Parents and grandparents can make several mistakes when they’re creating trust funds for children. Many are simply the result of not knowing how these funds work. A lot of them can be avoided if you have a good attorney but you’ll still want to be aware of some of the most common mistakes that parents make. They include selecting the wrong trustee and not reviewing the trust annually so it keeps pace with your child’s life and needs.
Key Takeaways
- Be sure to pick the right trustee. A family member may not always be the right choice.
- Young adults aren’t great at managing money so you may want to put in place limits as to what they can withdraw the money for, particularly when they’re under the age of 25.
- Review the trust terms you’ve set each year so you’re sure you still feel comfortable with the trustee and with other aspects of the plan.
- Don’t forget about college planning and how the money in the trust might impact any request your children make for student loans or scholarships.
Trust Fund Babies
The term “trust fund baby” brings up images of privileged children who grew up having every material possession that money could buy. This may be true in some cases but it’s far from the norm.
Trust funds typically have nothing to do with providing an excessive amount of cash so that the young person can buy whatever they want. A trust fund is usually established so the child has a source of income and assets sufficient to survive if their parents are no longer around to provide for them.
Choosing the Wrong Trustee
Choosing the right trustee is a key issue. You might think that your brother or sister would make great trustees because your children have a great relationship with their aunt or uncle. It might not be in their best interest to have financial control over your children’s assets, however. This is especially the case if the trust is set to turn over full control to the child at age 25 and the trustee has to be the villain who won’t let your children have access at age 23.
A better alternative to a family member is to let a bank act as your trustee. You can have the bank and a sibling or other family member act as co-trustees to keep a personal touch.
Important
Establishing a trust fund for your minor children enables them to have access to the funds they’ll need in case you pass away.
Setting the Wrong Goals
Most young adults aren’t responsible with money. Your children might technically become adults at age 18 but it’s probably not in their best interests to gain full control over the money at that age.
You get to decide what the money can be used for before the age of maturity when you’re setting up the trust. Hospital bills, education, and weddings are common reasons to withdraw money. You can set the trust up so the money for other types of expenditures can’t be retrieved until a certain age is reached.
Designating the Wrong Beneficiary
You get to decide who your beneficiary will be when you purchase a life insurance policy. You might want to name your trust rather than your children directly. Your estate will receive the assets unless you specifically designate the trust, not the trust fund you set up for your children.
Not Reviewing the Trust Annually
You may have chosen a responsible family member to act as a trustee when you set up the trust fund but you’ve watched them slip into depression, or maybe get involved with drugs or alcohol or accumulate a criminal record over the last 10 years. Is this still who you still want to be in charge of your children’s finances?
You’ll want to review the trust every year to make sure it’s still true to your desires and current overall realities, just as you would with life insurance, investments, and overall financial planning.
Forgetting About College Planning
The most common trust funds for children are UGMA or UTMA accounts. They’re generally very simple administratively. You simply have to add money to them regularly to make sure they’re fully funded. But these types of accounts must be listed as assets that are owned by the minor when they apply for college financial aid. They may end up disqualifying your child from receiving grants, scholarships, or sometimes even loans, particularly if there’s any substance to them.
What Are UGMA and UTMA Accounts?
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts. Money transferred into these accounts is typically irrevocable. You can’t take it back. It belongs to the child from the moment it’s transferred although they don’t have access or control over it until they reach a certain age, typically 18 or 21. The rules and the exact age can vary by state law.
What Are Some Other Types of Trusts?
Trusts are legal entities that hold property. They’re available in various forms that depend on their terms. A living trust is one that you form during your lifetime and it can be revocable or irrevocable. As the name suggests, an irrevocable trust can’t be changed or undone after it’s formed and funded.
Property is transferred into the trust after it’s formed and is designated to pass to one or more beneficiaries at a certain time, typically after the death of the grantor or individual who created and funded it. A testamentary trust is similar but is created under the terms of a last will so it doesn’t come into being until after the grantor’s death.
How Much Do Banks Charge to Act as Trustees?
Banks are pretty upfront about their fees. They can vary by state but are often in the area of 1% to 1.5%. Banks typically reserve the right to set their rates and fees for this service. You should determine the fee in advance and enter it into your trust formation documents so there’s no eventual dispute.
The Bottom Line
Most people want to make sure their family is taken care of when they’re no longer able to provide for them. They can’t give the money to their minor children outright so they establish a trust fund on their behalf. These funds can help children through rough patches when they’re formed correctly. They can be used to pay medical bills, fund college expenses, place down payments on home purchases, and establish businesses.
But the funds can end up wasted when a trust is established incorrectly. Would you rather see your children benefit from the assets or have the money cause family friction or hardship? Consider talking with a legal professional so you understand all the ramifications before you fund a trust.
Read the original article on Investopedia.