Does Your Child Need a Trust?
If you’re the parent of a young child, estate planning can carry with it an extra
layer of emotion. After all, you’re making plans for who will take care of your
child if the unthinkable happens and you can’t be there to do it yourself. It can be
tough to think through these things, but planning for your child’s well-being is
part of what makes you a good parent.
In addition to choosing a guardian to take care of your child’s day-to-day
upbringing, you’ll also need to put some thought into how your child’s inheritance
will be managed. If your child will be inheriting a large amount of money; say,
many hundreds of thousands of dollars, then it probably goes without saying that
you’ll want to establish a trust. But what if you’re a family of more modest
means? In that case, you’ll need to decide between establishing a custodial
account on behalf of your child and establishing a trust for your child.
A custodial account is essentially a joint bank account, with a minor child and an
adult custodian named as accountholders. Since children can’t legally manage
their own money, the custodian manages the account on behalf of the child until
the child reaches the age of legal adulthood. At this point, the money in the
account belongs solely to the child.
Custodial accounts are easy and inexpensive to establish, but they lack certain
restrictions and safeguards that many parents prefer.
For instance, a lot of parents would prefer that their children not receive large
sums of cash in their late teens or early twenties, preferring that their kids wait
until after college or until they’re more mature and stable before they take
control of an inheritance. With a trust, you as a parent can dictate when your
child gets control of the money. It can be a little at a time; once certain
milestones, such as a college diploma, are reached; or when your child reaches a
certain age – say 25 or 30. Until that time, the trustee retains control of the
inheritance, and uses it to support your child according to your instructions.
Another drawback to having a custodial account is that there’s no way to restrict
how the money is spent. You may prefer that your child’s inheritance be used for
the basic necessities and for education, but the custodian may spend the money
on items you would consider frivolous. With a trust, you can set down rules for
exactly how your child’s money is to be managed, and the trustee is legally
accountable for following your guidelines.
Your estate planning attorney can help you assess your situation and decide
whether a custodial account or a trust is the best option for your family.
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