All parents want to know that their children will be looked after if something happens to them, which is why you should start thinking about their financial future as soon as possible. If you start putting money aside for them now, it will be much easier to help them manage financial challenges like paying for college, for example. Having some money set aside also ensures that they are supported if something bad were to happen to you. Nobody likes to think about that but you never know what could happen, so you need to be prepared.
When you are setting money aside, it’s always a good idea to put it into a trust. When you start a trust, the money you put into it is controlled by the trustees (the parents) and it must be used to help the beneficiaries (the children). You are able to set out certain rules about how and when the money is used, so they can only access it when they go to college or get married, for example. Assets like your house can also be placed in a trust so they cannot be immediately sold.
However, you need to make sure that you set your trust up in the right way so your money is protected and your children get the most out of it. If you are starting a trust for your child, here are some important things to keep in mind.
Choose Legal Guardians Carefully
If something bad were to happen to you and your children were placed in the care of a legal guardian, you need to make sure that their inheritance is protected. All assets for minors should be kept in the trust until they are at least 18, so legal guardians cannot access them. Even if you think that somebody will make a good guardian, will they be responsible enough to manage the trust? They need to know how to communicate with beneficiaries as a trustee and make the right decisions about money. So, when you are drawing up a will and deciding on legal guardians, make sure that you protect inheritances and think carefully about legal guardians and whether they are capable of managing the trust. You can always leave the trust under the management of somebody else instead of allowing the legal guardian to manage it.
Don’t Make Funds Accessible Immediately
You might think that it’s best to leave the money in a trust until your child turns 18 and then make it accessible to them. If you have specified that the money should be used for college, that’s fine, but you shouldn’t give an 18 year old unrestricted access to a large amount of money. Most people make bad decisions when they are a teenager and if you give them lots of money in one lump sum, they will burn through it in no time at all. It’s much safer to wait until they are a little bit older and then give them access to the money. You should also consider creating a lifetime trust and releasing money throughout your child’s life.
A lifetime trust gives them more protection because the money is still under the management of the trust. If the money is released in one lump sum, it then becomes theirs and is subject to any creditors that they owe money to and can be accessed by a spouse. There is also the chance that they will make poor decisions with the money and end up in a bad financial position. Creating a lifetime trust is the best way to make sure that they have a financial safety net throughout their life, which gives you peace of mind as a parent.
Create Separate Shares For Each Child
Having one lump sum that is shared between all of your children can lead to some big arguments. Everybody has different financial goals, so it’s better if each child is free to decide what they want to do with their share of the money. For example, if one child wants to go straight into work instead of going to college, it’s not fair if they have to pay for their sibling’s education. Giving everybody their own shares means that each child can meet their own financial needs without causing any disputes with everybody else. This is especially important if some of your children are worse with money than others. You don’t want to run the risk of one child making bad decisions with the money so the rest of them lose out.
Start Contributing Early
The earlier you start contributing to the trust, the easier it will be to build up a healthy amount. The biggest mistake that people make with saving of any kind is that they wait until they are able to put aside a big amount each month. But something is better than nothing, so even if you can only spare a small amount of money at the end of the month, start saving straight away.
If you don’t have much room left in your budget, look for ways to cut back on your expenses so you can contribute more money to the trust. Finding ways to save on your mortgage or your energy bills will give you more expendable income, which can then be put aside for your children.
Make Some Investments
Saving money each month is important, but you should also make some investments. Any investments that you have can be held in a trust for your children, where they grow over the years. Investing some money in stocks and shares is a good way to make your money work for you and grow instead of stagnating. There are risks involved, of course, so you shouldn’t put all of your money into investments, but if you take the time to do your research, you should see some great profits.
Setting up a trust is the best way to make sure that your children are financially secure in the future. However, it’s important to follow these tips to make sure that the process goes smoothly.