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                      CHILDREN'S  TRUSTS


While there are many kinds of trusts available, this type of trust is often used where the objective is management and control of the assets in the trust. This comes up in situations when outright gifts to the children would not be desirable because the assets might be wasted.

Importantly, the trust avoids probate court and the costs, delays and challenges associated with that process. In addition, this trust serves as an asset protection trust. Assets in it are shielded from the children's creditors in the event of a major court judgment, bankruptcy, divorce, etc.

While management and control also can be achieved by establishing a custodial account for the child under the Uniform Transfers to Minors Act (UTMA), the disadvantage of the UTMA is that the assets must be distributed outright to the child at an early age, usually age 21.

In contrast, in a children's trust, the assets can continue to be managed in the trust well past age 21; for example, the trust could continue until the child finishes college, gets married, produces grandchildren, or attains a certain age such as 25, 35, etc. Provisions can be written into the trust that require mandatory periodic distributions, or that give the trustee complete discretion over distributions. The trust creator can also choose the exact circumstances in which distributions can be made (e.g., for education, a new home, etc.).

Parents can act as trustees, thus eliminating administration costs and issues that arise from having someone else manage the assets.

The trust can be set up as a grantor trust to simplify administration; on the other hand, you may want to avoid the grantor trust rules so that the trust is a tax-paying entity. In the latter case, the trust may be able to offer income tax-splitting advantages.

The irrevocable children's trust also can be used to eliminate estate taxes on the future appreciation in the underlying assets. Where elimination of estate taxes is not an issue, the trust can be revocable. The trust also can be established by way of a will (i.e., be testamentary in origin).

Finally, the trust can be revocable, which gives parents the flexibility to amend or revoke the trust. This option also probate court, but not federal estate taxes, and thus is not recommended where the trust will be funded with substantial assets.

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C. Francis Baldwin
Updated Wednesday, May 26, 2004