What Is a Living Trust for Children?
A living trust for children is a legal mechanism for sharing property and income with your children. There are many reasons for creating a living trust for children, including to help avoid probate and estate costs after you die, to care for special needs children or to care for children whom you may not fully trust to handle money on their own.
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Definition
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A living trust is a three-way legal agreement involving the person who creates the trust, called the trustor, the person who manages the trust property, called the trustee, and the children who benefit from the trust, called the beneficiaries.
The trustor funds the living trust by transferring certain property to the trustee, who holds title to the property subject to the terms and conditions of a trust agreement. The trustor has the right to define the terms and conditions, which generally include instructions for managing and investing the trust property, and for how and when to distribute property to the beneficiaries.
Probate
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Avoiding probate is one of the most basic reasons for creating a living trust. Probate is the legal process that occurs after you die. During probate, a state court judge will distribute your property according to your will or, if you don't have a will, according to standard state law. Probate involves judges and courts, which means it usually involves lawyers, which in turn means it can be expensive and a hassle. Avoiding probate can provide a significant benefit for your surviving children by reducing costs and avoiding lengthy hassles.
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Special Needs
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Another common reason for a parent to create a living trust for children is to provide a fund for taking care of special needs children. The parents can transfer money and property to the trust, and the trust will continue to exist even after the parents die or become incapable of caring for the special needs child. This means that surviving brothers and sisters will not have the financial burden of taking care of their special needs sibling. The trust fund will provide the money necessary to care for the special needs child even after the parents are out of the picture.
Spendthrift
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Another common example of a trust created by a parent for a child is a spendthrift trust. A spendthrift trust is a distinct type of trust used to provide income for people who are not fiscally responsible, or are otherwise untrustworthy. Under the terms of a spendthrift trust, the beneficiary, or child, can receive only a certain amount of income each month or year. The parent, as trustor, has the power to control how much income the child can receive from the trust and when. This allows parents to care for children who might otherwise squander an inheritance given to them in one lump sum under a will. Additionally, property in a spendthrift trust is protected from the child's creditors.
Estate Taxes
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One final reason for creating a living trust for children might be as a tax avoidance scheme. When used correctly, some living trusts can help minimize estate or inheritance taxes, which are federal and state taxes imposed on the transfer of property from a deceased person to a surviving heir. Estate and inheritance taxes are complicated and constantly changing; if you desire to minimize this for your children, you should consult with an experienced attorney or accountant to help you set up the living trust correctly.
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References
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