The Biggest Mistake Parents Make When Setting Up A Trust Fund For Kids

The Biggest Mistake Parents Make When Setting Up A Trust Fund For Kids

What is the biggest mistake parents make when setting up a trust fund for kids?

In this article, you’ll learn about: 

  • how parents can mess up their child’s trust
  • how a trust works for kids
  • how to set up a trust fund for kids
  • how much money you need to start the trust and fund it
  • whether you even need a trust for a child

Let’s dig in.

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What Is A Trust Fund For A Child?

A trust fund for a child is a legal arrangement that holds and manages assets for a child’s benefit. 

An appointed person, called a trustee, controls the assets in a trust fund for kids. 

Parents or guardians create trust funds to secure the child’s financial future. 

A trust fund for children can include money, property, stocks, or other assets. 

The child receives the assets when they:

Trust funds for kids can help pay for education, healthcare, or other expenses.

How Does A Trust Fund Work For Kids?

A trust fund for kids is a legal arrangement that holds and manages assets for children’s benefit. 

A grantor creates the kid’s trust fund by transferring assets to it. 

A trustee manages the trust, making decisions on investments and distributions. 

A trust for kids can hold various assets, like cash, stocks, and real estate. 

Trust funds protect assets from misuse and ensure they are used for the child’s welfare. 

The trust outlines specific terms, like when and how the child receives the assets. 

The child becomes a beneficiary, receiving the trust’s assets according to the terms set by the grantor.

Why Would You Set Up A Trust Fund For Kids?

You would set up a trust fund for kids to:

  • Protect Their Inheritance: Trust funds keep assets safe from misuse, creditors, or poor financial decisions.
  • Manage Money Distribution: You control when and how they receive funds, guiding their financial growth.
  • Provide For Education: Trusts can cover tuition and related expenses, ensuring they have access to education.
  • Offer Support During Emergencies: Trusts can provide financial help during unforeseen circumstances, such as medical issues.
  • Encourage Specific Goals: Trusts can be tied to milestones, like graduating college or starting a business.
  • Reduce Estate Taxes: Trusts can help minimize estate tax liability, preserving wealth for your kids.
  • Maintain Privacy: Trusts keep financial matters confidential, unlike public probate court proceedings.

The Biggest Mistake Parents Make When Setting Up A Trust Fund For Kids

Let’s look at the biggest mistakes parents make when setting up a trust fund. 

Establishing a trust for children can be complex. 

Here are the mistakes parents can avoid when setting up a trust fund for children. 

Read More: What Is A Child Entitled To When A Parent Dies Without A Will?

Not Identifying A Clear Purpose For Your Kid’s Trust

Not identifying a clear purpose means failing to establish a specific objective for the trust fund. 

A trust for kids’ goal could be to:

  • provide for a child’s education
  • support a family member with special needs
  • maintain a certain lifestyle for your child

Clearly defining the purpose helps in:

  • crafting appropriate terms and conditions
  • guiding the trustee’s decisions
  • ensuring the trust effectively meets your child’s needs

A well-defined purpose minimizes potential disputes and misunderstandings among:

  • your kids
  • trustees
  • family members

Choosing The Wrong Trustee

Choosing the wrong trustee can jeopardize the success of a trust for kids. 

A trustee is responsible for:

  • managing the trust’s assets
  • making decisions about distributions to your children
  • ensuring the trust’s purpose is fulfilled 

Here are some points to consider when selecting a trustee:

  • Trustworthiness: Choose someone who is honest, reliable, and will act in the best interests of your children.
  • Experience: Select a trustee with a strong background in financial management, legal matters, or investments, to help navigate complex trust-related issues.
  • Objectivity: Pick a person who can remain impartial and avoid potential conflicts of interest among your kids or family members.
  • Commitment: Ensure the trustee is willing to dedicate time and effort to managing the trust for children, as it can be a long-term responsibility.
  • Communication Skills: Select someone who can effectively communicate with your kids and other involved parties, providing transparency and clarity.
  • Backup Plan: Consider appointing a successor trustee or co-trustees to provide continuity and additional support in trust management.

These factors will help you choose the right trustee when setting up a trust for a child.

This ensures that the kid’s trust fund:

  • is managed effectively 
  • serves its intended purpose

Not Updating Your Child’s Trust

This refers to the mistake of not periodically reviewing and modifying the trust document.

You should do this to account for life changes and evolving needs. 

A ​​child’s trust fund should be dynamic, adapting to:

  • new situations 
  • family developments 

Some reasons you’d want to update trust funds for children are:

  • Changes In Family Dynamics: Births, deaths, marriages, or divorces can impact beneficiaries and require adjustments to the trust for a child.
  • Amendments To Tax Laws: Tax laws may change, affecting the trust’s structure or tax efficiency. Adapting the trust to comply with new regulations is crucial.
  • Shifts In Financial Goals: Beneficiaries’ needs or financial objectives might evolve over time, necessitating adjustments in trust provisions.
  • Alterations In Trustee Suitability: The chosen trustee may no longer be the best fit due to changes in their situation, expertise, or availability. Updating the trust to appoint a new trustee may be needed.
  • Asset Fluctuations: The value of assets held in the trust could change, warranting a review of distribution plans or investment strategies.

You should regularly review and update the trusts for children. 

This ensures that it continues to:

  • serve its intended purpose 
  • effectively meet the needs of your children

Ignoring Tax Implications

Ignoring tax implications leads to unexpected financial burdens for both the trust and your kids. 

Trusts and their beneficiaries may be subject to various taxes, depending on the trust’s structure and jurisdiction. 

Here are some tax implications to think of when creating a trust for a child:

  • Trust Income Taxes: Kids’ trust funds are often required to pay income taxes on the income they generate. The tax rates and filing requirements depend on the trust type and jurisdiction.
  • Beneficiary Taxes: Beneficiaries may be taxed on the income or distributions they receive from the kid’s trust. The tax treatment varies based on the type of distribution and the beneficiary’s tax situation.
  • Estate And Gift Taxes: Transferring assets to a trust may trigger estate or gift taxes, depending on the value of the assets and the applicable tax laws. Proper planning can help minimize these taxes.
  • Generation-Skipping Transfer (GST) Tax: Trusts that benefit multiple generations may be subject to GST tax, which is levied on transfers to beneficiaries more than one generation younger than the grantor.

To minimize the tax implications on your child’s trust, it’s essential to consider:

  • the trust’s structure
  • the types of assets held
  • the jurisdiction’s tax laws

Failing To Communicate

Failing to talk about the trust fund with family members can lead to:

  • confusion
  • misinterpretation
  • conflicts 

When setting up a trust for a child, it is important to:

  • Share The Trust’s Purpose: Explain the reason for setting up the trust and how it will benefit of your kids.
  • Detail The Terms: Clarify the trust’s conditions, distribution rules, and any restrictions placed on the assets.
  • Introduce The Trustee: Identify the person responsible for managing the children’s trust account and maintaining communication with your kids.
  • Address Concerns: Encourage family members to ask questions and express concerns to ensure they understand the trust’s structure and intent.
  • Establish Transparency: Promote open dialogue and keep beneficiaries informed of any changes made to the trust over time.

By openly discussing the kid’s trust fund, parents can:

  • minimize potential disputes
  • set realistic expectations
  • foster trust and understanding among family members

Over-Controlling Distributions To Your Kids

Over-controlling distributions refers to:

  • placing too many restrictions on how 
  • when your kids can access the trust funds

These constraints on a trust for a child might include:

  • strict age-based milestones
  • limited spending purposes
  • excessive conditions for disbursements

Some control can protect your kids from poor financial decisions.

But, overly restrictive conditions may hinder their financial growth and independence. 

Let’s say the kid’s trust only allows distributions for education expenses.

Beneficiaries might struggle to cover:

  • other essential needs 
  • pursue entrepreneurial opportunities

To strike a balance, consider more flexible distribution terms that still encourage responsible financial behavior. 

This approach can empower beneficiaries to make their own decisions.

While also benefiting from the trust’s financial support.

Neglecting To Fund Your Kid’s Trust

Neglecting to fund the trust means not transferring assets into the trust after setting it up. 

A trust fund for children holds and manages assets for the benefit of your kids. 

To make the trust legally effective and operational, you need to transfer assets into it.

Transferring assets may involve:

  • retitling property (i.e., with a quit claim deed)
  • transferring bank accounts
  • designating the trust as a beneficiary for life insurance policies or retirement accounts. 

Failing to fund the trust can result in it being considered an empty or “dry” trust.

This offers no benefits to your children. 

It is crucial to:

  • properly transfer the assets into the trust for kids
  • keep accurate records of these transactions

Skipping Professional Advice

Skipping professional advice when setting up a trust fund can lead to various issues. 

Attorneys can help you navigate complex legal and financial matters related to trust funds. 

Here’s why their guidance is important when setting up a trust fund for kids:

  • Understanding Legal Requirements: Attorneys can help you comply with trust laws and regulations, ensuring your kid’s trust is legally valid and enforceable.
  • Tailoring The Trust: Experts can help customize a trust for children to meet your unique goals, such as providing for special needs children or minimizing taxes.
  • Selecting The Right Trust Type: Attorneys can recommend the most suitable trust structure based on your objectives, such as revocable or irrevocable trusts.
  • Tax Planning: Financial advisors can guide you in optimizing the trust’s tax structure, and reducing tax liabilities for the trust and your kids.
  • Asset Protection: Professionals can help you safeguard trust assets from potential risks, such as creditors or lawsuits.
  • Investment Strategy: Financial advisors can assist in developing an investment plan that aligns with the trust’s objectives and your child’s needs.
  • Ongoing Support: Experts can provide continuous guidance on trust management, ensuring compliance with legal and financial requirements.

By seeking professional advice, you can:

  • avoid common pitfalls 
  • ensure the trust fund is set up correctly to serve its intended purpose

Next, let’s look at setting up a trust fund for a child. 

How To Set Up A Trust Fund For A Child

Setting up a trust for a child is an excellent way to:

  • provide financial security 
  • ensure their future needs are met

Here is a step-by-step guide on how to set up a trust fund for a child:

  1. Determine The Purpose Of The Trust: Consider the specific goals you want your child’s trust to achieve, such as providing for education, healthcare, or general financial support.
  2. Choose The Type Of Trust: There are two main types of kids trust fund – revocable and irrevocable. Revocable trusts can be changed or terminated by the grantor, while irrevocable trusts cannot. Talk with our trust and estate attorneys to determine the best option for your situation.
  3. Select A Trustee: The trustee will be responsible for managing the trust assets and distributing them according to the trust terms. Choose someone trustworthy, responsible, and capable of managing financial matters. This can be an individual or we offer trustee services.
  4. Hire An Attorney: Drafting a trust document requires legal expertise. Our estate planning attorneys can help you create a trust document that reflects your goals and complies with local laws.
  5. Detail The Trust Terms: Your kid’s trust document should clearly outline the terms of the trust, including the purpose, the beneficiaries (the child or children), the trustee, and any specific instructions or conditions for the distribution of the trust assets.
  6. Fund The Trust: You can fund your kid’s trust with a variety of assets, such as cash, stocks, bonds, real estate, or other investments. You may also choose to fund the trust gradually over time or via a lump sum. Consult with your financial advisor to determine the best approach for your situation.
  7. Transfer Assets To The Trust: To ensure the trust is legally recognized, transfer ownership of the assets to the trust. Our estate planning attorneys can guide you through this process, which may involve retitling assets or updating beneficiary designations.
  8. Maintain The Trust: Once your child’s trust is established, the trustee must manage the assets and file annual tax returns on behalf of the trusts for children. It is important for the trustee to stay informed about any changes in tax laws or regulations that may affect the trust.
  9. Communicate With Beneficiaries: It’s essential to keep beneficiaries informed about the trust, its purpose, and any conditions they must meet to receive distributions. Open communication can prevent misunderstandings and help beneficiaries make informed decisions about their financial future.

Do You Need A Trust Account For A Child?

You don’t always need a trust account for a child.

But it can be a useful tool for managing and protecting their assets. 

A trust fund for kids: 

  • offers financial security
  • ensures funds are used for specific purposes
  • can provide tax advantages 

Reach out to us if you want to chat about your options. 

(We’re not going to sell you on a trust for your kids. 

We will lay out all of your options for you and let you decide what’s best.)

FAQs About The Biggest Mistake Parents Make When Setting Up A Trust Fund For Kids

Here are some questions we get from parents setting up a trust fund for kids.

How Much Money Do You Need To Start A Trust Fund For A Child

To start a trust fund for a child, there is no specific minimum amount required. 

But, you should consider the trust’s purpose and goals when determining the initial funding. 

A few thousand dollars can be a good starting point to start a trust fund for a child.

But larger amounts may be necessary for specific needs like:

  • education 
  • long-term support

Should I Set Up A Trust For My Child?

Setting up a trust for your child can be beneficial for several reasons:

  • Financial Security: A trust can provide long-term financial support for your child’s needs, such as education and healthcare.
  • Asset Protection: Trust assets are generally protected from creditors and lawsuits.
  • Control: You can set specific terms and conditions for asset distribution, ensuring the funds are used as intended.
  • Tax Benefits: Trusts can offer potential tax advantages, depending on the trust type and structure.
  • Estate Planning: Trusts can help avoid probate, reduce estate taxes, and ensure a smooth transfer of assets.

How Long Does It Take To Set Up A Trust

The time it takes to set up a trust varies depending on several factors, like:

  • complexity
  • asset types
  • the time needed to draft and finalize the trust document 

In general, it can take anywhere from a few weeks to a few months.

How Much Does It Cost To Set Up A Trust For A Child

The cost to set up a trust for a child varies depending on several factors. 

These costs for a trust for kids include:

  • the attorney’s fees
  • the complexity of the trust
  • the state where you live 

Typically, you can expect to pay between $1,000 and $3,000 for a simple kids trust. 

More complex trusts for children may cost $5,000 or more.

Set Up A Trust Fund For Your Children

If you’re looking at setting up a trust fund for your children, fill out the form below. 

Our estate planning attorneys have the experience you need to protect your family’s inheritance. 

Talk soon. 

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