How to Set Up a Trust Fund for Your Child: Avoiding Common Mistakes
As a parent, securing your child’s financial future is an extremely important responsibility. You work hard to provide for your kids while they are growing up, but you also want to ensure their financial security long-term after you are gone.
One of the best ways to accomplish this goal is by setting up a trust fund. Trust funds allow you to provide funds for your child’s future in a protected manner.
However, if trusts are unfamiliar to you, the process of actually establishing one can seem complicated. There are various types of trusts, steps involved in creating and funding the trust, naming trustees, and more. It’s not as simple as just writing a check.
As estate planning attorneys who have helped many clients set up trusts for their children, we’re here to walk you through the basics.
What Exactly is a Trust Fund?
Simply put, a trust fund is a legal arrangement where assets are transferred into a trust to be managed by a trustee for beneficiaries.
Trust funds are commonly created to provide financial support for minor children and distribute assets in a protected way.
So why go through the process of creating a trust instead of just leaving assets directly to your kids?
Trust funds offer several unique benefits, including:
- Avoiding probate when assets are distributed after your death saves significant time and money compared to assets that must go through the court process.
- Protecting assets from creditors, lawsuits, divorce, and other claims made against your child. Trust assets aren’t as easily reachable.
- Setting aside funds for special needs children beyond what government benefits provide. Special needs trusts offer parents peace of mind.
- Precisely dictating when and how your child receives trust assets, like at certain ages or milestones.
The Types of Trusts Available for Benefitting Your Child
When clients come to us wanting to establish a trust for their children, we first explain the main options available:
Revocable Living Trusts
Revocable living trusts avoid probate and allow assets to pass directly to beneficiaries, either immediately or over time. However, unlike irrevocable trusts, assets have limited protection from creditors. Living trusts can be changed or revoked by the trust creator at any time. They provide less protection but more flexibility than irrevocable trusts.
Irrevocable trusts offer the most asset protection for your child since you relinquish ownership of the assets once transferred into the trust. This protects trust assets from lawsuits, creditors, and divorce. However, you lose flexibility since the terms can’t be changed once established.
A testamentary trust is a trust created after your death, funded by the assets in your will. Since the trust isn’t established until after you pass away, you retain full control over the assets while living. But the downside is the assets must go through probate when you pass, which can be costly and time-consuming.
Special Needs Trusts
Special needs trusts support a beneficiary with special needs while allowing them to maintain eligibility for government benefits like Medicaid and SSI. If properly established, funds in a special needs trust aren’t considered countable resources. This provides financial stability without jeopardizing essential services.
How to Go About Setting Up a Trust Fund for Your Child
The process of creating a trust fund for your child involves several important steps.
Here is a general overview:
- Consult with an estate planning attorney to discuss your family’s specific situation and goals. They will help you craft a tailored trust and handle the requisite legal filings and documentation. Relying on an attorney provides peace of mind that the trust is properly established.
- Designate trustees to manage and administer the trust. Trustees should be mature, financially savvy individuals you trust to handle the responsibility. Often, people choose their spouse, an adult child, a sibling, or a close friend to serve as trustee or successor trustee. Think carefully about naming successors in case your first choice is unable to serve at any point.
- Fund the trust with assets and property, which requires working with your financial advisor to determine the appropriate value. Typical funding assets include cash, life insurance, brokerage accounts, real estate, and business interests. Some assets will need to be re-titled into the trust’s name.
a) To get assets into the irrevocable trust, ownership must be officially transferred. Real estate gets a new deed, accounts are re-titled, beneficiary forms are updated, etc. Your attorney or financial advisor can ensure this is handled correctly.
Once established, the trustee must administer the trust according to its terms – managing investments, distributing funds to beneficiaries, filing taxes, and more. Proper administration is key to successfully implementing your wishes.
Some Common Mistakes to Avoid
While trust funds offer many benefits for financially providing for minor children, they must be properly established.
Here are some mistakes we often see people make that should be avoided:
- Not adequately funding the trust upfront. Even a thoughtfully drafted trust won’t help your child much if you fail to transfer sufficient assets into it.
- Naming the wrong person as trustee or successor trustee. This role holds major financial responsibility, so choose mature, impartial individuals.
- Failing to update the trust as tax laws and beneficiaries’ needs change over the years. What worked originally may not in 10 or 20 years.
- Not considering the tax implications involved. Understand how funding the trust, transferring assets, and distributions will be taxed.
- Trying to DIY the process without consulting an estate planning attorney. Mistakes could invalidate the entire trust or produce unwanted results.
While the process may seem complex, the peace of mind that comes with ensuring your child’s financial security is well worth the effort of properly setting up a trust fund. Don’t hesitate to contact Safe Harbor Estate Law if you have any other trust-related questions.