Establishing a trust for your child is one of the most practical estate planning strategies. A trust has various benefits, including providing educational funds and protecting your child’s inheritance.
When creating this type of trust, parents are faced with many decisions, and a wrong step on this journey may cost their children later in life. This article explores some common errors and steps you can take to avoid them.
Why Do You Need a Trust for Your Child?
A trust can benefit children and their future in many ways. Let’s review some of the benefits of a trust to children:
Provide for Long-Term Responsible Management of Your Assets
If you create a revocable living trust, you as trust creator will retain control over your trust and its assets. Once you have passed, a named person or financial institution of your choice will be responsible for managing your trust. This person or institution is called a Trustee. By naming your choice of individuals and/or institutions to serve later on as Trustee(s), you have the power to provide for long-term management of the assets you leave your children.
Ensure Proper Receipt of Your Assets
When creating a trust you will also name specific beneficiaries who will eventually be entitled to your trust’s property, likely your children or people you are close to in life. Only the creator of the trust has the authority to name beneficiaries in this way, meaning no one can alter your disposition wishes after you have passed. As such, you can name your children as the trust beneficiaries, and the Trustee will distribute your assets to them in accordance with your wishes.
Prevent Misuse of Your Assets
A trust allows you to define specifically how you want your assets to be used. If you want money allocated for your children’s education, for example, you can include language outlining this specific wish. By restricting how the funds should be used, you can have peace of mind knowing that the money will be spent only in ways you permit in the terms of the trust.
Irrevocable Trusts Protect Assets
There are two general categories of trusts: revocable and irrevocable. Revocable trusts, or “living trusts” allows the trust creator to maintain control over the assets as the legal owner until their death. This permits the trust creator to retain some flexibility and the option to revise their wishes within the trust.
However, revocable trusts can later become irrevocable upon the occurrence of a stated event or condition, such as the death of the trust creator. Once it is irrevocable, the trust can serve as a safeguard to protect assets from certain creditors. While creditors may have claims against your estate, or against your children later in their lives, these claims generally cannot be satisfied using assets within the irrevocable trust.
How To Create a Trust for Your Child
Trusts are often complex legal documents that require specialized knowledge to properly draft. You should work with an experienced attorney when creating a trust for your child. At Weiner Law, we will counsel you through the planning process. You will have the opportunity to tell us your objectives, and we will advise you on the best type of trust to achieve those objectives. You can generally create a trust fund in five easy steps:
1.Name Your Beneficiaries and the Trust Objectives
You have the freedom to decide how you would like your trust assets to be used in the future. You also will name those people or institutions you would like to benefit from your trust. These are your beneficiaries. You can divide your assets equally among beneficiaries, or in certain amounts as you wish.
2.Name Your Trustee
Typically, trust creators serve as Trustee themselves while they are still alive. However, after the trust creator(s) have passed, another person or institution must be available to manage the trust. These people and/or institutions are referred to as “successor Trustees” because they succeed the trust creator in the role of Trustee. Choosing a trustee is a very important consideration to make when creating a trust for your children. As the name implies, a trustee should be someone you trust, and they must meet legal requirements for acting as a trustee. A Trustee should also be someone capable of managing the assets you leave behind, which varies from estate to estate.
3.Define the Terms of the Trust
Once you select a Trustee, you need to decide when and how your children will access the trust assets. Remember that you can outline the specific terms of your trust as you wish. For example, you can specify certain age milestones your children will receive portions of your assets, or you can choose to give your children full access to the assets upon a certain age. There are many creative ways to ensure your wishes are met.
4.Determine How You Will Fund the Trust
You will also determine which assets you will put into the trust. This is a crucial step because a trust is not effective unless it is funded (i.e., made the owner) with certain property. Assets may include real estate, money, and investment accounts. We at Weiner Law will do everything we can to ensure you do not forget this important step, including follow-up consultations to discuss the progress of trust funding.
5.Execute the Trust
Once you have everything in order, as outlined in the steps above, you will need to review, approve, and execute your trust. You will sign and date the documents, which generally will make them legally effective. We will also arrange for your documents to be notarized as required by California law.
7 Biggest Mistakes Parents Make When Planning for Their Children’s Futures
Assuming Assets Only Transfer to Children Upon Parent’s Death
In California, a scheme of intestate succession determines where your assets go after your death if you do not leave a will. While the intestacy scheme dictates that a person’s living children are generally first in line to receive their assets, this can be disrupted if creditors or other heirs want to take a piece for themselves. Without a properly drafted trust in place, your children could be left to fend off unwanted predators of your estate.
Choosing the Wrong Trustee
Parents can also inadvertently make the mistake of entrusting the wrong person to handle the assets for their children. Choosing the wrong Trustee can lead to various complicated issues with costly consequences, such as misappropriation of funds. The most disheartening part is that you may not be there to correct the mistakes.
Therefore, you should take the time to determine who you want to manage the trust for your children. Before choosing someone to be your Trustee, you should consider factors such as their health, age, location, trustworthiness, and judgment skills.
Not Focusing on Trust Objectives
When you have clear objectives for your trust, you’ll have an easy time deciding which type of trust to create. For example, if your primary goal is to minimize tax liability on your assets after your death, creative trust drafting can affect this goal. This is why coming to a trust planning meeting with your attorney requires some forethought. You must have your goals in order before you proceed with creating a trust.
Not Considering a Child’s Maturity Level
Parents also need to avoid another common mistake: disregarding their child’s maturity level when creating a trust. You must objectively consider a minor’s maturity level when deciding how much of the funds they can access and when they can access them. You may want to consider factors such as your child’s age and how they demonstrate responsibility on a day-to-day basis.
We do not generally advise parents to leave a large sum of money at a younger beneficiary’s disposal to spend as they wish. To avoid situations where children are left with money they are not prepared to handle, your trust should include guidelines that spell out how and when the Trustee should use the assets and when the beneficiary will have access.
Naming Children as the Beneficiaries
Another big mistake parents make when establishing a trust is to name their children as the primary beneficiaries of any insurance policies and retirement accounts, rather than naming their trust. Naming the trust as the primary beneficiary of these types of assets ensures the funds from these assets are distributed according to the terms of your trust.
Not Reviewing the Trust Regularly
To maintain oversight, it is important to review the terms of your trust annually, or at least upon the occurrence of any major life event (someone in your family passes away, gets married, goes to college, etc.). You want your estate plan to be up to date as things change in your life. Regularly checking your trust allows you to reevaluate certain decisions you made previously such as:
- The person you have chosen to be your Trustee. Are they still fit to serve as Trustee, or have any concerns arisen that would compromise their capacity to serve as Trustee?
- Your list of beneficiaries. You may be considering adding or removing a beneficiary.
Weiner Law Can Help You Establish a Trust to Meet Your Needs
Establishing a trust for your children can ensure that the assets you leave behind will benefit them as you wish. However, your good intentions could be compromised by any of the common mistakes we discussed. An experienced attorney from Weiner Law can help you avoid these missteps and ensure you create a trust that meets your specific needs.
If you want to create a trust for your child but do not know where to start, Weiner Law can help. We offer a wide range of estate planning services to meet your specific needs. We will walk you through you every step of establishing a trust fund for your children. Contact us today at 858-252-4768 for a complimentary, no-obligation consultation.