The Biggest Mistake Parents Make When Setting Up a Trust Fund

the biggest mistake parents make when setting up a trust fund

Trust funds seem simple in concept — you put money into a fund that you want your child to access later in life. However, creating and managing a trust fund requires careful planning and forethought to ensure it works as intended. One of the biggest mistakes parents make when setting up a trust fund is choosing the wrong trustee to oversee and manage the trust.

This crucial decision can open the door to potential theft, mismanagement of assets, and family conflict that derails your child’s financial future. Read on to learn how to select the most qualified trustee for your situation and avoid pitfalls that can undermine your good intentions.

What is a Trust Fund, and How Do They Work?

A trust fund allows you, as a parent or grandparent, to provide assets and funds for your beneficiaries while maintaining control over when and how the funds are eventually distributed. Trusts are legal structures established with a designated trustee who manages the assets on behalf of the beneficiaries in accordance with rules and distribution schedules you put in place as the trust creator.

Trust funds can be funded with nearly any type of asset – cash, stocks, real estate, life insurance policies, or business interests. The assets are legally transferred into the trust, providing protection from creditors or divorce proceedings.

The trustee’s role is to administer the trust according to its terms, manage the assets in the best interests of beneficiaries, and distribute net income and/or principal at times specified by the trust agreement.

This arrangement allows you to provide financially for your child on your own terms while designating someone you trust to fulfill your wishes when you are gone. But the trustee you choose can make or break the entire arrangement.

Why Proper Trustee Selection is Crucial

The trustee holds immense power over the trust assets and distributions meant to support your beneficiaries. This individual or institution must manage the investment of the trust assets, tax filings, government reporting requirements, and distributions to beneficiaries according to the trust terms.

The trustee has a legal duty to act in the best interests of trust beneficiaries when making decisions.

Choosing an unqualified, incompetent, or dishonest trustee can lead to improper investment management, excessive fees, or outright theft of trust assets. Appointing a trustee with conflicting interests between beneficiaries or distribution schedules that don’t align with your intentions can also undermine the trust’s purpose.

Getting the trustee decision wrong can mean trust assets won’t be there as intended when your child needs them most for education, starting a business, or buying a home.

Family Members May Not Be Ideal Candidates

When establishing a trust, it’s natural to consider naming a family member as a trustee. Parents often feel more comfortable entrusting those duties to someone personally close to them. However, family members come with their own set of risks that must be weighed carefully.

One major concern is that family trustees may treat beneficiaries unfairly if they favor certain siblings over others. Parents themselves can show favoritism when structuring trust distributions, which is amplified when a family member administers the trust. Family trustees may also struggle to fulfill their duties diligently, especially if there are complicated assets to manage or unhappy beneficiaries to deal with.

There is also the risk that family member trustees give in to pressure from beneficiaries and provide early or excessive distributions, undermining your original intentions. It can be very difficult for loved ones to stand firm when denying funds from family.

Friends Also Come With Risks

Naming a trusted friend or advisor as a trustee seems like a good solution if family members don’t fit the bill. You know and trust these individuals, so it feels natural to appoint them as guardians of your child’s trust. However, friends often lack the time, experience, and impartiality required to properly manage trust assets and distributions.

The complicated nature of trust administration and asset management is often underestimated. Friends who take on trusteeship as a favor can easily get in over their heads, leading to poor investment decisions or record-keeping errors. This puts your child’s trust at risk of underperformance or mismanagement despite good intentions.

Having a friend oversee distributions can also strain the relationship over time, especially if they must play “bad cop” when denying beneficiaries’ requests. You risk souring a close friendship if expectations are not met.

Professional Trustees Bring Experience

Professional corporate trustees may be the best option if a family member or friend is not right for the job. Though they charge fees for services, you gain financial management expertise, tax optimization knowledge, and strict adherence to fiduciary duty.

A professional trustee like Hammond Law Group provides total impartiality when managing the trust between multiple beneficiaries. No family ties or friendships are clouding their judgment. This also gives your beneficiaries an impartial party to appeal to if any disputes arise after you’re gone.

Additionally, corporate trustees provide continuity of management and oversight that outlives any individual. Your child’s trust fund can be managed consistently based on your outlined terms, regardless of what happens with family or friends.

How to Choose the Right Trustee

Selecting the trustee for your child’s trust fund requires careful consideration of qualifications, your goals for the trust, and family dynamics. It’s also wise to consult with an experienced estate planning attorney as you weigh options.

Here are some best practices to ensure you choose the right trustee:

  1. Look for financial savvy, integrity, impartiality, and ability to make difficult decisions
  2. Consider a corporate trustee to maintain family harmony
  3. Thoroughly interview potential candidates on experience and philosophy
  4. Evaluate their capabilities to handle the types of assets in the trust
  5. Discuss cost structure and services upfront if considering a professional
  6. Consult with an estate planning attorney for guidance
  7. Review trustee choice regularly as circumstances evolve over time

The trustee’s decision carries long-term consequences for your loved ones. Taking time to carefully select with counsel can avoid missteps undermining your child’s needs.

Get Help Setting Up Your Child’s Trust

Avoiding big mistakes when establishing your child’s trust fund allows you to create an impactful gift to support their financial future. However, the complexities of trusts require working with an experienced estate planning legal team.

Hammond Law Group has helped Colorado parents create and manage trust funds for nearly 20 years.

We can advise you on:

  • Determining the right trustee selection for your unique situation
  • Crafting specialized trust terms to provide for your child’s needs
  • Funding the trust in a tax-efficient manner to preserve assets
  • Reviewing the trust regularly to make proper adjustments as your child grows

Contact us today to schedule a consultation. Our attorneys can ensure you establish the ideal trust fund to provide lifelong benefits for your loved ones. With the proper trustee guiding distributions, this powerful planning tool can secure your child’s financial future.

Author Bio

Catherine Hammond is the CEO and founder of Hammond Law Group, a Colorado-based estate planning law firm she founded in 2005. With a strong focus on protecting families from the legal consequences of disability and death, she creates comprehensive estate plans that minimize taxes, costs, and government interference.

A native of Denver, Catherine completed her undergraduate studies at Coe College in Iowa, and her Juris Doctorate from the University of Denver College of Law in 1993, concentrating on estate planning, tax, and mediation. Catherine is a member of various professional organizations, including WealthCounsel, ElderCounsel, the National Academy of Elder Law Attorneys, the Colorado Springs Estate Planning Council, and the Purposeful Planning Institute. Beyond her legal expertise, Catherine provides transformational coaching to support clients and their families through life transitions.

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