You don't have to be rich to open up a trust — an estate planning measure that holds on to assets on behalf of a beneficiary — and just because you get a trust fund for your child doesn't mean they'll end up spoiled. Setting up a trust fund for a minor beneficiary can help make sure an inheritance you leave for your child is put to good use. Since the person who opens the trust gets to set the terms, you can detail conditions for how your child uses the money and assets, including how much they get and how often.
Like all trusts, a trust for a minor can be a revocable or irrevocable and so it can come with some additional estate planning benefits for the trust creator, usually the parent or grandparent.
Why you should set up a trust for a minor
If you want to leave something to a young child or grandchild, like as part of an estate plan, you should consider giving it to them through a trust. Otherwise, if the child is under the age of the majority their guardian will have control of their finances — including any money you left for the through a will or life insurance policy— until they come of the legal age.
While you’ve likely chosen a guardian that you can count on to care for your kids, using a trust would ensure the money you set aside would be used for the benefit of your children and not for the guardian. Additionally, a child will get full access to the trust assets once they reach the age of the majority leaving more of a chance that they may not spend the money in the way you wanted. Setting aside the money in a trust can provide a way for you to guide their decisions and spending habits even after you’ve passed.
What you can do with a trust for a child
The person who opens the trust, called the grantor, has the ability to determine the terms of the trust and how it's structured. They will appoint a trustee (and a successor trustee) to manage the trust assets, which are off-limits to the beneficiary, like your child, until the conditions you created have been met.
You can choose how much and how often a beneficiary receives trust funds. Do you want them to receive the money every month? Every year? In lump sums when they reach a certain age? You get to decide.
You can also dictate how the money should be spent, whether it’s for the general benefit of the minor, or for expenses like housing, education, and health care, and you can even leave it to the trustee’s discretion.
It can be helpful to limit or restrict a beneficiary’s access to trust funds if suspect they'll have trouble handling finances on their own, whether they’re a spendthrift or have special needs. (In fact there are specific planning measures for these purposes: a spendthrift trust, and a special needs trust, which can help the beneficiary with a disability qualify for government benefits.)
You can decide what happens to any leftover trust funds after your child has died. Since a trust allows you to plan ahead, you could explicitly state in your trust document that any leftover trust money should go to a blood relative, like your grandchild, and not your child’s surviving spouse.
Alternatively, you could give your beneficiary more control and grant them additional powers, or rights, over how the trust works — including letting your child (the main beneficiary) choose who the future trust beneficiary is. You can even allow the child to become co-trustee by saying so in your trust document.
Reasons to set up a trust for your child:
Prevent them from squandering their inheritance
Pay for their education expenses
Teach them how to manage their money
Stagger your hard-won wealth meant for future generations, like your grandchildren
Ensure your surviving spouse has the necessary funds to care for your children if you pass away before them
Provide for a child with special needs
Use it to receive a life insurance death benefit on their behalf
How to set up a trust for a minor
Setting up a trust for a child is completed through the same basic steps as creating a trust fund or a trust for an adult. To create a minor’s trust, the grantor must
Create a trust agreement that lays out instructions in detail
Name a trustee to manage and distribute trust assets
Notarize the document to make it valid and follow proper witnessing procedure
Fund the trust by transferring or retitling assets into it
You can read more in this guide on how to set up a trust.
If the terms of your trust are straightforward, like having your beneficiary receive assets at a certain age or milestone, then you may be able to create the trust on your own. However if you have additional needs like making sure your child can receive government benefits then you may need to hire an estate planning attorney to set up the trust for you.
You can also have a trust established when you die, which is called a testamentary trust, by stating your wishes in the terms of your will. If the terms of the trust you want to create are complex, you should also consult with an estate attorney when writing your will.
Learn more about different types of trusts.