Setting Up A New Trust Fund Account

I have 2 nephews that are now of age where I am going to being investing on their behalf as part of a trust fund. The plan is:

– I put in $500 / year
– If they put in $500 / year
– Then I will match another $500 / year

Thus on a typical year we invest $1500 and this process starts when they are 11 or 12 and will go on until they are at least 18. For an account that means that the child will put in $500 * 7 or $3500, I will have put in $1000 * 7 = $7000, and then hopefully the market goes up by maybe $5000 over that time span, depending on performance.

The process of setting up a trust fund or UGMA / UTMA account (depending on which state that you reside) used to be kind of complex – but now it is very simple. You need to set up a brokerage account with yourself as a custodian and the child as the beneficiary. It is most practical to do this for a vendor where you already have brokerage accounts – someone like Schwab, Fidelity, or Vanguard.

The only information that you need is the child’s SSN, date of birth, and name (I assume you already know 2 of 3 of these, or they are having lonely birthday parties). In the past you had to fill out a lot of paper forms but now you can do it online and do an “electronic signature” which means that you don’t even have to sign the completed form and send it in (which can be a pain because there are a lot of pages and then they have to type in all the information and you have to re-check it to make sure it was set up properly). I was able to set up each of the 2 trust funds in about a half hour or so.

Every trust fund has 2 components – a money market account (where the cash initially goes in for investing, and where dividends are deposited and fees such as buys / sells are taken out of by the company), and a brokerage account where the stocks reside.

The trust fund can be connected to your own accounts with that same company (i.e. Fidelity or your own) so that you can electronically transfer funds into that account from your own money market account, for example. You can also set up the account so that you can transfer in funds from your bank, but this is more complex (you need bank routing information).

More information coming soon as we start to select stocks for the new 2009 investing round. I typically do this in mid-August before the kids go back to school – this gives them the summer to save up their share of the money through chores or working a summer job.

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