Key Takeaways
- Critical Importance of a Trustee: The choice of trustee is paramount; a reliable individual or professional ensures the trust’s goals are met.
- Specificity in Asset Distribution: Conditions for asset distribution should align with beneficiaries’ maturity and needs, preventing misuse.
- Naming the Trust as Beneficiary: Essential for life insurance policies to fund the trust properly.
- Accuracy in Trust Documents: Proper drafting by an experienced estate planning attorney is crucial.
- Asset Transfer into the Trust: Without transferring assets, the trust remains an empty entity.
- Regular Trust Updates: Life changes necessitate trust revisions to reflect new circumstances and goals.
The Purpose Behind Parents Setting Up Trust Funds for a Child’s Future Success
Setting our children up for future success is one of the most important things we can do for them. We teach them how to navigate the world, ensure that they receive a solid educational foundation, and teach them how to interact positively with others, all in the hopes that they thrive as adults.
There is no substitute for providing our kids with these valuable lessons. Establishing a trust fund is one more way we can help our children be successful even if we are no longer around.
Despite what many people think, trust funds are not reserved only for the extremely well-off. Many parents set up a trust fund for their children as part of a broader estate plan. Even relatively modest trust funds can provide valuable support for your children when they need it the most. When evaluating whether a trust fund is right for you and your family, it will be helpful to understand how to set up a trust fund.
What Is a Trust Fund?
Trust funds are legal entities that hold assets on behalf of individuals or businesses. Three primary parties participate in a trust fund’s operation. Grantors set up the trust fund and provide its assets. Beneficiaries are the individuals who receive assets from the trust fund. Trustees manage the trust fund and the assets within it for the benefit of the beneficiaries.
Trust funds can hold a wide variety of assets and take on many different forms. Grantors can also set up different goals for the funds and place different types of restrictions on how distributions can be made to beneficiaries. An experienced estate planning lawyer can help you establish a trust fund that best suits your needs.
Why Set Up a Trust Fund?
There are several advantages trust funds have over other estate planning tools. Trusts are extremely flexible and can be tailored to fit nearly any need or situation. They allow families to protect their assets and can be used to carry out a wide variety of estate planning and financial objectives. Potential benefits include the following:
- Avoiding probate court when distributing your assets,
- Providing control over how your assets are distributed,
- Helping you to address complicated family dynamics,
- Helping beneficiaries manage their newly acquired assets,
- Minimizing your estate’s tax burden, and
- Protecting assets from creditors and lawsuits.
Trust funds give you more control over your assets than many other estate planning tools. Additionally, setting up a trust can simplify the process of distributing your assets to loved ones. An estate planning attorney can help you capture the many benefits of setting up a trust while tailoring it to accomplish your goals.
How To Set Up a Trust Fund For a Child
Setting up a trust fund is not as complicated as many assume. An estate planning lawyer can guide you through a few easy steps, and your trust fund will be ready in no time. So, how is a trust fund set up?
First, you must determine the goals you wish the trust to achieve. Think through what your ultimate goals are and how you want to accomplish them. For example, do you want your child to be given a set amount of money on a certain schedule, or do you want them to have unrestricted access to the trust funds and property?
Second, your attorney will help you determine the type of trust you want to create, and explain the different types of trusts that you can set up and how each type might align with your goals.
Next, set the specific terms of the trust. This is also when you will choose a trustee. Selecting a reliable trustee is one of the most critical decisions you will make when setting up a trust.
After setting the terms, you must draft and execute the trust documents. A lawyer can help you clearly state the terms of the trust.
Finally, you will need to fund the trust. Without any assets, the trust is just an empty legal shell.
The Biggest Mistake Parents Make When Setting Up a Trust Fund
There are several common mistakes that parents make when creating a trust fund. These mistakes will hinder the trust’s ability to accomplish its goals. Ultimately, your children will benefit if you avoid these mistakes.
Choosing the Wrong Trustee
If you appoint yourself as trustee, the successor trustee you appoint will manage and distribute the trust’s assets when you are gone. Choosing a reliable and trustworthy successor is essential. An unreliable trustee can mismanage the trust and use their position to funnel assets to themself. A trusted lawyer, accountant, or other person with professional financial and management skills is generally a good choice of trustee.
Providing Assets to Beneficiaries Without Outlining Terms
Everyone has heard stories of affluent young adults who receive an inheritance only to squander it quickly. Usually, we want trusts to provide long-term benefits to our children. Some young adults still need to gain the maturity needed to handle money and assets responsibly. Trusts allow you to set conditions for the distribution of assets. If you want certain funds to be used only for college expenses, you can specify that in the trust. Or, if you want assets distributed at certain times of your child’s life, you can create a term in the trust instrument providing for that. Ultimately, you will be helping your children in the long run if you align your trust provisions with their maturity level and spending habits in mind.
Not Naming the Trust as the Beneficiary of Insurance Policies
One way to fund a trust is to name it as the beneficiary of your life insurance or other insurance policies. It is easy to forget to do this. Once your trust fund is set up, you can change the named beneficiary to the trust. Your estate planning attorney can help you make sure the trust is named as the beneficiary of all your insurance policies.
Having Improperly Drafted Trust Documents
Correctly drafting the documents and forming a trust is essential. An experienced estate planning attorney who understands how to set up a trust fund is best equipped to craft these important documents for you.
Forgetting to Transfer Assets Into the Trust
A trust can only accomplish its goals if there are assets to fund it. Further, the trust has no control over any assets not formally transferred into it. Transferring assets into the trust can be the most time-consuming aspect of creating a trust fund. However, it is a critical element of the process. Your attorney can help you make sure that all of the assets you want to put into a trust are properly transferred.
Forgetting to Update the Trust
Life changes and our plans change along with it. You should update your trust soon after any significant life events happen. The best way to ensure you update your trust when needed is to review the trust annually. This habit helps you remember to make essential changes after significant life events.
Let Us Help You Protect Your Child’s Financial Future
At Beller Law, P.L., we help families create practical solutions for their estate planning and trust needs. We will help you make sure that your children are set up for future success. Schedule a consultation with us today to find out more about how we can help you plan for your family’s future.