Three Common Mistakes Parents Make With Trusts
TED JENKIN: It's never fun to think about gloom and
doom. However, if you have been successful in building up an asset base or
you carry a lot of life insurance, you may be considering setting up a trust
fund for your children in case something happens to you. There are many
potholes that a family can stumble into when establishing a trust, but here are
three mistakes parents often make.
parents often don't think through who they want as the trustee of the trust for
their children. As complicated as it is to select a custodian, parents should
consider whether they want a single trustee or a co-trustee to have some
check-and-balance system for the trust. It is crucial to make sure you'll have
the right people in charge of the funds when you are no longer in the picture.
parents need to be clear about the goals of the trust. Specifically, most
parents don't think through when and how money can be distributed to the
children. Should it be every five years? Should it be upon attainment of a
certain age? Could you perhaps tie trust income to future
earnings? No matter what route you go, be thoughtful about how the trust
will distribute money.
is important to circle back on all of your beneficiary designations once the
trusts are established. Often, parents set up trusts and are hopeful that the
proceeds of their insurance policies will go into the trust. However, without
changing these beneficiaries you won't be able to accomplish your goals.
Who You Pick as a Trustee Is Key
ELEANOR BLAYNEY: One big mistake made by parents leaving
money in trust for children isn't giving sufficient thought to the choice of
trustees, and successor trustees. Parents need to weigh the pros and cons of
using an institutional trustee (who likely doesn't know the family dynamics or
the trust beneficiary) versus a trusted family friend or professional (who may
not want the obligation or may not be around to manage the trust). A real
mistake—though not invariably—can be having one sibling be the trustee on
another sibling's trust. There's nothing like having to ask a brother or sister
for money to rekindle some old, smoldering grudges or power struggles.
mistake is requiring the money to be distributed to the beneficiary at a
relatively young age, such as 30 or 35. A better idea is to specify dates that
are much further out, such as age 50 or even beyond, but allow the trustee to
make earlier distributions at his or her discretion based on the guidance of
the trust provisions. This way, the trustee can, in fact, distribute the money
when the beneficiary is 30, but doesn't have to. In cases where the beneficiary
isn't ready to handle the money—perhaps because of pending divorce or just a
failure to grow up on the usual schedule—the trustee then has the fail-safe
option of delaying until the specified age.
mistake is going to all the work to draft the trust and spell out its
provisions, but failing to talk to your children about the purpose and
intentions of the trust. A conversation can do a lot more than just a legal
document in communicating to your children your hopes and expectations for
their future, and having the spirit of your legacy honored.
Click here for the full article in the Wall Street Journal.