Imagine your children having a financial safety net, a source of funds to support them through education, a business venture, or even a difficult time in their lives. This is what a trust can provide for your children, and it doesn't mean they'll become entitled or irresponsible.
When we hear the phrase "trust fund kid," we often think of spoiled, wealthy individuals who don't appreciate the value of money. However, the reality is that most trust fund kids are simply young people who are fortunate enough to have a financial cushion.
A trust is a legal arrangement that allows you to set aside money or property for the benefit of someone else, typically your children. The trustee, some you appoint including your own child, is responsible for managing the trust assets and distributing them to the beneficiaries according to the terms of the trust.
Trusts can be created for a variety of reasons, such as:
Estate Tax Efficiency - Reducing the Size of Second Bite
Leaving your child wealth in trust can provide significant future estate tax benefits for your child. If your child keeps the trust funds separate from his or her own assets, the trust assets will not be included in the child's estate tax obligations at the time of the child's death. Since the trust is considered a separate legal entity from the child, the assets held in the trust are not considered to be owned by the child.
As a result, the child's estate tax liability will only be based on the assets that the child personally owns, which can significantly reduce their potential tax burden. However, certain exceptions to this rule exist such as exercising a power of appointment (i.e., the child directing the funds in the trust to another beneficiary), which will make the trust assets countable in the child's estate.
To ensure that the trust assets are not included in the child's estate, the child's trust must be carefully structured and adhered to - which always require the ongoing assistance of an experienced estate planning attorney.
There are other benefits to setting up a trust for your children. Here are just a few:
How to Avoid the Traps of Trust Fund Kids
Some additional tips for avoiding the negative stereotypes associated with trust fund kids:
A trust can be a valuable tool for protecting your children's future. By following these tips, you can help ensure that your children benefit from your trust without becoming entitled or irresponsible.