Putting away money for your child’s future is always an important idea on any parent’s mind. You do not have to be overly wealthy to create a trust in your child’s name. What is the main purpose behind setting up a trust fund? Basically, anything you place in that trust fund will avoid the death or estate tax in your location. The money or other items in the trust fund are already in your child’s name.
Another reason to set up a child’s trust fund is to place money for a specific purpose for your child, like a 529 savings plan for college, for them to use at a certain age or date. You may have your own reasons for doing this.
So what do you need to know before investing in a child trust fund?
- According to csbgroup.com law firm, Currently, as of about 2011, the child trust fund can be used, but is now what is called a Junior Individual Savings Account (JISA). This is a tax free way of saving money for your child. With this account you can invest in a range of assets from cash to bonds. This type of investment account gives parents a tax free option for their children up to the age of eighteen.
- There are restrictions to JISAs. No withdrawals are allowed until your child’s eighteenth birthday, except in cases of death or terminal illness. And at that point, only the child can withdraw the money.
- Different companies also offer different levels of restrictions and may cost more on a JISA or a Child Trust Account. Think about the service and the charges. You will want to compare different service providers. When doing this ask about administration fees, investment funds charges, fund and share dealing costs, and any other fees. If you plan on making a lot of investments for your children, you will want to keep the fees as low as possible.
- In any investment account, you want to consider whether you will have a say over where the money is invested. If you want to have a say or create your own portfolio, you need to either find an online company or other company that will allow you to do this. If you do not want to, there are companies that will do it for you. Find out what their policies are and any insurance they have on protecting your account.
- A benefit of the child trust fund service is that both friends and relatives can contribute tax free money each year. But similar to the JISA, no withdrawals can be made from the account until the child has reached eighteen.
- As far as risk goes when investing for your child, it is the same as when you invest for yourself. There is always a risk on losing money. But there are ways to mitigate that risk which includes investments that do not pay much in return but are as safe as it can possibly get. So it is a good idea to first determine your risk profile, or how much risk you are willing to take on.
- There are different types of assets you can choose from when investing and you will need to research and determine which you want to invest in. These include – stocks, bonds, mutual funds, savings accounts and certificates of deposit; and real estate investment trusts. Stocks typically offer the greatest return for the greatest risk, whereas savings accounts offer a very low return but are generally reliable.
- Do you want to set up a child trust fund for college? Then you may want to consider a 529 Plan. You can choose between a prepaid or savings plan where you buy credits for tuition as they cost today, and use them in the future when costs will likely increase.
- As for general investing, if you have never invested before, you want to definitely learn a bit more about it before you dive right in. Only buy what you know, and use the help of a professional financial investor if you feel you need the help. Mutual funds are also a great option so you do not have to pick individual stocks.
Remember why you are creating a child trust fund. It is to save for your child’s future. No matter when your child was born, things will be more expensive in the future in general. Why not give them a head start?
Photo: 401(K) 2012
Kara Perez is the original founder of From Frugal To Free. She is a money expert, speaker and founder of Bravely Go, a feminist financial education company. Her work has been featured on NPR, Business Insider, Forbes, and Elite Daily.
One Reply to “9 Things You Need to Know Before Investing in a Child Trust Fund”
I’ve heard and researched 529 plans, but wasn’t so familiar with child trust funds. Thanks for the breakdown. It is something that I may look into for the future, it seems like it could be an option for us!