We all want to make sure our children and grandchildren are provided for, and so we set up secure, foolproof trust funds — or so we think. There are several mistakes you can run into when designing a trust. Here are a few of them:
Mistake #1: Thinking that trusts are only for the super-wealthy
Trusts are not just for the ultra-wealthy. Anyone who carries a sizeable amount of life insurance — especially if children or grandchildren are beneficiaries — could possibly benefit from using a trust to own the policy and administer the proceeds payable upon death. The death benefit is excluded from the value of your estate and passes directly to the trust, becoming payable according to the terms you stipulate in the trust.
Mistake #2: Not thinking through your choice of trustee
It’s important to fully think through your choice of trustee. Sometimes it can even make sense to appoint co-trustees, as this affords a built-in system of checks and balances in the management of the trust. An institutional trustee may be the best choice, provided the relationship involves sufficient understanding of family dynamics.
Many people appoint a trusted family member or friend, which can work well. The risk here, though, is whether the individual has the appropriate level of knowledge, expertise, and objectiveness to administer the trust in a timely and equitable manner.
Mistake #3: Not being clear about the goals for the trust
You can design a trust in a variety of ways, but you need to know what you’re trying to accomplish. Here are some questions you should consider when clarifying your trust’s goals.
- Is it intended to give the beneficiaries a financial head start, or do you want to provide an income stream for life.
- At what age do you want the beneficiaries to receive the proceeds?
- Are there duties or qualifications you want the beneficiaries to demonstrate — achieving a certain amount of income on their own, for example — before receiving the assets?
- Are there certain life events — marriage, buying a home, starting a business — for which you want to specify a benefit from the trust?
Mistake #4: Failing to communicate with the beneficiaries
One of the biggest trust fund mistakes is a failure to communicate. Certainly, no one enjoys a conversation predicated on their own demise, but talking things through with your heirs should help them understand the depth of your regard for them and your concern for their future well-being. Talk about your intentions for the trust’s use and any conditions attached to receiving its benefits. The more they know and understand, the better the chance that your estate planning will achieve the goals you have set.
A trust is not a “one size fits all” document, and the particulars of your situation — and that of your beneficiaries — really do matter. It’s important to spend time with an experienced estate planner who listens carefully to your questions and concerns, as well as a financial advisor to help you navigate the complexities involved with transferring wealth.
Are you ready to start the estate planning process? Contact Triada Advisors today.