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How to Set Up a Trust Fund for your Grandchildren

How to Set Up a Trust Fund for your Grandchildren

February 28, 2024

As part of your legacy, do you want to leave behind financial freedom for your grandchildren? Setting up a trust fund to give them a firm financial foundation for their lives is a notable goal for many loving grandparents. A trust fund can be a strategic vehicle to ensure they have what they need to succeed financially. 

A trust fund comes with several estate planning benefits that ensure financial stability well into the future. For example, it could lessen the estate taxes they will pay upon your passing, allowing your assets to work harder for your grandchildren. It also grants you the ability to decide when and how distributions are handled. 

If these sound like benefits that you would like to ensure for your grandchildren, here is what you need to know about how to set up a trust fund for your grandchildren.  

Establish Your Goals

Before deciding on which type of trust to set up, it is important to establish clear goals for the legacy you want to leave. Why do you want to pass along money to your grandchildren?  The best path forward ultimately depends on what your goals are for their financial future. 

A trust may not always be the right option, so consider carefully what purpose you would like the money to serve. There may be other tax-advantaged accounts and vehicles available to you.

For example, you might want to give your grandchildren money for their college experience. If this describes your purpose, a 529 plan may be better suited than a trust fund. In this way, your goals can affect which type of trust is the best as well as the conditions you establish with your lawyer. Figuring out how the money should be spent in advance allows the entire process to go smoother and faster. 

A trust fund might be the right option for you under certain circumstances. Some examples of instances where trust funds are better suited include protection from spending all of the money at once or providing supplemental income. It could be used as a down payment for a house or to start a new business. It can give them the freedom and flexibility needed if they encounter major financial worries. 

Choose Your Trust Type

There are several types of trusts you may choose to implement for your grandchildren. The two major umbrellas that your trust may fall under are revocable and irrevocable trusts. Knowing the difference between the two allows you to plan for the future. 

A revocable trust is a great option if you think you may want to make modifications to it after the initial setup. While this flexibility is great, it comes with a few drawbacks. Revocable trusts do not offer protection in the event of a lawsuit or judgment. The assets and funds contained within it may be liquidated to cover the cost of a settlement. They may also be subject to state and federal estate taxes. 

With irrevocable trusts, you will not be able to make any modifications to the trust once the ink dries on your paperwork. However, there are lots of benefits to an irrevocable trust that you do not get with a revocable trust. For example, it is not subject to your estate taxes. It also provides protection in the event of a lawsuit because it protects assets. 

Other common trusts include charitable remainder trusts (CRTs), generation-skipping trusts, and family protection trusts

Charitable Remainder Trusts 

Charitable remainder trusts are a great option for those who want charitable giving to be a part of their financial legacy or for those seeking significant tax benefits. Furthermore, your grandchildren can start receiving distributions and you get the freedom to watch them enjoy it in the here and now. They can receive distributions at set intervals for the duration of their lifetime or a specific period of time. 

Keep in mind that CRTs are irrevocable trusts, meaning your beneficiaries and grandchildren will not have to pay your estate taxes on the sum included, but you also will not be able to make any changes after setup.

There are several different types of charitable trusts, and the best one for you will depend on your situation and the legacy you hope to leave behind.

Generation-Skipping Trusts

A less common type of trust you may set up in order to benefit your grandchildren is a generation-skipping trust. As the name implies, this permits you to skip over the generation of your children and award your assets to your grandchildren instead. Like CRTs, generation-skipping trusts may allow you to bypass the estate taxes on your assets.

One thing to note here is that the beneficiary should be someone who is less than 37 ½ years younger than you are. If you are interested in gifting to your grandchildren, this likely will not pose a problem for you. 

Family Protection Trust

Last but not least, a family protection trust might be a great way to leave behind your financial legacy for your grandchildren. Family protection trusts minimize estate taxes and are protected from creditors and lawsuits. These are often irrevocable trusts that may include special provisions considering government benefits.

These may be a great option for anyone who wants to ensure long-term care of a grandchild. You can set up a Medicaid trust that allows them to qualify for Medicaid before having to spend down the assets contained within the trust. Other options for family protection trusts include domestic and foreign trusts. 

Work with Professionals at Magellan

Don’t leave your trust to chance – work with professionals to ensure the wealth you’ve spent your life building is secured for your grandchildren’s future benefit. To this end, you often need an attorney, a financial advisor, and a CPA to help you hammer out the details of your new trust. Their help ensures that the trust works toward your goals for your family. 

With all of these professionals on board, you can rest assured that your trust is financially savvy, tax-efficient, and ultimately makes the most of your hard-earned dollars.  

At Magellan, we offer your tax, financial, and legal support all under one roof. We can ensure that all parts of your trust are tax-efficient and work in harmony toward your larger financial goals and vision for your grandchildren. Reach out to us today to learn more about how we can assist you with your generational financial legacy!

This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.