Trusts were once something only the wealthiest people had. Today, however, people from a range of income levels often use them to hold and distribute assets without having to go through time-consuming probate proceedings.
As a parent, you may therefore be considering a trust as part of your estate plan. But what are some common mistakes to watch out for?
Common mistakes people make when setting up a trust
Most of the errors people make when they establish trusts come from lack of knowledge. The top mistakes include:
- Giving the beneficiaries too much access, too early. You may want to limit how much money a young beneficiary can withdraw from a trust until they reach a certain age such as 25 or 30. Without out this protection, a young person in their early 20s can easily make excessive withdrawals that aren’t in their long-term best interest.
- Choosing the wrong trustee. A trustee must be chosen with care. Though it’s natural to turn to family members, each family is different and the dynamics must be considered. With the wrong trustee, resentment and conflicts among siblings or other beneficiaries can undermine your legacy.
- Not considering college finance. If you have a college-age child, you are probably familiar with the FAFSA form. With college costing tens of thousands of dollars, you don’t want to undercut your child’s ability to get as much aid as possible. In structuring a trust, it’s important to consider how it will affect FAFSA reporting.
- Forgetting to change beneficiaries. You have to fund a trust for it to be effective. This includes things like changing the beneficiary of your life insurance policy so that it goes to the trust rather than directly to your heirs.
There’s a lot to manage when you’re setting up a trust, and it’s easy to overlook something. Learning more about the legal process and your various options can help you make informed decisions down the line.