A trust fund is a monetary account set up for another person to use at a later date. This procedure of putting money aside for someone else is called putting it “in trust” because another party — typically a financial institution — is entrusted with the responsibility of holding the money and overseeing the distribution of its funds. A child trust fund, then, is a trust fund set up for a child. The Child Trust Fund also is an official fund that was set up by the government in the United Kingdom.
Child trust funds can be set up like any other trust fund. Trust funds are typically set up by a parent or grandparent, the grantor, with the child or children established as the beneficiary. A trustee manages the trust and distributes the funds. When setting up a child trust fund, it's important to research local tax laws to ensure the funds distributed to the child or children aren't subject to any taxes, such as gift taxes.
An official child trust fund program was set up by the government in the United Kingdom in 2005. Under this program, the government sent every child born after September 1, 2002, a voucher for 250 pounds (about $375 US Dollars) — or 500 pounds (about $750 USD) if the family met the low-income threshold — to be put in trust for their future with the stipulation that it cannot be withdrawn by the child, parents, or any other party until the child turns 18. In addition, rules of the child trust fund allowed family members to add up to 1,200 pounds (about $1,800 USD) to the fund every year, at the maximum rate of 100 pounds (about $150 USD) per month.
The rationale behind the decision to start the program was to encourage families to save for their children on a regular basis so that children would have a large enough fund at age 18 to help with educational costs or other expenses. The government also provided for children whose parents did not set up the child trust fund by opening up the fund for the child if the parents did not open it within 12 months of the child’s birth. The child trust fund got off to a difficult start when financial institutions balked at participating in the program. In spite of this, the program did come to fruition and served as a viable savings program for children who otherwise might not have had savings.
In early 2010, however, the government decided to scrap the child trust fund program effective January 1, 2011. Accounts that already exist continue to be child trust accounts with the same rules. Although the government will no longer issue vouchers for the child’s account, family members may still add up to 1,200 pounds (about $1,800 USD) to the account each year; interest still accrues tax-free and funds in the account may not be touched until the child reaches the age of 18.