Setting Up a Trust Fund: Is It Worth It?

Start-ups continually aim to solve the world's problems in an effort to seize the value created by offering a new product or service -- for example, simplifying the process of setting up a trust fund. That's just what a new savings service, TrustEgg, sets out to do with trust funds for children, also known as Universal Transfer to Minors Act custodial accounts.

TrustEgg charges nothing for signing up, but it charges a yearly expense ratio. Is this slicker form of custodial account worth the extra expense?

Should you hand your child a basket of golden eggs when they turn 18? Source: 401(k) 2012 via Flickr.

TrustEgg's version of setting up a trust fund
TrustEgg allows customers to open a trust for a child with no minimum balance, and it invests that money into Vanguard Wellington Fund (VWELX), which is composed of two-thirds stocks and one-third bonds. In addition, TrustEgg promotes the ability for family and friends to easily add to your child's account. For all of its services, TrustEgg charges an expense ratio of 0.89% per year.

TrustEgg notes that this particular type of account allows for any use when the child turns 18 -- not just education expenses, like a 529 savings account. However, income in this trust account is taxed, and assets are weighed against any calculation that determines college financial aid. And once a contribution to a trust is made, it cannot be taken back -- no matter how a child behaves.

Setting up a trust fund yourself
If filling out a few more forms in a potentially less convenient manner doesn't bother you, and you have the minimum $3,000 to open a Vanguard account, there is potential to save. This is because while TrustEgg charges 0.89% per year, the Vanguard mutual fund it invests in charges only 0.26% per year. With a balance of $3,000, the difference in fees amounts to about $20. Over the long term, the gap widens. Imagine, for example, that you start with a balance of $3,000 and add $1,200 per year:

Year TrustEgg  Wellington 
1 $3,000 $3,000
2 $4,473.90 $4,492.80
3 $6,082.37 $6,131.30
4 $7,837.69 $7,929.71
5 $9,753.27 $9,903.65
6 $11,843.74 $12,070.25
7 $14,125.07 $14,448.30
8 $16,614.69 $17,058.46
9 $19,331.62 $19,923.36
10 $22,296.59 $23,067.88
11 $25,532.27 $26,519.31
12 $29,063.37 $30,307.60
13 $32,916.85 $34,465.62
14 $37,122.16 $39,029.46
15 $41,711.42 $44,038.74
16 $46,719.67 $49,536.92
17 $52,185.17 $55,571.72
18 $58,149.68 $62,195.52

Author's calculations. Assumes that the dividend rate is 2.4% per year, stocks return 10% per year, bonds return 3% per year, and 66% of the Wellington Fund remains in stocks.

Over 18 years, the difference in fees works out to $4,000 in this example. The good news is that these accounts won't grow much further apart unless the child decides to keep the fund invested with the respective services.

Whether or not the ease of TrustEgg's product is worth the final difference is up to you. However, with no account minimum hurdle, it certainly simplifies the first step of setting up a trust fund.

Other trust fund considerations
When the child turns 18 years-old, they will have free reign over the account. And, if they've had no hand in their financial life up to that point, without thinking of a savings or checking account, receiving a large lump sum may not be the best crash course in finance. You might instead consider setting up a retirement account for your child, or the previously mentioned 529 educational savings plan, as a more strategic investment in their future.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click hereto discover more about this industry-leading stock and join Buffett in his quest for a veritable landslide of profits!

The article Setting Up a Trust Fund: Is It Worth It? originally appeared on

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story