The Biggest Mistake Parents Make When Setting up a Trust Fund
Your family’s future is riding on trust funds. These vehicles exist to keep your legacy alive, protect your assets, and put your kids in a position to be OK after you’re gone. Far too often, though, well-intentioned parents make a fatal misstep: appointing the wrong trustee. Let’s discuss.
What a Trustee Does
Everything from your trust fund will be overseen by your trustee. Distributions, managing investments, tax compliance, and making sure the trust is being operated as it was intended – your trustee has a lot on their plate.
They have tremendous authority and with that comes responsibility. Pick badly, and your trust fund may turn into a legal war zone, an unmitigated financial disaster, or even just a total flop.
And yet, many parents still just fall back onto a name they are familiar with, such as a sibling, a close friend, or a relative. The assumption? That someone who knows your family will be inclined to act in your children’s best interest.
The reality is much different. In our experience, we’ve seen some pretty bad things result from such decisions, and they were just as shocking to us as they were to the family. Bottom line, you want to avoid such headache and heartache.
Why Familiarity Isn’t Enough
You can pick the most trustworthy person in the world. That doesn’t mean they’re qualified to manage a trust fund. Your trustee needs to understand money, they need to be impartial, and they have to be willing to enforce the trust’s terms – no matter how tough that may get. Ask yourself:
- Can they handle the administrative depth of trust management?
- Are they financially knowledgeable enough to make sound investment decisions?
- What happens when things get dicey? Will they remain impartial?
If your trustee doesn’t have these traits, your trust could be mismanaged or even worse, you could unwittingly harm the trust’s beneficiaries.
The Fallout of an Unqualified Trustee
There’s a lot on the line, so we need to be clear about what the risks are. Let’s take a look:
Financial Mismanagement
We’ve seen inexperienced trustees gamble trust assets away on high-risk investments. What’s more, we’ve seen trust money sit dormant and not grow because the unqualified trustee failed to diversify the asset properly.
And while these decisions can erode the value of the trust, they can do so to the point that your children get much less than you intended.
Legal Vulnerabilities
Penalties, lawsuits and audits may trigger when poor record keeping or missing tax filing occurs. In worst case situations the trust itself could be dissolved.
Beneficiary Conflict
Uneven distributions and playing favorites by trustees can infuriate beneficiaries, resulting in time consuming and emotionally draining legal battles.
Lack of Accountability
If the trustee of a trust has not been prepared for their duty of trusteeship, they may inadvertently breach their duty as a fiduciary, exposing the trust (and your children) to risk.
This is not a hypothetical risk. It happens every day. We’ve certainly seen our fair share in the years we’ve been helping people right the wrongs of such decisions. So, what’s usually the correct route here? Glad you asked…
Professional Trustees: The Safer Alternative
The logical solution, then, is to hire a professional trustee. For starters, they’ve got the expertise, you can count on them to be neutral, and their professionalism evokes accountability. In other words, they’ll help make certain that your trust fund operates without a glitch.
They don’t have a personal connection to your family, and that can be a good thing because it’s their objectivity that makes them so effective. Advantages of professional trustees include:
- Financial Expertise: They carefully control assets, so your trust increases gradually.
- Legal Compliance: The pros know how to stay one step ahead of changes in tax rules and regulations. That means zero fines and no legal issues.
- Impartiality: They stick to the terms of your trust, putting aside their own biases or family issues to do so.
What’s the bottom line here? Don’t leave trust management to amateurs. Of course, every once in a while, it works for families. In most cases, though, it’s a recipe for disaster, heartache, familial fallout, and so on and so forth.
Beyond the Trustee: Other Common Mistakes
The most obvious mistake is choosing the wrong trustee, but it’s far from the only error parents make when creating a trust fund. There is a myriad of things that have to work together to make a trust effective.
Sadly, poor choices in other areas can quickly negate your efforts just as much as a poor choice in trustee. Two additional pitfalls parents have to avoid are explored below.
Failing to Properly Fund the Trust
A trust fund is only as strong as the assets within it. Too often, parents establish trusts but fail to transfer ownership of key assets, leaving the trust underfunded or entirely empty.
This oversight transforms what could be a powerful estate planning tool into an ineffective, hollow shell. For example, life insurance policies intended to fund a trust must explicitly name the trust as the beneficiary.
Also, title papers to land and bank accounts need to be changed to include the name of the trust. The trust won’t be able to do its job if these steps are skipped.
Many parents think that the creation of the trust is the last step. But a trust that has not been properly funded is legally incomplete. And without proper funding, you will run into unintended consequences that can extend the duration of probate proceedings. That’ll result in comprehensive taxes and asset protection from creditors. It’s a big mistake.
Moreover, parents should consider the liquidity of the assets they transfer. Trusts must often provide for beneficiaries’ ongoing needs, such as education, healthcare, or living expenses.
If the trust holds primarily illiquid assets – like real estate – it may struggle to meet these obligations without selling valuable holdings at inopportune times.
Ensuring the trust is adequately and strategically funded requires a thorough review of your assets. At Dominion, our advisors work closely with clients to identify the most appropriate assets to include in a trust, ensuring it has the liquidity and stability needed to serve its purpose.
Neglecting Regular Updates
Laws are always changing. Families change over time, too. There’s a very real chance that what worked for you when you were building your trust might not work for you now. Still, a lot of parents don’t go over their trust agreements very often, so they become out-of-date and sometimes even useless. Think about these situations:
- No longer can a named trustee do their job because of old age, illness, or something else.
- New family members, like grandkids, should be added as beneficiaries.
- A child recipient has specific needs now, and the trust’s terms need to be revised accordingly.
- Tax laws change, so you need to make changes to protect your funds properly.
- If your financial position changes in a big way, like buying or selling a business, the trust’s rules are no longer valid.
You need to review the trust on a regular basis. Try to aim for once a year. This goes beyond merely updating trustees or beneficiaries. you need to keep an active eye on your trust’s funds, how well its assets are doing, and make sure it follows the latest legal rules.
Vulnerabilities appear when a trust isn’t updated. If you have an old trust, it could leave important assets exposed or give your money to people who don’t follow your wishes anymore. But on top of that, it could create disagreements between the beneficiaries themselves, which directly defeats the purpose of creating a trust.
At Dominion, you’ll often hear us advocate for responsible trust management. Failure to do so could negate the entire purpose of the trust and render it useless. Don’t let this happen.
Our experts will help you set up a trust, and we’ll keep an eye on its structure and usefulness over time to make sure it changes with your life and the laws around the world.
Another Oversight Worth Considering
Besides the mistakes listed above, there are also smaller mistakes that can make your trust less effective. For instance:
Not Paying Attention to Certain Asset Protection Provisions
This is one of the great things about trusts: they can keep funds safe from lawsuits, creditors, and even careless heirs. And yet, a lot of parents forget to include things like “spendthrift clauses” that tell children how they can (and can’t) spend trust funds.
Without these safeguards, your children’s estate could be at risk from greedy thieves, partners getting divorced, or bad choices. Spendthrift rules are especially important for young recipients who might not be mature enough to handle large amounts of money properly.
Dominion builds rock-solid asset protection measures into every trust we create. This way, your wealth is always safe, no matter what problems come up.
The Dominion Difference
The trust is a formality as much as it is a promise to protect your legacy. Dominion’s dedication to keeping your trust fund safe from mistakes is the shield you need in these challenging times. Such mistakes have destroyed so many other trust funds.
But we make sure that doesn’t happen to you and your loved ones. Let us help with your estate planning, and let Dominion put your mind at ease.
