What Is a Child Trust Fund?
The Child Trust Fund (CTF) is long-term tax-free savings account for children. It allows parents and families to contribute to an account on behalf of their child, and it is managed by a registered contact. When a child turns sixteen, they can take over the management of the account. Until then, the account is held in a protected trust. Children can make decisions about investments and the account will earn interest tax-free.
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Investing in a CTF is an effective way to build a rainy day fund. Having a rainy day fund can reduce the need to borrow money in the future and is a good way to prepare for unexpected expenses. Parents and family can top up the account to help with a child’s education, driving lessons, or a rental deposit.
If a child has a CTF, they can apply for a withdrawal once they turn eighteen. They can also withdraw money from their account when they leave school. As an added bonus, their account won’t be affected by their parents’ tax credits. Once they reach adulthood, they can continue to save their CTF money. This way, their funds grow faster.
A Child Trust Fund can be a great way to get on the property ladder or even invest in a gap year. You can use it to pay for driving lessons, a university course or to buy your first car. In addition, children can receive money from their CTF for essential needs.
However, it’s important to remember that you will need to choose the right person to be the registered contact for your child’s account. Choosing the wrong person can lead to complicated issues. Also, you may be charged legal fees if you have to go to court for something.
Alternatively, you can use a conventional investment account to distribute your assets to your child. Make sure that you don’t spend any of your child’s money on activities that could put them at risk, such as gambling or substance abuse. Similarly, you need to think about when you plan to give them access to their funds. Ideally, you should wait until they’re financially responsible before giving them the option of using the funds.
For young people with disabilities, a Child Trust Fund might be too difficult to manage. Even though they are still able to save, they might not be mentally capable of making decisions about investments. Hence, you should consider getting an independent trustee. These individuals will ensure that the disbursement of the assets is handled in an orderly fashion.
In addition to a CTF, you should also consider setting up a college savings trust. This type of plan allows you to contribute to your child’s college tuition without paying gift taxes. Another popular child trust fund is the 529 Plan. While it does have its disadvantages, it does provide donors with an unsurpassed tax break.
While a Child Trust Fund will encourage you to invest for your child’s future, it is important to remember that if you choose to do so, you are committing yourself to the account. You can choose to make payments to the account for a set period or until a specified age.