A trust fund is a fiduciary fund by which a trustee or a third party holds the assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and require you to specify how and when the assets will be transferred.
Creating a trust fund is one of the meaningful steps you can take for your children’s future. But the whole practice can go in vain if it is not done properly. Not doing it properly can increase troubles for your children when they reach the age to take it over.
Since there are some details involved in creating a trust fund, it is common for people to make mistakes. If you are about to create a trust fund, you must know the mistakes you should avoid. Below, you will learn about all the slipups you must avoid when creating a trust fund.
1. Not specifying the right trustee
A trustee is a person who will look after your assets until your children can manage them on their own. Not choosing the right trustee is one of the parents’ most common mistakes. It is often not an intentional effort but happens out of bad luck or a simple bad judgment.
Also, sometimes you choose the wrong trustee because you are never prepared to think that your life will end. Therefore, you delay planning about your assets and rush into it when something terrible happens and jolts you out of your slumber.
Most people choose a family member as a trustee when they create a trust because they think a family member will have the best interest of their kids in their heart. But choosing someone with positive thinking about your children is not enough. You have to judge a person on some practical grounds.
Things you must consider when choosing a trustee include the following:
- Their health
- How far their current residence is
- Their age
- What will be their age when your kids are ready to take over the assets
- Do you trust them
- What do you think about their judgment skills over the years
- How long have you known them
You can consider many other aspects, but the above-mentioned are some of the most important ones you must never overlook. It is extremely important that you take the time to decide who will look after your assets for the benefit of your kids. Choosing the wrong person can complicate the matter and often result in the trust being misused.
2. Not being sure about your trust fund’s goals
If you are not sure about the goals of your trust fund or how you want it to help your kids, you can open doors for a disaster. Young kids will have access to a lot of money with no clue what they are supposed to do with it.
Proper planning of When your kids should have access to the money and for What purpose they can use it save you and your kids a lot of trouble. It can also prevent your hard-earned money from getting wasted.
Consider one or many of the following objectives when setting up a goal-oriented trust fund for your children.
- Giving your kids yearly access to some amount of funds
- Giving them the right to use all the money at once
- Making a plan to gradually increase their control over the assets after achieving major milestones (Graduation, getting married, having kids, etc.)
- Designating some money for their education, only that will be directly transferred to their institution
When developing a trust fund, having concrete objectives and answering all the Hows and Whens eliminates the chance of your assets being in the wrong hands.
3. Putting rigid restrictions on the trust fund
Imagine a situation where one of your children had an accident while residing overseas. Your kid needs medical care, but the hospital won’t start the treatment until a deposit is made. The trustees are approached to finance the medical bills. However, they cannot allow your kid to use the fund because of a restriction.
Putting restrictions that protect your funds from misuse is alright, but they should not be so strict that they bar your kids from using the funds when in need. Making flexible and simple arrangements that account for unforeseen circumstances and trusting the trustee and their judgment is often a better solution in the long run. Trustees are already bound by multiple well-established obligations and regulations to act in the best interest of their children. Putting them in additional trouble is not good. Also, when setting up a trust fund, ensure the “letter of wishes” is accepted by all stakeholders.
4. Forgetting to mention the backup beneficiaries
No one wants to contemplate death, especially if it is of their children. But to get more out of your trust fund, there is no harm in being a pessimist for a moment.
In an ideal world, you would wish your assets to go to your kids or a cousin after your death. Beyond that, you might not have thought about someone else. But imagine a situation where everything goes wrong, and the people mentioned in the trust fund agreement are no longer alive to use the money. Now your trustees hold a significant amount of money but don’t know what to do about it.
When creating the trust fund, consider all these situations and include backup beneficiaries. Maybe there is a distant cousin/relative, a friend, a charity, or anyone you would want to have your wealth with. These parties can either be included as beneficiaries (siblings, grandchildren). Or they can be mentioned in the “letter of wishes” that helps a trustee to add more beneficiaries depending on the situation.
5. Failure to review the trust every year
Creating a trust fund once does not mean you should not go back and review its features. As life moves on, situations change, and estate planning should change side by side. Having a plan which is not updated from time to time can be disastrous. Periodically reviewing your estate plan gives you the chance to redraft aspects such as:
- Reassess the person who has been selected as a trustee
- Make sure you have included all the rightful beneficiaries
- Consider new births or death in the family that might alter the trust
- Making sure the trustee is sound in mental and physical health
Conclusion
Creating a trust fund is a surefire way to secure your children’s financial future. But often, small mistakes can increase complications for children preventing them from using their rightful money whenever there is a need. Avoiding the above-mentioned mistakes helps you create a fail-safe trust fund that assists both your children and the trustees.