Setting Up a Trust: 3 Terms and Conditions to Include in Regard to Borrowing from the Trust

If you're concerned about your children's financial future and their ability to manage their own finances, setting up a trust fund in their name might actually be the best option available. While only 0.95% of Americans have a trust set up in their name by their parents, trust funds are actually a great idea for even an average American. Trust-fund management services ensure that the money within the trust fund is used appropriately and properly. On top of managing the trust and ensuring growth in the portfolio, trust-fund management services can also set up different terms and conditions regarding how the assets in the trust fund can be used. This article will look at three terms and conditions that need to be considered if you want to provide your children with the option of borrowing from their own trust fund.

The Types of Situations in Which Borrowing from the Trust Is Allowed

To ensure that the assets in the trust fund are used appropriately and properly, you should always carefully define the circumstances and situations when the management services will allow for the trust-fund recipient to borrow money from the trust. For example, you should consider whether you will only allow your children to borrow money in the event that they are experiencing a financial crisis, such as a foreclosure, or whether your children can borrow money from their trust fund if they are interested in enrolling in a trade school or post-secondary school. In the event of the latter, being able to borrow from the trust fund can help your children avoid hefty student-loan fees.

Upon defining the situation in which borrowing from the trust fund is allowed, it's also important to consider whether the trust-management service should require certain proof or receipts before approving the loan. For example, in the event that your children are looking to enroll in a trade school or post-secondary school, you might want to insist that the loan can only be approved once your children has been accepted into a trade school or university and have signed up for classes.

The Maximum Length of Time Allowed to Pay Back the Loan

If you allow your children to borrow from the trust fund, you'll also need to consider whether you are going to set any restrictions within the terms and conditions of the fund involving when the loan needs to be repaid. You also need to consider whether you would require the trust-management services to come up with a feasible and practical repayment plan with the borrower before the loan can be approved. Your children are more likely to pay back the loan if the terms and conditions of a repayment plan have been established.

You can give your children the option of paying back the loan all at once or within several payments. You should also consider whether you want to allow a grace period during which your children can enjoy the loan without having to worry about making any payments to the loan or paying any interest on the loan.

The Consequences Involved with Failure to Pay Back a Loan

There's no reason to come up with all of these terms and conditions and provisions unless you also define what the consequences are for failing to pay back the loan. The trust-management services will be responsible for enforcing the consequences you have outlined. For example, you might want to ensure that additional funds from the trust fund will be locked until the loan is completely paid back, or you might want to start charging interest on the money borrowed.

Clearly defining the consequences involved with failure to pay back a loan, as well as the responsibilities of the trust-management services, is crucial in keeping poor money habits in check.

Conclusion

If you've set money aside for your children in a trust fund, you most definitely want to make sure that they money is put to good use and not being wasted. Allowing your children to borrow from the trust fund can cause conflicts to arise, so you definitely need to sit down with a representative from the trust-fund management company to determine the types of terms and conditions and provisions you should include to protect the fund from being abused or taken advantage of.

Talk to a company such as Home State Bank to learn more. 

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