3. Set Up a Trust for Each Child

A second approach is to establish a trust for each child. With this arrangement, you use your will or living trust to name a trustee (usually a trusted relative or friend), who will handle money or property the child inherits until the child reaches the age you specify. If the beneficiary is already over this age at your death, the trust never comes into being; instead, the property goes straight to the beneficiary.

The trustee must act in the beneficiary's best interests and follow your written instructions. Generally, the trustee can spend trust money for the young person's health, education, and living expenses. When the child reaches the age you specified, the trustee ends the trust and gives whatever is left of the trust property to the beneficiary.

Serving as a trustee is more work than is serving as a custodian under the UTMA. For one thing, a trustee must file annual income tax returns for the trust. And because the powers of a trustee are limited to what's allowed in the will or trust document, the trustee may have to show the will (or at least the part of it that outlines the trustee's authority) to banks and others with whom he or she deals. The powers of an UTMA custodian, however, are set out by state statute. Most banks and other institutions are familiar with them and know just what authority custodians have.

4. Set Up a 'Pot Trust' for Your Children

If you have young children, you may want to set up just one trust for all of them. This arrangement is often called a pot or family trust. In your will or living trust, you authorize the trust and appoint a trustee, who will have the power to dole out trust money to each of the children. The trustee doesn't have to spend the same amount on each child; instead, the trustee decides what each child needs. When the youngest child reaches a certain age, usually 18, the trust ends.

A pot trust provides great flexibility for the trustee. Its major drawback is that the older children can't receive their shares of the trust property until the youngest child turns 18; they may not get control over their inheritance until they are well into adulthood.