This article is written by Kushang, from Himachal Pradesh National Law University (HPNLU). This article talks about trust funds and its advantages for the children. The article also mentions the issues revolving around the trust funds.
Table of Contents
Introduction
‘All parents want a better future for their children and a trust fund is a tool to achieve it.’ Not many consider Trust funds as an option to safeguard their children’s future instead they think it as an option that rich kids enjoy. In the UK, trust funds are in the news due to the withdrawal of money from the fund by the beneficiaries for the first time. Children born from 2002 were given vouchers by the government to invest in their future, with the money accessible at the age of 18. Millions of people would turn 18 in September and receive the benefit for the first time. It was a scheme by the then Labour government to encourage parents to save for their children’s future. The scheme was scrapped entirely by the coalition government in January 2011. This fund would help the children in their studies and future endeavors. Most people are not aware of what a trust fund is and what its benefits are. People have now realized the importance but are still not much aware of the fund. Thus, it has become important to study about trust funds and its advantages for children.
What is a trust fund
A trust fund is a legal entity that can hold property on behalf of someone or some group. The person who creates a trust fund is called a trustor, grantor, settlor, or trust maker. The trustor chooses the conditions and rules behind the trust and decides what property the trust will own. The person who the trustor wants to provide the money or property is known as the beneficiary. The beneficiary of the fund may not be called an owner as there are certain conditions attached. For instance, a trust fund allows a beneficiary to live in the house but he cannot sell it or other conditions like inheriting the property after turning 25. Another term related to the trust fund is a trustee. A trustee is an entity or person who oversees the money and property of the trustor. This person ensures that all conditions are met while distributing the property to the beneficiary. Trusts can have multiple or co-trustees. The trustee is often paid a small management fee.
Many people get confused about how the trust fund works. It can be understood by an example. Suppose a person has a granddaughter and he is concerned about her future education. But he only wants the money to be used only for educational purposes. Thus, the grandfather can specify such conditions in the trust fund that the money can be used by his granddaughter only for education. The granddaughter can take the benefit of these funds to fulfill her educational aspirations.
In India, these trusts have been compulsorily registered and governed by the Indian Trusts Act 1882.
Types Of trust funds for children
Trust Funds can be very beneficial for children. It can help them in the future in various ways and gives a sense of protection to them. Basically, there are two broad categories of trust- revocable trust and irrevocable trust. In the former, any changes can be made by the trustor at any time while the latter cannot be changed and gets over only when tenure is over. There are various types of Trust Funds for Minors or children:
Pot trusts
These trusts are beneficial for families having more than one minor child. These funds are generally for the use of the children. The parents need to determine a specific stage where the provision of the trust fund ends. For example, when the child turns 18, or they graduate, etc. The fund remains in trust until this stage is reached by the last child. After the stage, the distribution may take place between children.
Education trusts
As the name suggests these kinds of trust funds relate to only the educational purpose of the children. These trust funds can be revocable or irrevocable. Irrevocable means that no changes can be made to the trust once it has been created by the trustor. For example, a trust fund created for meeting the educational expense of the children when they reach college is an educational trust fund.
Trust-bound life Insurance
This is also an irrevocable trust that includes a life insurance policy. The benefit of such trusts is that it removes the death benefit from the general estate for tax purposes. This would lead to a tax-free payout to the minor children upon the death of the trustor. The drawback is that since it is an irrevocable fund, no changes can be made by the trustor.
Grandchildren trusts
Sometimes, the grandparents want to leave behind property and assets for the better future of their grandchildren. This prevents their children from spending their inheritance on themselves. But the parents of the grandchildren may have access to the trust in order to support the grandchildren, depending on written terms and conditions.
Difference between Will and Trust
Many times people get confused between a will and a trust. Sometimes these two terms are used interchangeably. But these are not the same thing. They may be similar but there are various differences that exist between a will and a trust. A will is a document that states the inheritance of the property after the death of a person. It involves appointing a legal representative to carry out the process. One main difference between a trust and a will is that a will goes into effect only after the death whereas the trust funds take effect as soon as you create it. It can be used before death, at death, or afterward.
Another difference is that a will passes through a probate that the court interferes in the matter of will. This is not the case in trust. The court does not interfere and hence it is more private. This also saves time and money.
Another major difference is that in a will, a person mentions the property and states who should get it. In trusts, the same has to be done plus the property mentioned has to be ‘transferred’ to the trust.
Will can be revised whenever the person wants. But, irrevocable trusts cannot be revised later as stated above. One may think which is a better option: a will or a trust. The answer to such a question is totally dependent on the situation and the person who wants to use them. Some may prefer will over trust while some may prefer trust over will based on their choices.
Advantages of trust funds for children
The trust fund can be very beneficial for children and their future. Some of the advantages of the trust fund is mentioned below:
- The trust exactly specifies who should receive the benefits. Thus, there will be no confusion regarding who should get what.
- In a trust fund, conditions can be applied. For instance, a beneficiary would receive the funds only after reaching a particular age. This actually helps in maintaining the objective of giving such benefits to children.
- The trust funds can ensure that not all money is spent in one go. This can be done by paying the funds to children at a particular age. For example, payment on reaching 18 years then another payment on attaining 21 years, and so on.
- It also helps to protect the business and provide financial security to the children.
- The trust helps in preventing the children to depend on others if their parents are no more. If the parent had a trust fund for their children, then the children can take those funds to carry forward their life.
- The trust fund can provide the child with a solid start to his or her adulthood. It can provide them financial security in their life.
- The trust also ensures that the property transferred is safe and protected. This is done by the trustee. The trustee ensures that the fund is used in the proper and correct manner as per the wish of the trustor.
- The trust fund would ensure that the fund is not used lavishly and carelessly by the children.
- The trust fund also ensures that money is available when there is a need. Especially in a country like India where the fees involved in higher education are high, these trust funds can help to overcome such problems and thus remove the financial hindrance that may develop in the education of the children.
Issues related to trust funds
Though there are many advantages related to the trust fund. Still, there are certain issues that relate to the trust fund. Some of the issues are:
- The cost related to the creation of a trust can be a problem for many people. This is the reason many don’t indulge in trust funds.
- Administering the trust fund may be more complicated than simply transferring assets to a beneficiary after the trustee passes away.
- Although trust funds may make sense in some cases because of the tax benefits, living trusts don’t actually confer the same major tax benefits as irrevocable trusts.
- Another disadvantage is setting up a trust fund for a child who is not capable of handling the responsibility. Thus structuring the fund is very important so that the money is distributed over time.
- Trust funds can also lead to children becoming more reluctant to excel and work as it provides them a sense of financial security. This leads to the overdependence of children on trust funds for spending their life.
- The trust fund involves the transfer of property or assets. Thus, the trustor may lose his property and in case of an irrevocable trust fund, no further changes can be made by the trustor in the future.
- Trust is more complicated to draft than a will.
- People sometimes tend to forget that they even had a trust fund account for their children. This has been the case in the recent trust fund scheme of the UK in 2002. Now, most of the people don’t remember or have lost the details about the trust fund account.
Conclusion
The trust fund contrary to what common belief is established so that if something happens to the parents, the child would still have assets and property to survive. People think that the term trust fund is related to rich kids who have extra funds or money to spend when they grow up. There are certain concerns related to trust funds. However, these issues can be solved if parents are careful while creating trust funds.
This includes the selection of the right trustee. After reading about trust funds, it is clear that a trustee plays a very vital role in trust funds. They are the ones who manage the trust and ensure that everything is done according to the trustor. Thus, it is very important to select the right person. A family member may not always be a perfect choice.
Apart from this setting, the right goal is very important. It is very important to analyze what these funds should be used for. Sometimes if the total responsibility is given to an 18-year-old boy, he may not be able to manage the money responsibly. Thus, proper study and analysis have to be done to achieve the goal that parents have for their children. Proper attention should be given to the paperwork process involved in the creation of trust funds. The name of the beneficiary and trustee should be correct to avoid any issues in the future. In the case of a living trust, a review of the trust should be done each year. The review is important as people tend to forget about the trust funds as it happened in the UK. In the end, as stated above, plan the trust fund for a better future for the children like a trust fund for college fees, etc.
Thus, it is important that people become aware of such important things and use the trust fund for their children. Trust Fund is for ensuring the security of children and is not only for rich kids.
References
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