How to Set Up a Trust Fund for a Child: Types, Trustees, and Taxes

Setting up a trust fund for a child comes down to six decisions and a few pieces of paperwork: pick the type of trust, write the rules for when your child gets the money, name a trustee, draft and sign the document, get a tax ID if you need one, and formally transfer assets into the trust’s name. Attorney-drafted trusts generally run between $1,000 and $6,000, though simpler arrangements cost less. Each choice you make will shape how your child receives the money, sometimes for decades.

Pick the Type of Trust

Your first decision is revocable or irrevocable. A revocable trust lets you change the terms, move assets in and out, or dissolve it entirely while you’re alive. The trade-off is that the assets stay in your taxable estate because you still control them.¹ An irrevocable trust locks in the terms once signed. You give up control, but the assets generally leave your estate for tax purposes and gain stronger protection from creditors and lawsuits.

The federal estate tax exemption for 2026 is $15,000,000 per person, so the estate tax advantage of an irrevocable trust mainly matters to families above that threshold.² Below it, the creditor protection and control features may still be worth the loss of flexibility, but the estate tax savings alone probably aren’t.

Section 2503(c) Minor’s Trust

A Section 2503(c) trust is a specialized irrevocable trust for children under 21. Contributions qualify for the annual gift tax exclusion — $19,000 per recipient in 2026 — even though the child can’t touch the money right away.² To qualify, the trustee has to be able to spend the property for the child’s benefit before age 21, and any remaining balance has to pass to the child at 21 (or to the child’s estate if the child dies first).³ The catch: at 21, the child gets the right to withdraw the funds. Some families give the child a short window to demand distribution, after which the trust continues on its original terms.⁴

Special Needs Trust

If your child has a disability, an ordinary trust could disqualify them from Supplemental Security Income or Medicaid. A third-party special needs trust avoids that by giving the trustee full discretion over distributions and stating explicitly that trust funds supplement, not replace, public benefits. The trust needs a spendthrift clause, and the child should never have the right to demand distributions. Use an estate planning attorney who works in disability law; small drafting errors can cost the child their benefits.

When You May Not Need a Trust

For smaller amounts, a custodial account under the Uniform Transfers to Minors Act (UTMA) is simpler and often free to set up. The downside is that when the child hits the age set by state law — usually 18 or 21, sometimes as late as 25 — the money is theirs, with no strings on how they spend it and no shield from their creditors. A 529 plan is another alternative if the goal is specifically college or qualified education expenses. A trust is the better tool when you want control that lasts well into the child’s adulthood.

Write the Distribution Rules

The distribution rules are the heart of the trust. They spell out when your child gets money and under what conditions. Many families tie distributions to specific ages, often 25 or 30, so the recipient has some financial maturity first. Others use milestones like finishing a degree or buying a first home.

Staggered distributions are common. A typical structure releases a third of the balance at 25, half of what remains at 30, and the rest at 35. That keeps a young adult from receiving a large lump sum all at once. Estate planners generally advise against setting the first distribution age below 25.

Include a spendthrift clause. It blocks the child from pledging future distributions as collateral for debt and prevents creditors from reaching trust assets before they’re paid out. Most trusts have one, and it matters most for younger beneficiaries.

Choose a Trustee

The trustee manages investments, handles tax filings, and decides when distributions are appropriate. They owe a fiduciary duty to the child: they must put the child’s interests above their own.

You can name an individual (a family member, friend, or professional) or a corporate trustee like a bank’s trust department. Individuals often know the family and the child better but may lack investment experience or the availability to serve for decades. Corporate trustees bring professional management and continuity, but they typically charge 0.5% to 1.5% of trust assets annually, and many require a minimum trust balance of $300,000 or more.

Always name at least one successor trustee. If the primary trustee can’t serve and no successor is named, a court may have to appoint one.

Gather the Information You’ll Need

Before drafting, pull together the following for everyone involved:

Full legal names for the settlor (you), the trustee, any successors, and the child. Nicknames and shortened names create problems during transfers.
Social Security numbers for the settlor, trustee, and beneficiary.
Current residential addresses for all parties.

You also need a detailed list of the assets going into the trust. For bank and investment accounts, note the institution, account number, and balance. For real estate, find the legal description on the deed — the lot and parcel language, not the street address. For life insurance, gather the policy number and issuing company. Having this ready keeps the funding step from stalling.

Draft the Trust Document

The trust document spells out the trust type, the trustee’s powers and limits, the distribution rules, what happens if the child dies before the balance is fully paid out, and how the trust can be amended or terminated. Online template services can work for straightforward revocable trusts. An attorney is strongly recommended for irrevocable trusts, special needs trusts, or anything involving business interests or real estate in multiple states.

Two companion documents are worth preparing at the same time:

A letter of wishes: a non-binding letter to the trustee explaining your intentions, values, and any context about the child that should guide the trustee’s discretion. The trustee must consider it but isn’t legally bound to follow it.
A pour-over will: a short will directing any assets you own at death that weren’t already moved into the trust to pour into it. It catches property you forgot to re-title or acquired after signing.

Sign the Trust

Unlike a will, a trust generally doesn’t require witnesses or notarization to be valid in most states. Your signature as settlor is usually enough. Notarize it anyway. Banks, title companies, and other financial institutions routinely ask for a notarized trust before allowing account changes or property transfers, and any deed transferring real estate into the trust has to be notarized regardless.

Some attorneys also arrange for witnesses even when the law doesn’t require them, because witnesses can later attest to your capacity and voluntary intent if the trust is challenged. Witnesses should not be beneficiaries or the named trustee.

Get a Tax ID and Fund the Trust

Whether the trust needs its own tax identification number depends on the type. A revocable trust normally uses your Social Security number during your lifetime because the IRS treats it as a grantor trust.¹ An irrevocable trust is a separate taxpayer and needs its own Employer Identification Number.⁵ You can apply online at the IRS website for free, and the EIN is issued immediately.⁶

Then comes funding. An unfunded trust is just paper; the trust only controls what has been formally moved into its name. Each asset type has its own process:

Bank and investment accounts: contact the institution and provide a certificate of trust, a short document proving the trust exists and identifying the trustee’s authority without exposing private distribution terms. The institution re-titles the account.
Real estate: prepare and record a new deed with the county recorder transferring ownership from you individually to you (or someone else) as trustee. The deed must include the legal description and be notarized.
Life insurance: contact the insurer to change the beneficiary from an individual to the trust. This keeps proceeds from going directly to a minor, which can trigger a court-supervised guardianship.

Retirement Accounts Are Different

Naming a trust as beneficiary of an IRA or 401(k) is more complicated than naming it on a life insurance policy. Under federal rules, a trust isn’t treated as a “designated beneficiary,” so it may not qualify for the same distribution timeline an individual would get.⁷ In some cases the entire account must be emptied within five years of the owner’s death, which accelerates the tax bill. A properly drafted see-through trust can avoid that outcome, but the requirements are technical. Talk to a tax professional before naming a trust on any retirement account.

Understand the Tax Consequences

A trust for a child creates several tax situations that catch families off guard after setup.

Gift Tax

Moving assets into an irrevocable trust is treated as a gift for federal tax purposes. In 2026, you can give up to $19,000 per recipient without owing gift tax or filing a return. Married couples can combine exclusions for up to $38,000 per child per year. Amounts above that count against your lifetime gift and estate tax exemption of $15,000,000.² Contributions to a 2503(c) trust qualify for the annual exclusion even though the child can’t access the money right away.³ Transfers to a revocable trust aren’t completed gifts because you can take the assets back.

Trust Income Tax

An irrevocable trust that earns income files Form 1041 if its gross income is $600 or more for the year.⁸ Trusts hit the top federal bracket of 37% at just $16,000 of taxable income in 2026, compared to over $626,000 for an individual.⁹ Distributing income to the child each year shifts the tax to their lower rate, but that can conflict with the point of restricting access.

Kiddie Tax

When trust income is distributed to a child, the kiddie tax may apply. In 2026, the first $1,350 of a child’s unearned income is tax-free, the next $1,350 is taxed at the child’s rate, and anything above $2,700 is taxed at the parent’s marginal rate.¹⁰ It generally applies to children under 19, or under 24 if they’re full-time students. Keeping annual distributions below $2,700 minimizes the combined tax.

What the Trustee Does After Setup

Setup is only the start. The trustee has continuing legal duties that last as long as the trust does.

Most states require the trustee to give beneficiaries written financial reports at least once a year, showing assets and market values, income received, expenses paid, and trustee compensation. A parent serving as trustee for their own child should keep the same careful records a corporate trustee would.

The trustee also has to invest prudently. Under the standard most states use, that means investing as a reasonably careful investor would given the trust’s purposes, the child’s needs, and overall risk and return — not any single holding in isolation. Self-dealing is a serious breach and can leave the trustee personally liable for losses.

If the trust is irrevocable and earns more than $600 in gross income, the trustee files Form 1041 with the IRS each year and gives each beneficiary a Schedule K-1 showing their share of the income.¹¹ Missed deadlines can trigger IRS penalties. Many families hire an accountant familiar with trust taxation once the trust is funded, especially as it grows.

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