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Trust funds: They're not just for the 1 percent any more.
Several companies are now offering trusts that can be created online, can be quite small, and cost little to keep running. The new offerings are aimed at providing better investment returns for people who are trying to amass savings for their children, but who don't have enough money to make a customized trust practical.
(Read More: Alternative Ways to Pay for College)
Whether these new trust options are really right for you and your offspring is another question, however. They have significant pros and cons to consider.
"If you're telling me 'I don't have a lot of money to start with and I want to start saving for my kid's college,' I would set you up with a 529 plan," said Mike Blehar, a principal at Fort Pitt Capital Group and a financial advisor.
(Read More: How to Pick a College 529 Savings Plan)
But the creators of TrustEgg, a newcomer to the trust scene, beg to differ. TrustEgg offers what may be the simplest trust-creation option on the market. Users can create a trust account online in just a few minutes, with a minimum initial investment that can be as little as $1. They can also invite friends and family to contribute any amount to the account, whenever they like.
The TrustEgg trusts are structured as UTMAs, or Uniform Transfers to Minors Act trusts, which means that when a beneficiary turns 18 (or 21, depending on the state) he or she gains ownership of the assets. In the meantime, the assets are invested in Vanguard's venerable Wellington Fund.
"Trusts are normally for the top 1 percent. It doesn't make sense," said Jeff Brice, founder of TrustEgg. "They're amazing tools for everyone. It's for that lower 95 percent" who, without the minimum required to invest in a mutual fund, might be limited otherwise to low-yielding savings accounts. (The minimum for the Wellington Fund is $3,000, and its annual return in 2012 was 12.57 percent.)
Then there is Kiss Trust, a slightly more elaborate venture. Glen Armand, chairman of the board of Eastern Point Trust Company, which administers Kiss Trusts, describes the process of setting up the trust as "taking you through Turbo-Tax style," and says it takes about 15 minutes. In the process, though, users have more ways to customize their trust, specifying the allowable purposes for the funds and the age at which the beneficiary gains control of the assets.
Customers can choose between three levels of service and fees. The most basic allows for investments in an array of mutual funds, and the premium level provides investment management.
"This is kind of the Wal-Mart trust," he said. "We're bringing a tool to middle class America to allow them to better manage their finances."
Armand describes another advantage: His company is the trustee of the trusts, so "we're the ones who can say no" if beneficiaries ask for an early withdrawal or something else. If a young beneficiary is upset, "I cannot hear the bedroom door slamming from my office," he added.
He is wary of the UTMA structure, particularly the clause mandating that the beneficiary gain control of the assets at age 18. "The idea of me saving for my grandkids and the idea that at age 18 it will be theirs?" he asked rhetorically, adding that "in the brokerage community, UTMAs are laughingly referred to as Cancun accounts" because 18-year-olds may or may not get the idea to blow their trust money on vacations and such.
Then there is the financial aid question.
(Read More: Five Financial Aid Pitfalls to Avoid)
Both UTMA trusts and Kiss Trusts are irrevocable—once a contribution is made to either type of trust, it cannot be taken back. But UTMA trusts are counted as assets of the beneficiaries, while Kiss Trusts are not. And if the beneficiaries are college applicants seeking financial aid, having assets can sharply reduce what they are awarded.
Trusts of a certain size are also taxed at a high rate, though the target customer for TrustEgg and Kiss Trusts probably will not face that issue.
Certainly there are plenty of situations where a TrustEgg trust, a Kiss Trust, or some other kind of trust makes sense. For example, divorcing spouses might use them to give them both peace of mind that money set aside for a child's education will not be touched. An elderly grandparent might create a trust to hold the assets of a life insurance policy to insure that the money is used the way they intend.
"There are so many creative ways folks have found to use the product," Armand said.
The bottom line: A trust fund sounds enticing, and the new models may well work for you—but you can trust that sorting it out is not as simple as it seems.