The Biggest Mistake Parents Make When Setting Up a Trust Fund
April 21, 2021


Are you considering setting up a trust fund? Knowing what NOT to do is a great way to ensure that you are setting up your children for financial success in the future.  Trusts are a great way to spell out exactly how, when and what funds are available to beneficiaries.

However, there are some big mistakes parents make when setting up a trust fund for their children.

Key Takeaways:

  • Make sure you choose a trustee that is stable and trustworthy.
  • Establish your goals for the trust before you make any decisions.
  • Consider a minor’s maturity level and set up guidelines that state when and how the funds can be disbursed and used.
  • Set up asset protection provisions so that your beneficiaries do not run into financial difficulties.

 

1. Choosing the Wrong Trustee 

Choosing the wrong trustee can cause problems with your funds and your family. You need to choose someone who is financially stable, savvy and trustworthy. Even if you have a close family member or friend who would be great for the role, it may not be the best choice.

When a family member or friend is in charge of the trust, tension and resentments can result. Trustees may or may not take a fee for the time they spend managing the trust. If they do take a fee, the beneficiaries may be unhappy about it.

If the trustee doesn’t take a fee, they might feel that their time is being taken advantage of. A sure way to avoid this is to have a corporate fiduciary manage the funds. A corporate fiduciary will be able to look at everything without bias and make sound decisions. They will have a higher level of expertise to insure all the rules applicable to a trust are followed.  However, a corporate fiduciary will take percentage fee based on income and the principal value of the trust.

 

2. Setting the Wrong Goals

Setting proper goals will determine what type of trust you will create. If your goal is to avoid paying taxes on assets when you pass away, you would likely start an irrevocable trust fund. An irrevocable trust is unchangeable once it’s established so you need to be sure of your goals before moving forward with an irrevocable trust.  If you want to avoid taxes when you pass away, you must relinquish all interests in the trust assets.

If you’d like to have more control over the funds, may need the income or principal or want the flexibility to change the trust  a revocable trust would be the answer. Establish your goals for the trust before you make any decisions.

 

3. Disregarding the Minor’s Maturity Level

It’s important to consider a minor’s maturity level when you decide when and how much of the funds you will allow them to have access to. Generally, we don’t want to give a younger beneficiary a large lump sum of money to use for whatever they please.  It is likely that the  money would be used frivolously.

You’ll trust will include  guidelines and rules that state when and how you want the trustee to use the funds and when the beneficiary should gain control of the funds . You can decide if there are specific things you’d like the trust funds to be used for, like help buy a home or pay for a wedding.. You can also determine a schedule for funds to be available, rather than a large sum of money at once.

 

4. Not Setting up Asset Protection Provisions

If you don’t set up asset protection provisions, your trust fund could be at risk if your beneficiaries run into financial difficulties.

You can put provisions in place that don’t allow for beneficiaries to use the funds to pay off debt. This also means that creditors can’t touch any of the trust’s funds if the beneficiary has debt.

 

5. Set-Up Your Trust Fund

Setting up a trust fund is a great way to protect your assets, ensure your beneficiaries use their inheritance the way you’d like, and avoid taxes and probate.

If you’re curious about what type of trust fund is right for your situation or how to get started, you should consider consulting an experienced lawyer to help you.

 

Daley Zucker Attorneys Can Help!

It’s best to discuss your options with an experienced estate attorney who can offer legal advice and help you make the best decisions with your goals in mind so you can avoid making the biggest mistake parents make when setting up a trust fund.

Daley Zucker has been helping families throughout Central Pennsylvania sort through the complexities of estate planning for more than 50 years. Give us a call and schedule a consultation at (717) 674-8797.

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