The term “trust fund baby” is associated with a negative stigma. It brings up images ofprivileged children who grew up having every material possession that money could buy. While that may be true in some instances, it is far from the norm when talking about trust funds.
Most people would be surprised at how many trust funds have been established for children. It has nothing to do with providing an excessive amount of cash so that the young person can buy whatever they want. Instead, a trust fund is established so that if the parents are not around to provide for the child, the child has a source of income and assetsnecessary to survive.
If you havelife insurance, this probably sounds familiar. In fact, if you have life insurance, and your underage children are beneficiaries, they will have a trust fund established for them if you happen to pass away.
Unfortunately, there are a number of mistakes that parents make when creating trust funds for their children. Many are the result of not knowing how these funds are supposed to work.
If you have a great attorney working for you, many of these problems never arise. However, there are many times when things slip through the cracks, or the individual setting up the trust simply doesn’t have the necessary experience. Here are some of the most common mistakes that parents make when they set up a trust for their children.
Key Takeaways
- When establishing a trust fund for your children, be sure to pick the right trustee, keeping in mind that a family member may not always be the right person.
- Be aware that young adults aren't great at managing money, and put in place limits to what they can withdraw the money for, particularly when they are under the age of 25.
- Make sure you have your paperwork in order and that the correct beneficiaries are named, including the name of the trust when appropriate.
- Be sure to review the trust each year to make sure you still feel comfortable with the trustee and with other aspects of the plan.
- Don't forget about college planning and how the money in the trust might impact any request your children make for student loans or scholarships.
Choosing the Wrong Trustee
Choosing a trustee doesn’t sound too hard to do. You think that since your children have a great relationship with your brother or sister (their aunt or uncle), that they will be great trustees. Even if this family memberagrees to take on that role, it may not be inhis or herbest interest to have financial control over your children’s assets. This especially holds true if the trust is set to turn over full control to the child at age 25, and the trustee has to be the bad guy and not let your children have access at age 23.
A better alternative to a family member is to let the bank act as trustee. To keep that personal touch, let the bank and a sibling act as co-trustees.
Establishing a trust fund for your minor children enables them to have access to the funds that they may need in case you pass away.
Setting the Wrong Goals
Most young adults are not responsible with money. Even though your children become adults at age 18, it is likely not in their best interest to gain full control over the money at that age.
When setting up the trust, you get to decide what the money can be used for before the age of maturity. Hospital bills, education, and weddings are common reasons to withdraw money. Anything else and you can set the trust up so that the money can’t be retrieved until a certain age is reached.
Designating the Wrong Beneficiary
When you purchase your life insurance, you get to decide who the beneficiary is. After you have established your trust, did you change the beneficiary from the name of your children to the name of the trust?
Unless specifically designated, your estate will receive the assets, not the trust fund you set up for your children.
Not Reviewing the Trust Annually
When you set up the trust fund, you may have chosen a responsible family member to act as a trustee. After 10 years, you have forgotten about that designation, but you have watched that family member slip into depression, maybe get involved with drugs or alcohol, and accumulate a criminal record. Is that who you still want to be in charge of your children’s finances?
Just like your life insurance, investments, and overall financial planning, you will want to review the trust every year to make sure it is still true to your desires and current overall realities.
Forgetting About College Planning
The most common trust funds for children areUGMA or UTMAaccounts. They aregenerally very simple administratively, andyou just have to add money to them regularly in order to make sure that they are fully funded. But did you know that these accounts must be listed as assets owned by the minor when they apply forcollege financial aid? If there is any substance to them, they may end up disqualifying your child from receiving grants, scholarships, or sometimes even loans.
The Bottom Line
You have worked hard for your money. Many people want to make sure their family is taken care of. Since they can’t outright give the money to their minor children, they establish a trust fund on their behalf. When done correctly, these trust fundscan help children through rough patches, pay medical bills, fund college expenses, put down payments on houses, establish businesses, and much more.
When a trust is established incorrectly, funds can end up wasted. Would you rather see your children benefiting from the assets, or would you rather the state probate court get rich off your back?
FAQs
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
What is the negative side of a trust? ›
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
Is a trust fund a good idea for a child? ›
You can use conventional investment accounts, or even a will, to distribute assets to your children. But a trust fund will do it safely, and in exactly the way you want it to occur.
What is the downside of putting assets in a trust? ›
What Are the Disadvantages of a Trust in California? Trusts are costly to create. Creating a trust without an attorney may be less expensive, but doing so leaves the trust much more vulnerable to trust contests and other legal litigation. It is also more time-consuming to properly set up a trust than to create a will.
Should my parents put their assets in a trust? ›
It really depends on your needs and the needs of your family. Generally, a trust is a faster, more efficient way to get your assets to your heirs but setting up a trust is often more expensive than creating a will. Well-planned estates often utilize both trusts and wills.
What is the downside of a family trust? ›
Disadvantages of a Family Trust
You must prepare and submit legal documents, which the court charges a fee to process. The second financial disadvantage of a family trust is the lack of tax benefits, especially when it comes to filing income taxes. When the grantor dies, the trust must file a federal tax return.
Why are trusts not good? ›
Your Assets Might Not Be Protected: Another crucial point to note is that not all trusts offer protection from creditors. For instance, in revocable trusts, the assets are not protected from creditors as the grantor retains control of the assets. Potential Tax Burdens: Finally, trusts can carry potential tax burdens.
What is the enemy of trust? ›
Among the most common enemies of trust, though, are inconsistent messages from top management, inconsistent standards, a willingness to tolerate incompetence or bad behavior, dishonest feedback, a failure to trust others to do good work, a tendency to ignore painful or politically charged situations, consistent ...
What is a Murphy trust? ›
Murphy's will purported to place all of his and Royene's community property, as well as his own separate property, into two trusts in which Royene would have life interests plus a general testamentary power of appointment in the trust that included her community property interest.
What is the average trust fund amount? ›
While some may hold millions of dollars, based on data from the Federal Reserve, the median size of a trust fund is around $285,000. That's certainly not “set for life” money, but it can play a large role in helping families of all means transfer and protect wealth.
Before 40: Wills and Trusts
For many people, this will happen in their thirties. But if you're someone who bought a house earlier or has accumulated wealth before then, you may want to start in your twenties. Estate planning documents should outline your plan for these assets once you're gone.
What is the best trust account for a child? ›
The most common type of trust for children under 18 years of age is a custodial account. Custodial accounts are governed under the Uniform Gift to Minors Act (UMGA) or the Uniform Transfer to Minors Act (UTMA). UGMA lets minors own securities while UTMA lets minors own other kinds of property including real estate.
Should I put all my bank accounts into my trust? ›
In the state of California, for instance, you may hold up to $166,250 in assets, property, or accounts outside of a Trust and still avoid Probate. But if you have over $166,250 in your account, you should consider transferring it to your Trust so that your Beneficiary can receive their inheritance outside of Probate.
What are reasons to not have a trust? ›
- Probate avoidance is the only goal. While this is an admirable goal, a trust may not be the only way to avoid probate. ...
- You have straightforward wishes. ...
- You're motivated by tax savings or Medicaid eligibility. ...
- You're not great at follow-through.
Using an irrevocable trust allows you to minimize estate tax, protect assets from creditors and provide for family members who are under 18 years old, financially dependent, or who may have special needs.
What is the trust fund syndrome? ›
What Is A Trust Fund Baby? A trust fund baby refers to someone whose parents created a trust account, which they benefit from. The term “trust fund baby” has a negative connotation, as it's associated with the stereotype of a spoiled individual who doesn't have to work.
Why do trusts fail? ›
The purpose of a Trust is to manage the assets held in it. In order for the Trust to do it's job, the assets need to be in the Trust. If there are no assets in the Trust, then the Trust fails. Retitling the assets in the name of Trust is called funding the Trust.
Can a family trust make a loss? ›
Disposal of a trust asset can result in a capital gain or loss unless a beneficiary is absolutely or specially entitled.
Are trust funds protected from bank failures? ›
A trust owner's trust deposits are insured for $250,000 for each eligible beneficiary, up to a maximum of $1,250,000 if five or more eligible beneficiaries are named. This limit applies to the combined interests of all beneficiaries the owner has named in revocable and irrevocable trust accounts at the same bank.
