Trusts for Children

It's common for parents or grandparents to set up a trust for children, in case they inherit property while they're still young. Often these trusts are created in a grandparent's will; they come into being only if, after the grandparent dies, the beneficiary is still too young to manage money without adult help.

These trusts must be drawn up by an experienced attorney - it's not something you'd try to do on your own like a will or living trust.

If you're named as the trustee of a child's trust, you may have many years of work ahead of you. These trusts don't end until the beneficiary reaches a certain age or the money runs out, whichever comes first. Meanwhile, you'll be responsible for managing trust funds, making spending decisions, and dealing with the beneficiary.

Individual Trusts and Pot Trusts

Someone who's drawing up an estate plan and creating a trust (the settlor) may have several youngsters— often grandchildren or nieces and nephews—in mind. There are two different ways to leave money to more than one child: set up individual trusts for each one, or put all the money in one trust.

A trust for more than one child may be called a family, pot, or sprinkling trust. It's commonly used when someone is leaving money to siblings; the theory is that one child may end up with more expenses (for medical needs, perhaps) than another, and that the trustee should have the flexibility to divvy up the money in whatever way is compassionate and fair.

Investing Trust Assets

If you'll be managing trust assets, you're going to have to make some investment decisions. Those decisions should serve to further the goals of the trust. Are you investing for the short term or the long term—to produce income or to increase the value of trust property?

As always, you'll need to look to the trust document and whatever other knowledge you have of the settlor's intent. Did the settlor want to provide the beneficiary with a lavish childhood, education at a private college, or a down payment on a house? Or was the goal simply to help out with the cost of a public university?

Anyone who is managing other people's money over a period of years needs an investment plan, with clearly stated goals. You should review the plan at least annually, to see whether it's meeting your objectives. You may also want to read about the "prudent investor" duty.

Spending Money for the Beneficiary

Probably your toughest job as trustee will be deciding how to spend trust funds. Again, look to the trust document for guidance—does it say what you are allowed to spend trust money for? You may have broad authority to spend money for "education, health and support."

The job will be more complicated if there is more than one beneficiary, because you'll have to balance the needs and desires of each. You have a fiduciary duty to be fair to each beneficiary, but that doesn't mean—unless the trust document says it does—that you must spend the same amount of money on each beneficiary.

Recordkeeping and Taxes

You'll need to file an annual income tax return (Form 1041) on behalf of the trust. To make preparing the return easier, and to meet your obligations as a fiduciary, you'll need to keep very good records all year long. The beneficiaries have a legal right to know how their money is being managed and spent.

Ending the Trust

A trust for a child usually ends when the beneficiary reaches a certain age, or, if the trust is for more than one child, when the youngest one does. That's when you'll distribute whatever assets are left, following the directions in the trust document.

If the trust funds dwindle to a relatively small amount, however, you can end the trust earlier. States have their own rules on this; for example, in Illinois you can terminate a trust if the value of the assets falls below $100,000.

Special Needs Trusts

Special needs trusts—that is, trusts set up to benefit someone with a permanent disability without jeopardizing eligibility for government benefits—are a different animal. If you're the trustee, you'll need to follow the terms of the trust and the law very carefully, to make sure expenditures don't make the beneficiary ineligible to receive Medicaid or Supplemental Security Income (SSI). For more on these, see How a Special Needs Trust Works.