Parents, Don’t Make These Mistakes While Creating a Trust Fund for Your Child

As a parent, you are always thinking of ways to secure your child’s future. But life is full of uncertainties. What if you are no longer around to take care of their needs? How, then, can you provide for them and take care of their well-being? A great way to do that is to set up a trust fund that can serve as a pillar of financial strength and support for your children in your absence. 

What is a Trust Fund?

A trust fund is a legal financial arrangement that allows you to set aside your assets and wealth for the benefit of your loved ones. Using this estate-planning tool, parents can support their children’s future by transferring their savings and assets to them, subject to the rules and conditions they wish to apply. 

For instance, parents can specify whether the trust fund money is to be used for the child’s education, healthcare expenses, or to support their career ambitions.

Contrary to popular belief, a trust fund is not the prerogative of the rich and famous only. Any parent can set up a trust fund for their children’s welfare. Not only does it protect your children financially, but it also reduces the burden of estate and gift taxes in the future.

Key Considerations When Creating a Trust Fund for Your Child

Creating a trust fund requires careful planning and astute execution.

Clearly Defining the Purpose of the Trust 

First and foremost, you need to define in clear terms why the trust is being set up. Does the trust seek to benefit all of your children or just a specific child? This is especially necessary if you have a child with special needs who might need extra care and financial support. 

Further, you need to specify how the assets, estate, or funds are to be distributed among beneficiaries. At what age would you like your children to get access to the funds? Are there any restrictions on how they can use the funds, and what conditions do they need to fulfil (for instance, specific age, graduation, career milestone, marriage) to be eligible for the funds? What is to be done with the funds in case of an unforeseen event? All these questions have to be answered beforehand.

Ambiguous purpose and terms invite trouble for your children. Money in the hands of inexperienced young adults who are yet to begin their financial and life journeys can be risky. It can even lead to rifts between the beneficiaries, driving siblings apart. So, take your time and take advice from a competent accountant and legal advisor to set the terms.

Choosing the Right Trustee 

A trust needs trustees to handle the inheritance till the time your children are old enough or eligible as per your conditions. So, the trustee you choose has to be reliable and impartial – someone who would look out for your children in your absence and has their best interests at heart. As a trustee has to manage your assets and follow instructions, they should know financial matters and management skills.

Now here’s the bitter truth: no matter how much you love them, your relatives or friends might not be the ideal trustee. Keeping emotions aside, you, as a parent, need to make a logical decision based on facts such as the trustee’s age now and when your children grow up, their health, and their proximity to your children.

Apart from this, you must also assess their financial intelligence, integrity, judgment, ability to handle stressful situations, and willingness to take on such a role. Appointing two trustees is advisable to handle duties if the primary trustee is unavailable.

If you cannot think of any such individual in your family or friend circle, consider appointing a professional trustee or trust company to handle your children’s trust fund. They will offer impartial service combined with expert knowledge of managing a trust fund. 

Legally Setting up a Trust Fund and Trust Documents

Having decided on your purpose and zeroed in on the trustees, it’s time to draft the necessary trust documents. This step requires guidance to ensure all legal conditions are met and that the documents clearly mention all details, such as the names of the beneficiaries and trustees, their rights and responsibilities, and distribution criteria. Any errors or oversights in documentation can lead to significant legal and financial problems for your children in the future.

Along with the documents, you also need to transfer your assets to the Trust, including real estate, investments, and bank accounts. Because assets are held in the Trust’s name, they are protected from creditors and lawsuits. As the terms of using the funds are defined, it safeguards against wasteful spending or poor financial decisions of young kids.

Considering the Cost of Managing the Trust Fund

Setting up a trust fund involves costs, including trustee fees, tax filing fees, legal and accounting advice fees, administrative costs, documentation charges, future expenses, and more. If not factored in, these expenses could eat into the funds you have left for your children, defeating the very purpose of the Trust. Ensure you make arrangements, either in monetary terms or by allocating specific assets, to cover these costs.

Furthermore, the kind of trust fund you choose is essential, as different trusts have different tax implications. Consider consulting an expert accountant who is well-versed in estate planning and trust funds to understand how you can set up your children’s fund in the most tax-efficient way.

Annually Reviewing and Updating the Trust Fund for Life Events

You’ve thought of all the possible challenges that might arise about your children’s inheritance and successfully set up the Trust Fund to address these concerns. However, the duration from when the trust fund is created to when it is used is long. A lot can happen during that time, from births, deaths, marriages, divorces, to disputes and changes in family or financial circumstances.

It is vital to revisit the terms and conditions of your trust annually and update them to incorporate any new beneficiaries, exclude any existing ones, or make changes to the trusteeship. Also, ascertain if the purpose and intent of the Trust still hold true to your wishes, goals, and values. If not, make the necessary changes immediately.

Seek Professional Estate Planning Help

Though trust funds are all about your wishes and decisions, doing it all yourself without the help of a professional could cost you dearly. Trust fund laws are complex, and tax implications and other legal requirements require expert knowledge.

Contact KSSP Partners LLP in Markham to Help You Create a Trust Fund for Your Child

Having an estate-planning expert on your side can help you avoid costly errors and ensure the entire transaction is tax-efficient and compliant. At KSSP Partners LLP, our accountants and tax experts provide services including trust accounting, fund management, and tax planning. To learn more about how KSSP Partners LLP can provide you with the best accounting and estate planning expertise, contact us online or by telephone at 289-554-5997.