Setting up a Trust Fund might be the best thing you ever do for your little ones. However, if you don’t do it properly, you may inadvertently make things extremely difficult.
Learn about the biggest mistakes parents make when setting up a Trust Fund, and how you can avoid them. Best of all, we’ll even walk you through the best practices on how to set up your Trust Fund the right way, so you have the most protective plan possible in place for your loved ones’ financial future.
Should You Set Up a Trust for Your Child?
First, let’s address the elephant in the room. There’s a huge misconception out there that Trust Funds are only for extremely wealthy families, for children who will one day inherit extreme wealth. This could not be further from the truth. While the stereotype may have, at one time, been somewhat accurate, there are multiple reasons why a Trust Fund can be beneficial, regardless of how significant your wealth is.
Smart Estate Planning revolves around using the vehicles and tools you have to best protect your legacy, both now and in the future - and setting up a Trust Fund for your children can do many things, including:
Potentially reduce estate taxes in the future
Potentially reduce gift taxes in the future
Keep your estate out of probate
Allow you to protect loved ones with special needs
Offer protection from lawsuits or creditors
For more information about Trust Funds and different types of Trusts, check out our in-depth article What Is a Trust in Estate Planning?
How to Set Up a Trust Fund for a Child
The process of setting up a Trust Fund for your children doesn’t have to be complicated, time consuming or expensive. It really can be simple and streamlined. Follow these steps, and you’ll be done in no time!
Specify the purpose of the Trust
Clarify how the Trust will be funded
Decide who will manage the Trust
Legally create the Trust and Trust Documents
Transfer assets into and fund the Trust
1. Specify the purpose of the Trust
Before you open the Trust Fund For your children, you should have a clear idea about what the purpose of the Trust will be. Decide who the Trust will benefit - one, or all of your children? If certain assets will go to specific beneficiaries, that needs to be clearly defined.
Trust Funds can be set up for a number of purposes like providing college funds, as a way to hand down real estate, or as a tool to pass down other inheritances and assets. Trust Funds are also great ways to set up financial security for a loved one with special needs.
2. Clarify how the Trust will be funded
Setting up a Trust is only half the battle. After that’s done, a Trust needs to be funded so it can hold assets, offer protection and one day be distributed. As soon as you decide on the purpose of the Trust Fund, the next step is to figure out which assets the Trust should hold. Trusts can be funded through investments, real estate or straight cash.
3. Decide who will manage the Trust
Deciding on a Trustee (the person who will manage the Trust Fund) might be the most important part of the entire process. Obviously you need to choose someone trustworthy, as they’ll have the great responsibility of overseeing the management and distribution of the Trust on behalf of the beneficiaries (likely your children).
4. Legally create the Trust and Trust documents
Once you’ve made all the decisions about who the Trust will benefit, how it will be funded and who should manage it, it’s time to actually legally create your Trust Fund.
This can be accomplished by going the traditional, expensive route of meeting with an Estate Planning attorney. Or, if you’re looking for an equally effective, but substantially more affordable and accessible route, using a trusted online service like Trust & Will can be an excellent option.
5. Transfer assets into the Trust
Remember! You’re not finished until the Trust is funded. Funding a Trust essentially means you make the Trust the owner of any assets you want it to hold. If you transfer any real property into it, you’ll need to have a new deed executed that uses Trustee language. Other assets like accounts, investments or policies will need to be retitled to be Trust-owned as well. This is a simple process that you can complete by contacting financial institutions directly.
Once the Trust is fully funded, the Trustee you named can then begin to manage all the assets inside of it on behalf of your children. If you’ve named yourself as Trustee, you want to also name a successor Trustee who can step in when the time comes. The Trustee’s responsibilities include managing and distributing the Trust’s assets per the terms stated in the Trust.
The 4 Biggest Mistakes Parents Make When Setting Up a Trust Fund
While everyone goes into this process with the best of intentions, there are a few mistakes that we see fairly often. It’s easiest to avoid these common blunders by understanding them before you make them.
1. Not choosing the right Trustee
Choosing the wrong Trustee is a common mistake parents make. It happens honestly, and often stems from the fact that we just don’t want to think about the reality of us not being there, so we rush into the decision. It might feel easy to choose a close family member, because you know they’ll have your children’s interest at heart, but you need to think about some pretty realistic problems that can occur if you choose someone just because they’re related to you.
It’s important to take into account things like:
The Trustee’s health
How far they live from you
How old they are
How old they’ll be when your children are set to gain control of the Trust
Are they trustworthy
What their basic judgment skills have shown to be in the past
It’s so important to take the time to make the right choice about who’ll manage your children’s Trust Fund. Choosing the wrong person can result in a number of complicated issues with real consequences (like the Trust being mismanaged). And unfortunately, the worst part is there’s a good chance you won’t be around to fix things if the Trustee isn’t doing the job you envisioned.
Want to learn more about the role of Trustees? Find helpful information about what they do and how to choose the right one in our in-depth article “What Is a Trustee - Everything You Need to Know.”
2. Not being clear about the goals of the Trust
If you have the wrong goals, or if you’re not clear about what your goals are, you may open the door to young adult children having access to money that may do more harm than good. Thinking through how and when your children should gain access to their money is key to successfully setting up the most beneficial Trust possible for their financial futures.
Do you want your adult children to get money every year? Every three years? At a certain age? At the completion of a major life milestone or goal (like graduating college or getting married)?
Being thorough and thoughtful about how (and when!) your children get the money inside their Trust Fund is a key element to setting up a useful Trust.
3. Not including asset protection provisions
A major benefit to any Trust is the asset protection it can offer if you set it up the right way. Including spendthrift provisions inside a Trust Fund can prevent beneficiaries from making financially disastrous missteps that could result in a significant loss.
Another important component of having a Trust is setting up a system that serves as a sort of checks and balances. Checking in on assets over time can ensure they’re protected in the long run.
4. Not reviewing the Trust annually
Reviewing your Trust annually is so important. Things change in life, and your Estate Plan needs to change with them. Having an outdated plan can be as disastrous as not having a plan at all.
Consistently reviewing your Trust gives you the opportunity to reassess things like:
Who you’ve selected for the role of Trustee
Have you included every beneficiary you should?
Are there any beneficiaries who should not be included any longer?
Have there been births in the family that would result in a need to update your Trust?
Have there been any deaths?
Has your designated Trustee had a change in mental or physical health?
Remember that when you set up a Trust (or any part of your Estate plan) through an online service like Trust & Will, reviewing your plan becomes simple and incredibly affordable. No longer do you need to set up an appointment and meet in person with a lawyer, which takes both time and usually a significant amount of money.
Knowing how to set up a Trust Fund for a child can be a surefire way to provide for their financial future. And as you’ve seen, you don’t need to have millions for a Trust Fund to be beneficial. You just need to have a desire to protect your children, and the passion to set them up for a financially responsible future. If you have these things, a Trust Fund may be the next logical step for you to take.
Is there a question here we didn’t answer? Reach out to us today or Chat with a live member support representative!