Trust funds can protect your children’s financial future and provide them with a safety net. However, a trust fund that is not set up properly could derail your plan.
Below, we discuss the biggest mistakes parents make when setting up a trust fund and give you practical information so you can avoid them.
Parties Involved in the Administration of Trusts
Before getting into the specifics of trusts, let’s get some definitions out of the way. Here are the parties who may play a part in setting up a trust fund for your kids.
| Party | Role |
| Grantor | A grantor makes the trust. |
| Trustee | The trustee is responsible for carrying out the terms of the trust for the named beneficiaries. |
| Cotrustees | Cotrustees are trustees who serve as trustees at the same time. |
| Successor trustee(s) | A successor trustee assumes the responsibilities of the current trustee if they resign, die, or become incapacitated. |
| Beneficiary | Beneficiaries benefit from the trust funds, through third-party payments or direct distributions. |
| Contingent beneficiaries | A contingent beneficiary only stands to inherit if a condition is met, such as the original beneficiary predeceases the grantor. |
Benefits of Trusts
Properly-structured trusts can protect your children’s financial future.Some of the most common reasons people include trusts in their estate planning strategy include:
- Avoid probate – A trust can help avoid probate, which is often an expensive and time-consuming process.
- Tax savings – Certain types of trusts, such as irrevocable trusts, may be able to help minimize or eliminate taxes, such as gift taxes and estate taxes. You could also be able to double your estate tax exemption.
- Asset protection – Certain types of trusts, such as spendthrift or irrevocable trusts, might be able to protect trust assets from creditors.
Biggest Mistakes Parents Make When Setting Up a Trust Fund
Some of the biggest mistakes parents make when setting up a trust fund and how you can avoid them include:
Not Setting Up the Right Type of Trust
There are several different types of trust. The best type of trust for you will depend on your needs and objectives. For example, you might need an irrevocable trust if your goal is to provide asset protection to your loved ones.
Revocable living trusts are a common way to provide flexibility throughout your lifetime while a special needs trust may be necessary if your child receives public benefits, such as SSI or Medicaid. Other types of trusts can help protect a surviving spouse or minimize estate taxes.
How to Avoid This Estate Planning Mistake
Carefully consider your objectives, and don’t hesitate to get legal advice from an estate planning attorney if you’re not certain about which type of trust is right for your situation.
Choosing the Wrong Trustee
Sadly, one of the biggest missteps a grantor can make when setting up a trust is to choose the wrong trustee. The trustee has one of the most important jobs because they are responsible for carrying out the terms of your trust. They owe a fiduciary duty to the beneficiaries, so they must act in their best interest, provide important information to them, and carefully safeguard trust assets. As such, the person you select to fulfill this role is an incredibly important one.
How to Avoid This Estate Planning Mistake
Many people choose close family members as their successor trustees, which may or may not be a good option. If you are concerned that your beneficiaries might be able to leverage their relationship with the trustee to get a disbursement you would not want them to have, you may be better off using a financial institution or trust company as your trustee.
Some of the most important things you should consider when selecting your trustee include:
- Trustworthiness
- Age and health
- Geographical proximity
- Financial savvy
- Whether the prospective trustee will follow your instructions and not deplete trust assets too quickly
If a problem arises with a trustee during your lifetime, such as a falling out or they declare bankruptcy, you can change the trustee if you have a revocable living trust.
Not Specifying the Purpose of the Trust
Because trusts can serve many purposes, this missing information could confuse your successor trustee after they take over. For example, are you wanting all of your children to be beneficiaries or just your child with special needs?
Do you want the trustee to continue managing trust assets once your children reach the age of 18, or do you want the trustee to consider managing trust assets while your children are young adults? Carefully considering these questions and answering them is a critical step to establishing the purpose of the trust, which you can then convey in the trust document.
How to Avoid This Estate Planning Mistake
Before setting up a trust fund, carefully consider why you are establishing it. If you fail to take this step, you could be opening the door to allow young adults who may not have the level of maturity to have a large sum of money.
Trusts can be set up in various ways to accomplish various objectives, such as providing college funds, managing real estate, or provide a steady stream of investment income to supplement their regular income.
To clarify your purpose, answer questions like:
- What do you want the trust funds to do for your children? Pay for college? Serve as a down payment on a house?
- When should your children have access to the trust funds?
- How do you want your property to be used?
- How often do you want your children to receive distributions?
- What role do you want the trustee to play?
Not Considering the Beneficiaries’ Different Needs
If you have multiple children, you might be wording the trust documents regarding beneficiaries in the same way. You might not be thinking about their individual differences and challenges. For example, you may have one child who has always been responsible and one who has not but may be restricting both of them from having access to their trust fund until they are 30.
Is this really necessary? Or, would you (and your beneficiaries) be better off providing individual provisions for each child?
Another consideration is how access to funds may affect their financial aid. For example, if you expect your child to go to college, giving them unfettered access to trust funds could make them ineligible for scholarships or grants. Likewise, giving access to trust funds to a child with special needs can make them ineligible for public benefits.
How to Avoid This Estate Planning Mistake
There are a few different ways you can handle this issue, including:
- Spreading out your children’s inheritance so they do not receive a large sum of money at one time, such as after a number of years or reaching certain milestones
- Allowing your trustee to have discretionary power regarding distributions so if your adult child does not have the maturity level to receive a distribution, it can be restricted
- Restricting distributions to payment only to third parties, such as a college to receive tuition payments or doctors who provide medical care for your beneficiaries
Not Getting Legal Advice or Assistance
Many people are able to create their own trust documents with minimal assistance. However, some cases are more complex and may benefit from having help from an estate planning attorney.
How to Avoid This Estate Planning Mistake
If you are confused about anything, seek legal advice from a lawyer from a law firm that focuses on estate planning.
Failing to Fund the Trust
Trust assets can consist of many different types of assets, including:
- Real estate
- Individual Retirement Accounts (IRA) and other retirement accounts
- Mutual funds
- Investments
- Savings accounts
- Checking accounts
- Personal property
- Insurance policies
- Life insurance proceeds
Funding the trust comes at the end of the process, but it is often forgotten. The last thing you want to do is go through all the trouble to set up a trust and then have it be ineffective because there are no assets in it.
How to Avoid This Estate Planning Mistake
Finalize the process by ensuring the trust is properly funded. There are different ways to fund a trust, such as:
- Making and recording a new deed to transfer real estate to the trust
- Retitling an asset into the name of the trust
- Contacting financial institutions to update beneficiary designations
- Having checks or other financial instruments made out in the name of the trust
- Creating new accounts the name of the trust
Not Periodically Reviewing the Trust
As your children get older and your finances change, it is important that you periodically review your trust to determine if it is still set up in a way that will fulfill your objectives. Estate planning is not a one-and-done process.
How to Avoid This Estate Planning Mistake
Reviewing your estate plan annually can often ensure that your plan can be changed to account for major changes, such as:
- The birth or death of a family member
- Marriage or divorce
- A change in medical status
- A change in relationship
- Changes in state law
- Major tax changes
- The purchase or sale of a major asset
You can easily make changes to your estate planning documents with passdown™.
Additional Tips to Help You Set Up a Trust
In addition to avoiding the common mistakes mentioned above, you can take additional steps to ensure your estate plan meets your needs, such as:
- Carefully considering the wants and needs of your beneficiaries
- Talking to your loved ones about your estate plan and their role in it
- Considering your non-probate transfers that will occur at your death, such as transfers to loved ones included on beneficiary designations for retirement accounts and life insurance policies
- Following all the laws in your state regarding the execution of trust documents, including the notarization of the documents when applicable
- Considering giving your trustee discretionary powers so they can make decisions based on the current events
Should You Set Up a Trust Fund?
Whether or not you should set up a trust fund for your children depends on many different factors, including their age, maturity level, needs, and challenges.
A trust fund may help protect assets, minimize taxes, and serve other important objectives. Knowing how to set up a trust fund in a quick and efficient manner can help you protect your children’s financial future.
Takeaway
Parents may make mistakes when they are setting up a trust fund for their children. However, careful estate planning and attention to detail can help avoid these common mistakes.