Have you ever heard the term “trust fund baby?” If so, you likely understand that it is used to describe an individual that’s inherited a significant sum of money from their parents or guardians. Trust funds aren’t just for the socialites of the world; they can be for anyone with assets and wealth they’d like to pass on after their death.
A trust is essentially a legal arrangement where an individual (the grantor) reserves assets or funds for a beneficiary to receive upon their passing. A trustee manages the trust. While several types of trusts exist, revocable living trusts are the most common.
As the name suggests, the grantor can revoke the trust at any time. With a living trust, the grantor can also serve as the trustee and beneficiary of the trust during their lifetime. When the grantor dies, a successor trustee takes over the management of the trust.
The goal of a trust is often to safeguard money and assets (like property) so that children will be taken care of after their parent(s) passes. This article will explain how a trust protects a child, how to set one up, and three common mistakes to avoid when setting up a trust for a child.
How A Trust Protects Your Child
A Survey of Consumer Finances report shows that of the just 1.3% of people who receive money in a trust fund, 73% of them inherit it from their parents. This is a shame considering the benefits that trusts provide to both grantors and beneficiaries. Here’s why you should consider setting up a trust for your child.
A living trust is established by a trust document that specifies the terms of the trust, which can be customized to honor the grantor’s intentions. Trusts guarantee that a grantor’s wishes are met, even in death.
For example, a parent could set up a trust that can only be accessed by their child upon them graduating from college, getting a job, reaching a certain age, or anything else. The trustee managing the trust would require proof that the beneficiary completed the aforementioned tasks before releasing funds.
If college is a prerequisite for trust fund access, a parent can rest assured that their offspring has done the work to get a diploma and earned some life experience before receiving access to a large chunk of their inheritance.
These types of provisions also decrease the likelihood of a child spending all of their inheritance at a young age.
Another benefit of setting up a trust for a child is that trusts can avoid probate. This means that trust funds do not need to go through a lengthy court administration process, making them an increasingly popular estate planning tool.
Other benefits of a trust include:
- May reduce estate taxes
- May reduce gift taxes
- Allows you to protect loved ones with special needs
- Offers protection from lawsuits or creditors
How To Setup A Trust For Your Child
A trust for your child has many benefits, but the best part is that it’s relatively simple to set up with the help of an estate attorney. Here are the five main steps.
Before you begin creating a trust, you need to sit down and decide the purpose of the trust. For example, will the trust funds benefit your biological child and your stepchild? Will your trust funds be accessible at 18 or 21 or some other age?
Will your oldest child receive your real estate assets but not your youngest? Although trusts are a great way to grant your children financial security, you need to clearly define who the trust will benefit from and which assets will go to which beneficiaries.
A trust is designed to hold and protect assets. Once you’ve defined the trust details, you can start the process of funding your trust. You can fund your trust with various things like your bank account, stocks, bonds, retirement accounts, tangible assets (like clothing, furniture, and jewelry), business partnerships, real estate, and life insurance.
After the trust details and funding have been ironed out, you’ll need to determine who will manage your trust. Select a trustee that you trust to oversee the management and distribution of your assets when you pass. Trustees can be friends or family members, professionals such as lawyers or accountants, or trust companies or corporate trustees.
Sign On The Dotted Line
Now that the trust details, funding, and management are settled, you can begin the legal paperwork. Legal paperwork is often long and confusing to the average person, so it’s helpful to work closely with an estate planning attorney that can walk you through the process and explain all of the “legalese.”
Transfer Assets Into The Trust
The last step to setting up a trust is officially transferring your assets.
By funding a trust, you are making the trust the owner of any assets you want it to hold. Any real estate will need an updated deed. Other asset accounts will need to be retitled.
Once the trust is fully funded, your trustee can manage all the assets inside of it on behalf of your children. If you’ve named yourself the trustee in the case of a living trust, you’ll also name a successor trustee who can step in when you pass away.
Mistakes In Creating A Trust For A Child
#1 Choosing The Wrong Trustee
Selecting the wrong trustee to manage a trust is a common mistake parents make. This happens because parents appoint a close family member, assuming they’ll have the children’s best interest at heart, but that doesn’t always pan out for several reasons.
For example, a trustee may be irresponsible with the trust; they could pass away, there could be tension among family members about the trust, or other issues. In many cases, appointing a neutral party is best to avoid familial complications.
#2 Not Setting Rules
Carefully thinking through how and when your children should gain access to their money is key to setting up the most beneficial trust possible for their financial futures. For example, minor children’s assets should always be held in trust. You do not want children under 18 inheriting assets. While they are under 18, their guardian or conservator will control the money for them.
Additionally, it’s usually a mistake to distribute large sums of money to children outright when they reach 18. You should set ground rules to protect your children from blowing through cash, being preyed upon by creditors, or losing their inheritance in a divorce settlement. You can set rules that dictate when a beneficiary gets their funds and how they can access them.
It’s essential to include asset protection provisions to protect beneficiaries (and their inheritance) from creditors and/or ex-spouses. The first step is to include spendthrift provisions in the trust to ensure a beneficiary cannot assign the trust to a creditor.
Next, ensure your assets align with a trust. Only assets in a trust are protected by the trust’s provisions. Finally, have a system in place to track and validate your assets over time.
While none of us know when we will die or if we will become incapacitated, it is crucial to plan for your child’s financial future sooner rather than later. Accidents happen all the time, so the best time to start estate planning is well…yesterday.
Even if you don’t have a mountain of cash to give your child right now, some property and investment assets are better than nothing at all. Start estate planning now, and you can always add assets later.
How To Find The Best Estate Planning Attorney
If you’re considering creating a trust fund for your children, it’s best to seek out the help of a qualified estate planning attorney. Professional estate planners can help you properly plan your estate so that all of your wishes are granted after your death.
To find the best estate planning attorney for you, make a list of attorneys specializing in your specific needs. Not all attorneys specialize in estate planning, so look for those whose primary focus is estate and trust law in your state.
Additionally, make sure attorneys have at least a few years of experience in estate planning. From there, you can narrow your list, read reviews, interview candidates, and make a final decision.
At Blake Harris Law, we understand how overwhelming the thought of creating trust can be. In the end, trust allows your wishes to be carried out without court interference, making things easier for you and your loved ones. Contact our office for guidance in planning and creating a trust suitable for you and your family.