BY ANDREW TARPEY
There is a common misconception about children who are beneficiaries of a trust set up by their parents: rich kids born with a silver spoon in their mouth who don’t exactly have to rush into looking for employment. However, such trusts are not only for the wealthy. More parents these days of varying income levels are creating trusts to provide stability and sound financial footing for their children’s future as they enter adulthood. In fact, trusts can even be established for the benefit of a minor during their childhood should the death of their parents or guardians occur. Here we’ll take a look at the reasons for creating a trust for your children, and what that trust should entail.
The main reason parents set up trusts is to provide security for their children’s future. Most parents would like the proceeds of their hard work and investment to be passed down to future generations once they pass on, and a trust is one way to ensure this happens under the terms that the person setting up and funding the trust (known as the settlor or grantor) desires. What sort of terms might someone include in the trust to ensure that the funds are distributed in the way they would like?
For starters, the funds could be distributed to the beneficiary (or beneficiaries if the trust’s proceeds are for more than one child) at a certain age when he or she will be responsible enough to handle such a sum of money. It’s probably not wise to allow a large cash windfall to fall into the hands of a 21 year old, as his lack of maturity may make a trip to Vegas with friends seem like a better investment than a down payment on a first home or the paying off of student loans. Instead, the wiser move would be to design the trust so that he could receive a portion at age 21, and perhaps other portions several years later when he would be more mature and thus able to make more sound financial decisions. The trust can also be designed with certain stipulations set by the grantor, such as stating that payments to the beneficiaries occur on a monthly or quarterly basis, or that they can only use the funds for certain purposes, such as education costs or to pay for a wedding. Although most parents want their children to benefit from the proceeds of their employment and investments that they have accumulated over the years, control over when those funds are passed on and for what purpose is something that most would desire to have.
The grantor also needs to name someone to manage the assets that are held in the trust. This is known as the trustee, and selecting the right one is one of the most important decisions to be made when setting up a trust. The trustee can be someone reliable and trustworthy such as a family member or close friend. If the parents were to unexpectedly pass away, they would want someone who cares for their children to fulfil the role of guardian, and it’s logical that they may want this person to also look after the children’s financial future. However, this may not always be the best selection if the children’s caretaker isn’t financially savvy. The trustee needs to be knowledgeable about things such as the responsibility it entails, managing money, making it grow, and tax implications. If your finances are extensive and complicated, it may be necessary to hire a lawyer or professional trustee company to handle this role. There is also the option of appointing both a family member and a corporate trustee to work together as co-trustees.
There are other benefits to establishing a trust for one’s children aside from the passing down of wealth from one generation to the next. Setting up a trust for your children not only allows them to receive the proceeds of your estate after you pass on, but it also offers them asset protection. Trusts can be designed so that the distributions to beneficiaries are immune to bankruptcies, lawsuits and various types of creditors, ensuring that the funds continue to be distributed as the grantor desired. Once the trust is set up, the assets in the trust no longer become the legal property of the grantor. As far as tax benefits are concerned, it’s always best to consult a tax advisor when setting up a trust, but they should be able to advise you how to set up the trust to maximise your tax benefits.
Creating a trust to benefit children is a big step in someone’s financial life, and involves important decisions with regard to who will manage the trust and when the trust’s assets will be passed on to the beneficiaries. However, establishing a trust can provide a great sense of relief and peace of mind that the proceeds of a person’s savings can provide financial security to their children. The idea that trusts are only for the wealthy is a myth; they can offer a way for people of various income levels to protect their assets and provide for their family long after they pass on.