Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund. As estate planning attorneys, we’ve seen first-hand how this critical error undermines so many parents’ good intentions.
When you establish a trust fund for your children, you likely have some wonderful goals in mind. You want to provide them with an inheritance while also ensuring the money gets used wisely. You hope to protect assets from creditors or misuse. You plan to avoid probate and reduce estate taxes. All noble aims, right?
But here’s the reality – the legal complexities of trusts open the door for things to go wrong. If you don’t put the right protections in place upfront, your children’s inheritance could evaporate, get wasted, or be tied up in legal battles. Of all the mistakes we see parents make when creating trusts, none wreaks more havoc than appointing an unqualified trustee to manage the fund. Handing over trust administration to the wrong person jeopardizes everything you hope to accomplish.
Choose Your Trustee Wisely — Their Decisions Impact Everything
The trustee you appoint has immense power over your trust fund. They direct how assets get invested when distributions occur and which beneficiaries receive what share. The trustee handles all the accounting, tax filings, record keeping, and communication with beneficiaries.
Given the trustee’s expansive role, you’d assume parents put great care into selecting the perfect candidate. Unfortunately, that’s often not the case. Many parents name a close family member or friend to serve as trustee, assuming they are the “obvious” choice since they know the children and parents’ wishes best. While understandable, appointing someone more due to familiarity than financial qualifications is an incredibly risky move.
Let’s explore this further.
Prioritize Expertise, Not Relationships
A capable trustee should possess strong financial literacy, organization skills, impartiality, and availability.
- Do your potential candidates truly exhibit these traits?
- Can they handle the administrative chores efficiently?
- Are they prepared to weather tough family pressures that might arise?
Weigh their expertise over familiarity. Naming family members as co-trustees often stokes strife. Siblings may have inherent conflicts of interest or struggle to agree on distributions. A professional trustee may sidestep these family skirmishes.
The Damage an Incompetent Trustee Can Unleash
Maybe you still think a close family member or friend deserves that trustee role. Let’s consider what happens when the person overseeing a trust fund lacks financial acumen or integrity:
- Reckless investing that gambles trust assets instead of prudent, diversified holdings.
- Delinquent tax filings leading to penalties that eat into the trust.
- Playing favorites by making excessive distributions to one beneficiary over another.
- Shoddy record-keeping and failure to account for decisions that open the door to malfeasance.
- Mismanaged trust assets, resulting in beneficiary lawsuits and steep legal expenses.
This just scratches the surface of how an unqualified trustee can throw your entire estate plan off the rails. Appointing the wrong trustee means jeopardizing your children’s inheritance and your intentions.
Where Else Can Trust Plans Go Awry?
While the trustee decision remains paramount, two other common oversights plague many trust funds:
Dropping the Ball on Initial Trust Funding
A trust only functions if you fund it upfront with adequate assets retitled in the trust’s name. But, some parents establish “empty” trusts only relying on contingent funding later, like life insurance proceeds. This leaves trusts without assets to fulfill their purpose. Work closely with an estate planning attorney to properly shift assets into the trust and budget realistic funding amounts.
Fumbling Trust Updates
Laws change. Families grow and face new situations over time. The terms of a trust a decade ago may no longer suit your present circ*mstances and goals. Trusts require periodic reviews and amendments to align with new developments. Major life events also necessitate reshaping trust structures. An outdated or stale trust is a tragedy waiting to happen.
Craft Your Trust Thoughtfully to Align with Your Hopes
At Apple Payne Law, we know no parent dreams of seeing their trust fund become a costly nightmare. But without proactive planning and foresight, your goals for your children’s inheritance may never materialize. Don’t leave it all to chance.
The ideal solution? Collaborate with our experienced trust lawyers to thoughtfully craft your trust strategy. We help you hand-select financially savvy trustees and include provisions to discourage misuse. An ounce of prevention through a customized trust goes a long way to securing your family’s legacy.
Does your trust plan need a check-up? Contact us today to schedule an introductory call to start the conversation. We’re happy to offer our perspective.
Author Bio
Ronald D. Payne II is the CEO and Managing Attorney of Apple Payne Law, a North Carolina law firm he founded in 2018. With more than 11 years of experience practicing law, he is dedicated to representing clients in a wide range of legal matters, including business law, estate planning, family law, probate, and traffic law.
Ronald received his Juris Doctor from the Wake Forest University School of Law and is a member of the North Carolina Bar Association. He has received numerous accolades for his work, including being awarded the 2020 Client’s Choice Award by Avvo and multiple Rising Star awards from Super Lawyers.
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FAQs
Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund. As estate planning attorneys, we've seen first-hand how this critical error undermines so many parents' good intentions.
What is the biggest mistake parents make when setting up a trust fund near Texas? ›
The Biggest Mistake When Setting Up a Trust Fund
What is the single biggest mistake that parents tend to make when attempting to provide for the financial futures of their children? The answer may surprise you as it could be easily avoided: lack of proper planning.
What is the biggest mistake parents make when setting up a trust fund near Virginia? ›
Choosing the wrong trustee can cause complicated issues for your child. A trustee not acting in your child's best interest is a common mistake. There are legal requirements that trustees act in the beneficiaries' best interest.
What are the bad things about trust funds? ›
The major disadvantages that are associated with trusts are their perceived irrevocability, the loss of control over assets that are put into trust and their costs. In fact trusts can be made revocable, but this generally has negative consequences in respect of tax, estate duty, asset protection and stamp duty.
What would cause a trust to fail? ›
The purpose of a Trust is to manage the assets held in it. In order for the Trust to do it's job, the assets need to be in the Trust. If there are no assets in the Trust, then the Trust fails. Retitling the assets in the name of Trust is called funding the Trust.
Should I put my parents assets in a trust? ›
It really depends on your needs and the needs of your family. Generally, a trust is a faster, more efficient way to get your assets to your heirs but setting up a trust is often more expensive than creating a will. Well-planned estates often utilize both trusts and wills.
What is the downfall of a living trust? ›
What Are the Disadvantages of a Trust in California? Trusts are costly to create. Creating a trust without an attorney may be less expensive, but doing so leaves the trust much more vulnerable to trust contests and other legal litigation. It is also more time-consuming to properly set up a trust than to create a will.
What is the best state to set up a trust fund? ›
Nevada, South Dakota, Delaware, Alaska and Wyoming are generally recognized as the states with the most favorable trust laws and regulations. These states generally have a favorable tax environment, strong asset and privacy protection laws, and flexible decanting provisions and trust modification options.
What is a negative of a family trust? ›
Disadvantages of Family Trusts
Loss of ownership of assets – If you transfer your personal assets to a trust, then the trustees of that trust will control the assets.
At what net worth does a trust make sense? ›
Many advisors and attorneys recommend a $100K minimum net worth for a living trust. However, there are other factors to consider depending on your personal situation. What is your age, marital status, and earning potential? At what point in time will your focus shift from wealth creation to wealth preservation?
For very simple trusts, you may be able to create one by yourself or with the help of an online service. However, most experts agree that for more complex trusts, it's in your best interest to hire an estate planning attorney to help you.
What is the best trust to put your house in? ›
Placing a house in an irrevocable trust can help you qualify for Medicaid by decreasing your taxable estate. With an irrevocable trust you can get asset protection from creditors, including nursing homes.
Does money grow in a trust fund? ›
If you are wondering do trust funds gain interest, the answer is “yes, it is possible.” However, they must hold assets that produce income. A trust fund is a type of account that holds a variety of assets for your beneficiaries. Some assets, like a savings account, produce interest, while others do not.
Is a trust safer than a bank? ›
Takeaway: In addition to the estate planning advantages, like probate avoidance, owning deposit accounts in a revocable trust may provide additional protection against a possible bank failure.
Are trust funds worth it? ›
The benefits of a Trust Fund are numerous, but perhaps the biggest perk is the control it provides over the management of your assets. Trust Funds can guarantee that your assets are properly taken care of until your beneficiaries come of age, while also allowing them to avoid probate.
Does a trust protect assets in Texas? ›
The Texas legacy trust shields assets from past creditors but does not protect you from new current debt or future creditors. Also, it is irrevocable, meaning funds committed to the trust and placed under its protection cannot be removed or changed. The maker of the trust can be the beneficiary.
What is the 5 5 trust rule? ›
A 5 by 5 Power in Trust is a clause that lets the beneficiary make withdrawals from the trust on a yearly basis. The beneficiary can cash out $5,000 or 5% of the trust's fair market value each year, whichever is a higher amount.
What does Suze Orman say about trusts? ›
Suze Orman, the popular financial guru, goes so far as to say that “everyone” needs a revocable living trust. But what everyone really needs is some good advice. Living trusts can be useful in limited circ*mstances, but most of us should sit down with an independent planner to decide whether a living trust is suitable.
Should I have a living trust in Texas? ›
In Texas, compared to other states, living trusts are particularly useful for avoiding probate and dealing with community property. However, Texans still need a will for things like: Naming an executor to handle final affairs.
