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5 Common Mistakes When Creating a Trust Fund for Your Child

  • April 2021
  • 3 minutes

The term ‘’trust fund baby’’ is associated with a negative stigma. It brings up images of privileged children who grew up having material possession that money could buy.

Most people would be surprised at how many funds have been established for children. 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 assets necessary to survive. If you have life insurance and your underage children are the beneficiaries, they will have a trust fund established for them if you happen to pass away.

There are a number of mistakes that parents make when creating trust for their children.

  • 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 are not great at managing money and put in place limits to what they can withdraw the money, particularly when they are under ’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.

taxqube Choosing the wrong Trustee

Even if a family member agrees to take on that role, it may not be his or her best interest to have financial control over your children’s assets. This especially holds if the trust is set to turn over full control to the child at age 25, and then 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 professionals such as bankers, accountants or solicitors to act as a trustee. To keep that personal touch, let the professionals and a sibling act as co-trustees.

taxqube 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, wedding) Anything else, and you can set up a trust so that the money can’t be retrieved until a certain age is reached.

taxqube Designating the wrong beneficiary

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.

taxqube Not reviewing your Trust annually

When you set up a trust fund, you may have chosen a responsible family member as a trustee. After some time, you forgot about that designation- investments and overall financial planning must be reviewed every year to make sure it is still true to your desires and current overall realities.

taxqube Forgetting about college planning

The most common funds for children are generally very simple administratively and you have to add money to them regularly in order to make sure they are fully funded. These accounts for trust must be listed as assets owned by the minor when they apply for a college financial aid. If there is any substance to them, they may end up disqualifying your child from receiving grants, scholarships or even loans.

You have worked hard for your money. Many people want to make sure that their family is taken care of. Since they can’t outright money to their minor children, they established a trust fund on their behalf. When done correctly, these trust funds can help children through rough patches, pay medical bills, fund college expenses, put down payments on house, establish business and much more.

When trust is established incorrectly, funds can end up wasted.

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