Setting up a Trust for Your Newborn
She wrinkles her face in disbelief. “Why would someone want to set up a trust for a newborn?”
“Um, so they don’t directly inherit a bunch of money?”
“Oh… You mean setting up a trust for the parents,” she says.
Yeah, that was what I meant. And as an ex-financial advisor, I should have known better than to phrase the question that way. While a trust may be set up with the intention of benefiting your children, the typical trust itself is in the name of and controlled by (i.e. “for”) the parent. So what exactly is a trust, why should new parents set one up, and how do they go about it?
Like a will, a Revocable Living Trust, or Family Trust, includes the details and instructions for how you want your estate to be handled at your death or incapacity. The trust is a legal document that holds title to your assets. When you transfer title to the trust, you do not relinquish any control, however. You can still buy, sell, borrow, or transfer whatever is placed inside the trust.
Some people confuse a trust with a will. The benefits of a trust, however, make the distinction clear. If, heaven forbid, something were to happen, which left your children orphans, would you want the court to dictate who manages your minor children’s inheritance? Probably not. A trust ensures that someone of your choosing manages the money for your kids, for as long as you want, in the manner you dictate.
Other benefits include:
- Avoiding probate: Probate is costly and time consuming. It’s also public. If you can avoid putting your family through it, why wouldn’t you?
- Avoiding taxes: Certain types of trusts (e.g. the irrevocable life insurance trust, or ILIT) can hold life insurance so it is not included as a taxable part of your estate. While life insurance proceeds are not taxable to the beneficiary, they’re includable in the estate, possibly resulting in estate taxes (depending on the size of your estate). By putting the life insurance in an ILIT, it’s not included in the taxable estate. Talk to your lawyer about this to see if it makes sense for you.
- Avoiding taxes II: If your estate is large enough to get hit with an estate tax, a family trust can also minimize estate taxes upon a spouse’s death.
- If you become incapacitated, a trust can designate who would manage your assets during your lifetime, acting much like a financial power of attorney, but embedded within the trust.
Bottom line: talk to an estate planning or family law attorney about whether any of the above applies to your situation, and what kind of trust makes sense.
When you meet with an attorney to put together a trust, he or she will want to understand:
- What your goals are,
- Who the beneficiaries should be,
- What assets you would like to place in the trust,
- Who will manage those assets, and
- When and how the assets will be transferred to the beneficiaries.
Having these answers decided beforehand can save you time (and attorney’s fees).