Creating a children’s trust fund is one of the most practical estate planning strategies. This type of trust can be used to provide educational funds and cover the cost of living expenses and medical care, as well as to protect inherited gifts.
Due to the fact that there are different types of children’s trust funds, it is advisable to speak with an estate planning law firm. Attorneys can offer guidance on the most appropriate strategies for overall goals, as well as help individuals achieve tax savings.
For the most part, parents make use of college trust funds or testamentary trusts. Both offer tax advantages to minor children and are managed by an appointed Trustee.
College Trust Funds
Those setting up college trust funds should learn about gift tax exclusions. A crucial factor is that tuition must be transferred from the fund to the school in order to receive the exclusion.
Another factor is that the university must be a qualified institution to provide formal education. Qualified educational institutions include accredited public and private colleges, trade schools, and preparatory schools.
Currently, the Internal Revenue Service gift tax limit is $14,000 per person per year. However, the IRS does not limit the amount of financial gifts provided for educational tuition and health care expenses, as long as the recipients meet the criteria in the guidelines.
Anyone providing financial donations to fund college should speak with a tax attorney to make sure they meet IRS requirements. Otherwise, they could face tax consequences.
Although college savings trusts are the most widely used, there are other ways to safeguard minor children’s money and assets. Some of the most popular include testamentary trusts, Section 2503(b) trusts, and Section 2503(c) trusts.
Testamentary Trusts
Testamentary trusts are a little different than most others. People prepare a last will and testament to establish the trust upon death. Cash inheritance gifts are managed by an administrator until the recipients become adults.
Living trusts are one of the best ways to ensure that children are financially secure if their parents pass away. The disadvantage of using this method is that the trust is not exempt from probate since it does not take effect until after death.
That said, executors can make use of estate planning strategies to avoid probate or simplify the process. These include things like the designation of beneficiaries to receive financial investments, real estate, and other types of titled property.
Obligatory Income Trusts for Minors
The Section 2503(b) is an irrevocable trust that provides annual income for the care of minor children. Funds are held in a custodial bank account and managed by a trustee until the beneficiaries reach adulthood. Once established, the terms cannot be changed without judicial authorization. Therefore, it is important to work with an estate attorney to ensure compliance and avoid future problems.
Section 2504(c) is another type of children’s trust fund that protects inherited gifts and meets the gift tax exclusion until the beneficiaries turn 21. Distributions are then taxed at fiduciary rates.
In addition, a Crummey trust can be established for those who need to obtain the gift tax exclusion after the age of 21. This is beneficial for students attending law or medical school or for those enrolling a few years after graduating from high school.
There is no doubt that establishing a children’s trust fund can provide financial security. That said, trusts must adhere to guidelines to avoid tax consequences. Getting help from an estate planning expert ensures assets are fully protected and qualify for the gift tax exclusion.