, it involves talking to the concerned party, making decisions and informing the trustee about the same, and considering your options as to how a trust fund is supposed to be run. But once all the verbal and thinking processes are complete it’s now time to get to the physical setup part. So keep reading to find out how to set up a trust fund for a child.
The first thing to do is to specify the purpose for which you wish to set up the fund, we saw above that trust funds can be set up for being released at specific ages or for specific purposes so first, you mention the specific purpose. Again we saw above how you have some irrevocable trusts like the gift trust, so you now decide if you want a revocable one or an irrevocable one.
You then pick a trustee be it a family person or a third-party individual or organization as mentioned above. And you may also pick an alternative trustee in case the first one is not around when the time for execution of the trust fund comes.
It is now time to pick and sort the assets that you want to put in the trust and you may either set up multiple trusts or put all the assets in one. Now comes the documentation part where you mention various guidelines or stipulations as mentioned above in the how to start a trust for a grandchild section. It is important to treat this section carefully and seriously since it will determine how the finances reach your beneficiary and in what way they use them.
Now you legalize the creation of the trust fund by signing the form and getting appropriate witnesses for the same. A third-party notary would also have to verify these signatures. And the last step in setting up a trust fund for a child would be to transfer assets into the trust without which the process is incomplete.
You can proceed with a simple title change in some cases while in others you are required to create new accounts, quitclaim deeds, or transfer assets to the trust.
Biggest mistake Parents make when Setting up a Trust Fund
Now just because you have decided to set up a trust fund your work is not just to create a fund, transfer assets, and peacefully rest afterward. Creating a trust fund is a serious matter of utmost importance and this is why they need all your attention. A lot of times parents make mistakes when setting up a trust fund for their child and so we will mention them here so that you can become aware of them and avoid them.
Choosing the Trustee
It is okay to go ahead and choose a family member as a trustee as long as you are being careful and critical in arriving at this decision. One of the biggest mistakes parents make when setting up a trust fund is that they treat choosing a trustee as a not-so-important aspect of the process. However, if the chosen trustee is not managing the trust fund the way they should be, if they pass away untimely, or don’t have your best interest in their mind then that can cause some serious problems for your kids in the future and you may not be around to make things right.
Goals of the Trust
It might seem like a controlling move to do but it is always better to set up milestones or specifications as to when the kid should receive the funds from the trust.
It is better to set up stipulations that allow money to be drawn every few years or on achieving certain milestones or are released when certain goals are to be met. Because otherwise if you give away all the money to them at once and see they are no older than a young adult at that point then they might not know any better and may end up wasting all the money.
Protection Provision
Before you even know how to start a trust fund for a grandchild you should know all the ways that you can protect a trust fund. And parents usually make the mistake of not getting up protection provisions on a trust fund but you should always make sure to keep such important things in mind.
Trust funds have spendthrift provisions that make sure that the beneficiary is protected from making bad financial decisions that could leave them in ruins. Also, they can set up a check system wherein the trust checks and balances the assets from time to time which protects them in the longer run.
Reviewing
This may sound boring and that might well be the reason why parents end up making a mistake in this part of the trust fund. Time is passing with every second and over time change is inevitable in all aspects. Something that worked yesterday or was in fashion last week may not still be acceptable today and that can apply to your trust fund as well.
It is very important and can’t be emphasized enough that parents need to review their trust every year. The health or condition of your trustee might have gotten worse, a new person might be needed to the trust, or someone might have to be removed from that list if trusts or any other such situation may come up and so it is very necessary to keep reviewing and updating the trust fund as per requirements.
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How to get Money out of a Trust Fund?
From how to start a trust fund for a grandchild to withdrawing money from the trust fund, let’s say the day has come and you are finally eligible to get what was kept aside for you. However, how exactly does one withdraw the assets or money from the trust fund? Well as per our knowledge and research, we were able to come up with three distribution methods and we will mention all of them here for you.
Outright
In this method, you are directly given all money owed to you in a lump sum payment in one or two installments. If the property is involved then the title or deed is changed to reflect your name.
Staggered
The second method of how to get money out of a trust fund includes being paid in bits and pieces. Let’s say the creator of the trust put in stipulations in the will that the money should only be given to you at specific ages or on achieving goals like graduation, marriage, etc. Then you get what you deserve but in a staggered or prolonged way.
Discretionary
If the beneficiary is deemed incapable of making viable financial decisions then the grantor can set up special needs or spendthrift trust funds where they instruct the trustee at the time of chalking up the trust fund when the funds should be released. The trustee is bound by the word of the grantor and is supposed to act the way they were instructed to until the assets in the trust have been distributed fully and the trust is now dissolved.
Be it staggered distribution or discretionary distribution method both of them are capable of earning a trust income as the assets are distributed over time and during the time they are held they are still earning money since that is what assets usually do.
So that is all about how to start a trust fund for a grandchild and how to set up a trust fund for a child. As important as the process is, there is always room for complacency since we are only humans and that is where some of the biggest mistake parents make when setting up a trust fund can occur and so we hope now that we have made you aware of them you can and will be more careful with it.
You now also know how to get money out of a trust fund and so you might want to ask your parents or grandparents if they ever created a trust fund for you and might want to try and withdraw some assets or money from it if you are eligible for the same.
