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THE BIGGEST MISTAKE PARENTS MAKE WHEN SETTING UP A TRUST FUND & HOW TO AVOID IT

Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund.  We’ve seen first-hand how this critical error undermines so many parents’ good intentions.

When you establish a trust fund for your children, you likely have some wonderful goals in mind. You want to provide them with an inheritance while also ensuring the money gets used wisely. You hope to protect assets from creditors or misuse. You plan to avoid probate and reduce estate taxes. All noble aims, right?

But here’s the reality – the legal complexities of trusts open the door for things to go wrong. If you don’t put the right protections in place upfront, your children’s inheritance could evaporate, get wasted, or be tied up in legal battles. Of all the mistakes we see parents make when creating trusts, none wreaks more havoc than appointing an unqualified trustee to manage the fund. Handing over trust administration to the wrong person jeopardizes everything you hope to accomplish.

Choose Your Trustee Wisely — Their Decisions Impact Everything
The trustee you appoint has immense power over your trust fund. They direct how assets get invested when distributions occur and which beneficiaries receive what share. The trustee handles all the accounting, tax filings, record keeping, and communication with beneficiaries.

Given the trustee’s expansive role, you’d assume parents put great care into selecting the perfect candidate. Unfortunately, that’s often not the case. Many parents name a close family member or friend to serve as trustee, assuming they are the “obvious” choice since they know the children and parents’ wishes best. While understandable, appointing someone more due to familiarity than financial qualifications is an incredibly risky move.

Let’s explore this further.

PRIORITIZE EXPERTISE, NOT RELATIONSHIPS
A capable trustee should possess strong financial literacy, organization skills, impartiality, and availability.

Do your potential candidates truly exhibit these traits?
Can they handle the administrative chores efficiently?
Are they prepared to weather tough family pressures that might arise?
Weigh their expertise over familiarity. Naming family members as co-trustees often stokes strife. Siblings may have inherent conflicts of interest or struggle to agree on distributions. A professional trustee may sidestep these family skirmishes.

The Damage an Incompetent Trustee Can Unleash
Maybe you still think a close family member or friend deserves that trustee role. Let’s consider what happens when the person overseeing a trust fund lacks financial acumen or integrity:

Reckless investing that gambles trust assets instead of prudent, diversified holdings.
Delinquent tax filings leading to penalties that eat into the trust.
Playing favorites by making excessive distributions to one beneficiary over another.
Shoddy record-keeping and failure to account for decisions that open the door to malfeasance.
Mismanaged trust assets, resulting in beneficiary lawsuits and steep legal expenses.
This just scratches the surface of how an unqualified trustee can throw your entire estate plan off the rails. Appointing the wrong trustee means jeopardizing your children’s inheritance and your intentions.

Where Else Can Trust Plans Go Awry?
While the trustee decision remains paramount, two other common oversights plague many trust funds:

DROPPING THE BALL ON INITIAL TRUST FUNDING
A trust only functions if you fund it upfront with adequate assets retitled in the trust’s name. But, some parents establish “empty” trusts only relying on contingent funding later, like life insurance proceeds. This leaves trusts without assets to fulfill their purpose.

FUMBLING TRUST UPDATES
Laws change. Families grow and face new situations over time. The terms of a trust a decade ago may no longer suit your present circumstances and goals. Trusts require periodic reviews and amendments to align with new developments. Major life events also necessitate reshaping trust structures. An outdated or stale trust is a tragedy waiting to happen.

Trustor: a person who establishes a trust, typically either an individual person or a married couple. A trustor may also be called a grantor or a settlor.

Trustee: a person or persons designated by a trust document to hold and manage the property in the trust.

The trust is set up for the benefit of other individuals or organizations, known as beneficiaries.