The 5 Biggest Mistakes Parents Make When Setting Up a Trust Fund & How to Avoid Them

biggest mistakes parents make when setting up a trust

If you’re a parent looking to establish a trust fund, you likely have the best intentions – you want to ensure your kids are provided for in the future.

But setting up a trust fund isn’t as simple as writing a check.

There are nuances and complexities to consider. Over my years as an estate planning attorney, I’ve seen many well-meaning parents make critical mistakes when creating trusts that sabotage their goals.

Let me walk you through some of the most common pitfalls I encounter so you can avoid them. I want you to create an airtight trust that truly serves your family’s interests and stands the test of time.

1. Not Defining the Trust’s Purpose and Parameters

First and foremost, be clear on why you are establishing this trust. Do you aim to pay for college? Help with a down payment on a first home? Provide startup funding to launch a business later in life? Get ultra-specific on what expenses the trust will cover. Outline any limitations on how funds can and can’t be used.

Additionally, indicate at what age your kids can access the assets. Can the trust be used for education costs at 18? Or do you intend the funds to help establish them during young adulthood at 25-30 years old? If you don’t spell this out, it leaves the door open for confusion, potential family infighting, and the trust being utilized in ways you never intended.

Take time upfront to define the trust’s purpose and exactly when and how your children can benefit from it. This guidance will prove invaluable for the trustees and beneficiaries down the road.

2. Failing to Properly Fund the Trust

Don’t make the mistake of setting up a trust without backing it sufficiently through assets and ongoing funding. Take stock of what you can allocate to initially seed the trust – things like existing investments, real estate, and life insurance proceeds. With the help of a financial advisor, strategically grow and feed the trust over time so it remains sufficiently capitalized.

You want to ensure adequate assets exist to fully accomplish your goals for your children. Starting with an underfunded trust undermines the whole effort. Quickly darting in and out with a large deposit alone isn’t thoughtful planning. You need consistent funding and growth.

3. Choosing the Wrong Trustee

Hands down, one of the biggest disasters I see is parents selecting an unqualified trustee to oversee the trust. This is far more prevalent than you’d think. Often, they appoint a well-meaning but irresponsible sibling or pick someone unfit simply because they are family.

Managing a trust is a major undertaking full of duties like investing, record-keeping, and distributing funds appropriately. One misstep by an incapable trustee can sink the whole ship quickly. Take great care when deciding on an individual trustee or professional firm. Do your homework to ensure they have the skills, maturity, integrity, and continuity to successfully steward the trust for years to come.

4. Neglecting to Review or Modify the Trust

Trusts aren’t a “set it and forget it” situation. Revisiting the estate planning documents annually gives you a chance to see if any changes are warranted. Are the original trustee or beneficiaries still suitable? Have new family needs or dynamics emerged that necessitate tweaks to distribution provisions?

Building flexibility to modify the trust as circumstances evolve is prudent. Ignoring the trust for long periods can make it outdated and less impactful. A little proactive oversight goes a long way toward keeping the trust aligned with your children’s best interests.

5. DIYing the Trust Documents

I see it all the time – parents try to save money by using online templates to draw up trust agreements themselves. Unfortunately, these DIY documents often lack key provisions pertaining to taxes, terminating the trust, contingency plans, and more.

Then, if the parents realize mistakes were made, trying to overhaul a DIY trust after the fact can be far more complicated than doing it right from square one.

I highly recommend having an estate planning attorney like myself draft customized trust documents for your family’s specific situation. We make sure to include the intricate legal components required to avoid issues down the road. Doing this cleanly at the outset provides true peace of mind.

Set Your Kids Up For Success — Contact The Titus Law Firm Today

The bottom line – with some diligence upfront, you can prevent the most common mistakes parents make when establishing trusts. Define clear goals and parameters so your children utilize the trust as intended. Take time to sufficiently fund the trust through thoughtful planning.

Be extremely selective in choosing your trustee. Revisit the trust over time and modify it as needed. And perhaps most importantly – enlist an experienced estate planning lawyer to ensure watertight trust agreements tailored to your family’s interests.

If you have any questions on how to avoid missteps and establish an ironclad trust fund for your children, don’t hesitate to reach out to our team at The Titus Law Firm. We’re always happy to offer personalized guidance to help parents like you carefully craft trusts that stand the test.

Author Bio

Eddison S. Titus

Eddison S. Titus is the Founder of The Titus Law Firm, a Houston estate planning, business law, and real estate law firm he founded in 2016. He has successfully represented clients in a wide range of legal matters, including will and trust creation, probate, real estate transactions, business formation, business and contract disputes, and business succession planning.

Eddison received his Juris Doctor from the Charlotte School of Law and is a member of the State Bar of Texas.

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