The Biggest Mistake Parents Make When Setting Up a Trust Fund

Creating a trust fund can be one of the best things you ever do for your children. This process can shield your assets while creating specific protocols for your kids to access your money and belongings in the future.

You don’t need extreme wealth for a trust fund to be beneficial, as any family with assets can use this setup as an estate planning vehicle. Setting up a trust fund is also relatively straightforward if you have the necessary assistance. 

Some things can go wrong, though, if you aren’t careful with how you create your trust fund. This guide will look at the biggest mistakes parents make when setting up a trust fund and some ways to avoid errors throughout the process.

What Is a Trust Fund?

A trust fund is a legal entity that holds property and other assets for a person or organization as an estate planning tool. Your trust fund can keep things like money, stocks, bonds, real estate, and businesses before turning them over to your beneficiaries once specific stipulations are met. 

These entities are advantageous because they protect assets from creditors and help your children avoid probate if you die. They can also reduce the inheritance and estate taxes your beneficiaries pay on your assets. 

How to Set Up a Trust Fund Bank Account

Setting up a trust fund for your kids isn’t overly complicated. You’ll just have to follow a few straightforward steps, and you’ll be well on your way. Some steps to look at include the following:

-Determine the Purpose

Specifying why you’re creating a trust comes before everything else. You’ll want to clearly state that the trust is to benefit your children and ensure they receive specific assets. You can use this vehicle to pass on all your assets when you die or a smaller amount of money for college or real estate, as it all depends on what you put into the trust.

-Specify How You’ll Fund It

You’ll need to clarify how you’ll fund the trust by specifying its assets. The trust can contain anything from cash to real estate to businesses, so it all comes down to what you want your children to inherit. The trust will shield these assets from creditors, making this portion an essential part of the process.

-Decide on a Trustee

Your trust needs three things: a grantor, a beneficiary, and a trustee. You’re the grantor, and your children are the beneficiaries in this situation, so all that’s left is to assign a trustee to manage the trust. Many grantors will use an attorney or other professional as a trustee to minimize potential problems. 

-Create the Documents

The most significant part of setting up a trust fund for your kids is creating the legal entity. Using an estate planning professional to write the paperwork can minimize mistakes and ensure you have everything in order before filing these vital documents. 

-Transfer Your Assets into the Trust

The final step involves transferring your assets into the trust. The trust fund will retain ownership of these assets until the necessary stipulations are met and the beneficiaries take control. Remember that different trust types are available, as a living trust allows the grantor to maintain control of certain assets until they die.

Learning how to set up a trust fund and following through with it puts you on track to protect your assets for future generations. Make sure you carefully review your documents to avoid potentially costly mistakes.

4 Mistakes to Avoid When Setting Up a Trust Fund for a Child

Any errors you make when setting up a trust fund for a child can be costly. You’ll want to avoid these mistakes whenever possible to ensure the process goes smoothly. Four issues you could run into include:

1. Selecting the Wrong Trustee

The trustee you choose must act in the best interests of the trust fund and its beneficiaries. You might be tempted to name a close friend or family member as trustee, but remember that money can strain personal relationships, and resentment can arise if the trustee believes they should be a beneficiary. Using a neutral third party like an attorney or fiduciary ensures all the necessary rules are followed and the beneficiaries’ best interests are considered.

2. Having Unattainable Goals

Establishing clear and realistic goals before creating a trust fund can help prevent disappointment. Grantors looking to help their children avoid taxation on assets might look to set up an irrevocable trust, which involves relinquishing all control of these assets. A revocable trust is more flexible and allows the grantor to maintain control over their assets but might not have the same tax benefits.

3. Ignoring the Child’s Age

Some parents are willing to hand over significant amounts of money or business assets to children that aren’t ready for the responsibility. It’s vital that you consider a minor’s maturity level before handing these assets over. Problems may arise if the child doesn’t have the necessary life or financial skills to handle them. 

4. Forgetting Asset Protection Provisions

You can put special provisions into your trust fund that protect the assets from creditors. These provisions prohibit creditors from taking any assets in the trust fund to pay off your debts. Overlooking these provisions could leave your beneficiaries on the hook for your liabilities in the future.

These mistakes are entirely avoidable if you determine what you want your trust fund to accomplish and create it in a manner that protects your beneficiaries. Receiving some help with the process is perhaps the best way to prevent errors along the way.

Find Estate Planning Assistance

A trust fund could be a vital part of your financial planning solution, depending on how you wish to organize and distribute your assets. Speaking with an estate planning expert helps ensure you maximize the value of your assets while minimizing the tax burden for your heirs.

Bogart Wealth offers estate planning services in Northern Virginia and the Greater Houston area. We help clients achieve financial peace of mind while creating a plan that benefits those you love the most. Contact Bogart Wealth for more information on setting up a trust fund for a child.


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