The 3 Most Popular Child Trust Fund Options


One of the most practical estate planning strategies is to create a children's trust fund. This type of trust can be used to provide funds for education and to cover the cost of living and medical care, as well as to protect legacy gifts.

Due to the fact that there are different types of children's trust funds, it is advisable to speak with a law firm in estate planning. Lawyers can offer advice on the most appropriate strategies for general goals, while helping individuals achieve tax savings.

For the most part, parents use college trust funds or testamentary trusts. Both offer tax benefits to minor children and are managed by a designated trustee.

College trust funds

Those creating trust funds for colleges should educate themselves about tax exclusions on donations. A crucial factor is that the tuition fee must be transferred from the fund to the school to qualify for the exclusion.

Another factor is that the college 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 donation tax limit is $ 14,000 per person per year. However, the IRS does not limit the amount of financial donations provided for tuition and health care costs as long as recipients meet the criteria of the guidelines.

Anyone who provides financial gifts for college funding should speak with a tax attorney to make sure they are in compliance with IRS requirements. Otherwise, they could face tax consequences.

While college savings trusts are the most commonly used, there are other ways to protect the money and assets of minor children. Some of the testamentary trusts, Section 2503 (b) and Section 2503 (c) are among the most popular.

Testamentary trusts

Testamentary trusts are a little different from most others. Individuals prepare a will and a will to establish trust upon death. Heirloom cash gifts are managed by a trustee until the beneficiaries become adults.

Testamentary trusts are one of the best ways to ensure the financial security of children in the event of their parents' death. The downside to using this method is that the trust is not exempt from probate since it only becomes effective after death.

That said, wills can use estate planning strategies to avoid probate or to simplify the process. These include the designation of beneficiaries to receive financial investments, real estate and other types of titled property.

Mandatory income trusts for minors

Section 2503 (b) is an irrevocable trust that provides annual income for the care of minor children. Funds are held in a custodian bank account and managed by a trustee until beneficiaries reach adulthood. Once established, the terms cannot be changed without court permission. Therefore, it's important to work with an estate attorney to ensure compliance and avoid future issues.

Section 2504 (c) is another type of children's trust fund that protects inheritance gifts and respects the gift tax exclusion until such time. that beneficiaries reach the age of 21. Thereafter, distributions are taxed at the trust rate.

In addition, a Crummey Trust can be created for those who need to obtain the exclusion of tax on donations beyond 21 years. This is beneficial for students who attend law school or medical school or for those who enroll a few years after graduating from high school.

There is no doubt that setting up a children's trust fund can provide financial security. That said, trusts must adhere to guidelines to avoid tax consequences. Getting the help of an expert in estate planning ensures that the assets are fully protected and are eligible for the exclusion of gift tax.

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