For parents, nothing is more important than knowing your kids are safe—whether they’re 4 years old or 40. You can’t protect them from everything, but establishing a trust does allow you to move a financial safety net under their feet. Creating a well-drafted trust allows you to pass on assets in a way that best supports your kids’ needs at every stage of life. There are a lot of decisions that need to be made during the process, and making the wrong ones can have costly consequences. Work closely with your advisors to make sure you don’t repeat the biggest mistakes parents make when setting up a trust.
During the estate planning process, parents of minor and/or disabled children agonize about who would make the best guardian if they die while their kids still need care. You might evaluate your closest friends and family members using criteria like whose parenting style, values and lifestyle are most similar to yours, and who your kids would be most comfortable living with.
Using those same criteria to choose a trustee might be the single biggest mistake parents make when setting up a trust. The person or people you name in your will as your chosen guardian for your kids may not be the right person to appoint as trustee.
The right trustee is someone who can make clear-eyed decisions about managing and distributing assets held in the trust. They should be fiscally responsible, trustworthy and willing to take on the job of trustee. The right trustee should also be young enough and in good enough health that you expect them to be around to manage the trust for many years to come. Depending on the terms of the trust, the trustee might need to make some judgment calls about when to let beneficiaries access money and property. These decisions can create conflict within the family when the trustee is close to the beneficiaries. This is why many parents end up electing to use a professional trustee like a trust company or financial advisor.
It doesn’t matter how thoughtful and responsible your kids are. Giving an 18- or 21-year-old access to a large sum of money is rarely a good idea. Distributing assets when children reach certain age benchmarks can be another one of the biggest mistakes parents make when setting up a trust. Say a parent of a young child decides that he will get $100,000 when he turns 21. She hopes that he’ll use that money to start his adult life, maybe using it to start a business or as a down payment for a home. But by the time he turns 21, that son might have a history of bad decision-making around money. And if he grew up knowing that he had a windfall coming at age 21, he may not have had any motivation to start building a career for himself.
Parents have a great deal of flexibility in how they structure trusts. Instead of tying distributions to age, you may want to tie them to other benchmarks and/or give your trustee the authority to decide whether a beneficiary is responsible enough to receive scheduled distributions.
An unfunded trust is just a piece of paper. It’s worthless until you move assets into it. If you put off the process of transferring assets, or make mistakes that keep them from being properly transferred, those assets won’t be passed to your children in keeping with the terms of your trust—and you might trigger estate tax issues that cost your beneficiaries a lot of money.
Say a parent owns a piece of real estate that they intend to transfer to their child’s trust, but they die before completing the transfer. Because the property belonged to the parent at the time of death, it’s counted toward the value of the parent’s estate and may increase the estate tax liability. The child might still ultimately inherit the property their parent wanted them to have, but not until the parent’s estate has gone through the long and expensive probate process and has potentially paid out many thousands of dollars in estate taxes.
Parents sometimes assume that establishing a trust is the best way to provide for all of a child’s future financial needs, including school tuition. It’s true that you can structure a trust to provide for a child’s college or other future educational costs, but this isn’t the best strategy in every case.
Sometimes it makes sense to create a separate education account in the child’s name. For one thing, if there’s any chance the child will need to apply for financial aid to attend college or grad school, having a trust might affect their eligibility for aid. There are a lot of different factors to consider around trusts and education planning, so parents should talk through the potential scenarios with their advisors.
As with the other elements of your estate plans, any trusts you create need to be reviewed and possibly updated in the ensuing years. Changes to your family structure, like divorce or the addition of more children, could affect your trust plans. Parents may change the terms of a trust if they don’t think their teen or young adult children are mature enough to handle the money they were scheduled to inherit. Revisiting your trust plans every few years allows you to make sure that all those protections you created are still solidly in place.
Sachetta Callahan understands that no two families and no two children are the same. We work with parents to create the financial plans that best support their specific needs at every stage of life. We know how high the stakes are, and we know how important it is to get this right. Let us help you avoid the biggest mistakes that parents make when setting up a trust. Contact me today!
Joseph Sachetta, CFP®, CPA/PFS, MBA, MST, For over 40 years, Joe has worked in finance and accounting. He is a Certified Financial Planner, and a Certified Public Accountant. Joe’s passion lies with helping his clients strike a balance between living for today and saving for tomorrow.