5 Pitfalls to Avoid When Setting up a Trust for Your Children

Trusts used to be a tool only the wealthiest people used to manage their assets, estates and access to funds for the next generation. Now, people from a range of income levels use them more frequently as a way to hold and distribute assets without having to go through time-consuming probate proceedings.

As a parent, if you are considering a trust as part of your estate plan, in particular with children as beneficiaries, there are some pitfalls to avoid.

Most of the errors people make when they establish trusts come from lack of knowledge. It is also important to understand that these pitfalls can impact families in different ways given the family makeup, dynamics and planning goals. Working with a trusted attorney is key to creating a plan that is right for your personal needs.

Top 5 Pitfalls:

1. Failing to actually fund the trust. Once you have determined that a trust is a beneficial tool for your estate, drawing up the initial creation paperwork is just the start. It is important to then take action to transfer the assets into the confines of the trust. This is not an automatic process. For example, one might need to change the beneficiary on life insurance policies to the trust rather than directly to an heir.
2. Giving the beneficiaries too much access, too early. Consider limiting how much money a young beneficiary can withdraw from a trust until they reach a certain age, such as 25 or 30. Without this protection, a young person in their early 20s can easily make excessive withdrawals that aren’t in their long-term best interest.
3. Choosing the wrong trustee. A trustee must be chosen with care, though it’s natural to turn to family members; each family is different, and the dynamics must be considered. With the wrong trustee, resentment and conflicts among siblings or other beneficiaries can undermine your legacy.
4. Not considering college finance. With college costing tens of thousands of dollars, you don’t want to undercut your child’s ability to get as much aid as possible. In structuring a trust, it’s important to consider how it will affect FAFSA reporting. This also applies to how the trust will impact you and yours in relation to tax mitigation efforts.
5. Forgetting to review and refresh your plan. Family dynamics and needs can change; it is important to review your estate plan and the details of a trust frequently, and in particular after large life events, in order to ensure it still aligns with your long-term goals.

There’s a lot to manage when setting up a trust, and it’s easy to overlook something. Learning more about the legal process and your various options can help you make informed decisions that best serve you and your family.