Parents and grandparents want the best for the children in their lives. With this in mind, some of them establish children’s trust funds - often days after a child is born. You may think wealthy families are the only ones who can establish children’s trust funds, but that’s simply not true.

What are children’s trust funds?

Children’s trust funds are similar to long-term savings accounts set up by parents or grandparents for the benefit of a child. It is a legal entity whereby one party, normally the parent or grandparent, sets aside a certain amount of money or property for the benefit of a minor child.

The property (money, stocks, bonds, or physical property) is held in trust by a trustee. The trustee is the person who looks after the property for the benefit of the child. This person may also be the grantor (the person who gave the money to the trust), but does not have to be.

1. The child is too young to manage the property. By setting up a trust for the property, the assets are protected for the beneficiary. The trustee will protect the assets until the child has reached the age set forth in the trust. Often children’s trust fund will set an age of 18 to 21 as the age at which a child may access the account.

2. The person setting up the trust is looking for tax savings. Income, estate, and gift tax advantages are common when establishing a trust for a child or grandchild. To understand the tax advantages of establishing a trust for your loved one, contact a professional tax advisor or financial consultant.

Once a children’s trust fund is established, the funds belong to the child. The person setting up the trust cannot reclaim the fund. Depending upon how the trust is set up, the child may be able to access some of the income or principal from the trust. Normally, however, trusts are set up to limit a minor’s access to the trust without getting approval from the trustee.

According to the Internal Revenue Service (IRS), there are two types of trust funds they will acknowledge.

The first is the 2503 which allows the use of the funds until the child reaches 21, at which point the money is disbursed and the child may choose to reinvest or spend as they see fit.

The second is the 2503b which distributes money to the child each year. If the child is too young, the money may be set aside in an account until the child is old enough to be given the money.

Choosing to establish a children’s trust fund is a serious matter. You’ll want to think about who should be the trustee, what requirements are going to be set in place, when or if the child will be able to access the funds while a minor, and more. To better understand children’s trust funds, speak with a lawyer and financial consultant. They will be able to give you the best advice for establishing the trust for your child or grandchild.