Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Wednesday, April 23, 2014

Funding Trusts for Newborns


Some believe the best gift for a new baby is financial security, that is, a trust that will cover college costs or other future expenses.  It is fairly typical for grandparents to fund trusts for newborns, because they are likely to be more financially secure than parents and recognize that they may not be around when the child needs money for college. 

Cindy Peterson, a senior advisor at Delaware-based Lau Associates, says many of her clients use defective grantor trusts, or irrevocable trusts in which the grantor continues paying income taxes, rather than the grantor paying them out of the trust itself.  Peterson says her clients are reluctant to set up 2503(c) trusts, which require distribution at age 21.  She says giving up all of this money at once is inherently risky, and instead recommends a three-step approach with a third at one age, a third at another age, and finally access to the balance at another age.

Peterson does caution that trusts are not appropriate for everyone.  The benefits need to be weighed against the costs incurred in creating and administering the trust and income tax considerations.

See Jennifer Kelly, Trust Fund Babies: The Pros and Cons of Trusts for Newborns, The Trust Advisor, Apr. 21, 2014.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.


Estate Administration, Income Tax, Trusts | Permalink

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