Every parent would like their child to live in financial security without a single hiccup. That’s where many people decide to go for a trust fund. And that’s where the problem begins, despite the good intention of parents to secure their child’s financial future.
So what are these mistakes that parents make? It’s not about the amount that they invest, it’s something much simpler and something very easy to overlook- A clearly defined Terms & Conditions for the trust fund.
We will explore the biggest mistake parents make when setting up a trust fund for their kids and how to avoid them. But before Everything else, let’s start with the basics.
What is a Trust Fund?
A trust fund is a legal arrangement where the person (Grantor) creating the trust fund transfers their assets to a trust, which is managed by a trustee. A trustee can be someone the person knows or simply a financial institution that they trust. And the trustee has to ensure that the assets are provided to the beneficiary as per the grantor’s wish.
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Types of Trust Funds
Revocable: This type of fund can be revoked anytime, which means you can change the Terms & Conditions whenever you like or just stop funding it and stop the trust whenever needed. These trust funds may offer better financial flexibility but don’t offer any tax reductions.
Irrevocable: This type of trust fund is fixed, and the Terms & Conditions are harder to change once the setup is finished. These trust funds offer more security for the long term and have reduced taxes.
Inheritance: The inheritance trust fund is designed to manage and distribute the inheritance left by the grantor for their beneficiaries.
How Much Does It Cost to Set Up a Trust Fund?
On average, you can expect charges from $750 – $1600 for start-up and to $around $5000 -$6000 for the actual trust fund. These exclude external charges, as they can change from person to person. External charges include the attorney fees, the type of trust, and how you want to set your trust funds.
The Biggest Mistakes Parents Make
A trust fund is a parent’s way of saying they will protect their child even after they are long gone. The intentions here are very pure, but parents tend to make several mistakes in these emotions. And while setting up a trust fund, it’s important to think logically and set clear boundaries for the trust fund.
A trust fund is like a guide on how to spend your money. It should clearly explain to your child how and where to spend their money. Imagine if a guide had been written vaguely; what would happen? Your child may get locked out of their own inherited money, or they might end up spending the money too quickly on things they never wanted.
1. Not Defining Clear Terms
If your trust terms are vague and loose, your child might go unhinged and spend all the inherited money on things they deem fit, which might not be the right choice for them. They could spend everything too quickly with no thought of the future. Or if the terms are too strict, they might not be able to access the money even in case of emergencies.
Fair and clear terms for the trust fund will help you avoid this problem. Set up terms that would teach them how to value money and spend it wisely. A well-set rule will also help you avoid future conflicts if you have more than one kid. Let’s face it: things don’t go well in these situations. Make sure that you set fair and clear terms for all your kids.
2. Choosing the Wrong Trustee
A trustee is the entity responsible for distributing your trust fund to your child after you. Parents often tend to go for people close to them and the family, but it might not be the right choice. The problem is not these people’s intention, but can they handle such a big responsibility? What would happen if you selected your best friend because you know he can take care of it, but he has no experience with kids?
Make sure you take your time with this decision and think carefully about who would be better at handling these situations: someone with a little experience and someone you believe will follow through on their promise.
3. Ignoring Asset Protection Services
When you set up a trust fund, it offers you an asset protection service that helps ensure your beneficiaries don’t end up spending their money on nuisance and lose it. It’s a hard call to make, every parent believes their child will be able to make their decision, but are you ready to risk it?
4. Not Doing Follow-Ups
As a parent, your job doesn’t end when you set up a trust fund for your kid. It is never that simple when it comes to kids. Many parents just keep filling the trust with funds without checking on the progress or making any necessary changes.
Make sure that you at least make the necessary changes annually to keep the trust fund relevant as per your current ideas. These include any new kids or your first one becoming self-reliant or anything.
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Tips for Setting Up a Trust Fund Successfully
1. Professional Help
Setting up a trust fund is not everyone’s cup of tea. It requires comprehensive knowledge, which is why always make sure that you have a professional advisor- a lawyer or a financial advisor with you to guide you through the process.
2. Defining Clear Terms and Goals of the Trust
Make sure that you have a clear goal about why you are setting up a trust funds account. Are you doing it for your kids’ education? Medical support? Or just long-term financial health? Also, be clear on who gets the money and when along with the details about how to use it.
3. Trust Funding
Once you are clear with your goals about the trust funds account, move on to the next step and decide how you are going to manage your assets. Is your trust fund account all about money? Do you have any assets that you want to include, such as a house, car, or business?
4. Choose the Right Trustee
Think carefully about this one; the trustee will manage and distribute your money to your kids or other beneficiaries. Make sure the trustee is responsible and understanding enough to follow through the process you want. You can select anyone here: a close friend, a family member, a lawyer, or a financial institution.
5. Plan for the Future
When you are planning for the trust fund, make sure you consider all the changeable factors. Some of these factors might be known to you right now, such as your kid going to study in a different state or country in the future. Make sure your trust is flexible enough to adapt to these situations.
6. Tax Rules
There are different tax plans for different assets and different trust plans. These can be complicated to follow through. I would advise you to go to your lawyer or financial advisor so they can help you set up a trust fund with more tax savings.
7. Communicate with Your Family
When you set up the trust fund, don’t let your family be in the dark about it. Talk to them and explain to them how you decided to distribute the assets so there won’t be any conflicts in the future.
8. Annual Review
Lastly, review your trust fund account annually to make the necessary changes to stay on top of things. With time, things change, a new kid or a new addition to the family, make sure your trust has everything you need.
Final Statement
Establishing a trust fund is an effective way to secure your family’s future. However, it comes with some difficulties and difficult decisions. The most common mistake that parents commit is not establishing specific rules and conditions, which can result in tension and discord later. However, you must know the fundamentals and costs involved and the tax laws and carefully plan your finances.
Set your sights and consult with a professional to make sure you define what you would like the trust fund to achieve. When you do this, you’re not only giving away money; you’re creating a legacy of caring of security, love, and care, which will be beneficial to your family members for years to follow.
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FAQs
How Much Money Do You Need to Start a Trust Fund for a Child?
There’s no minimum amount to be set for establishing a trust fund. However, setting up trust funds usually costs between $1,600 and $750 in beginning fees and total expenses ranging from $5,000-$6,000. It’s possible to start with any amount that is compatible with your objectives, such as funding education or providing support in the long term.
How Can a Trust Fund Help Avoid Inheritance Tax?
An irrevocable trust can lower or even eliminate inheritance taxes by taking assets from your estate. Because you don’t own the assets, they won’t be considered part of your estate when you pass them to the next generation.
How Do You Set Up a Trust Fund Bank Account?
After creating the trust through an attorney, bring the trust’s document to a bank to open an account in the trust’s name. The trust account will contain the trust’s assets or any money that you give to the trust, controlled through the trust’s trustee.
What Are the Steps for Setting Up a Trust Fund for a Family Member?
Choose the kind of trust you want to establish, select an experienced trustee, write the trust documents by a lawyer, then make sure the trust is funded with assets, and make sure the trustee is managing it according to your desires.
Can You Change a Trust Once It’s Set Up?
It is possible to modify the trust at any time. An irrevocable trust is generally indefinite, but modifications can occasionally be made with the beneficiaries’ consent or through legal channels.
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