When safeguarding their children’s financial future, parents often turn to trust funds as a reliable option. When safeguarding their children’s financial future, a trust fund is a great start. However, the biggest mistake parents make when setting up a trust fund is choosing the wrong trustee. Find out what characteristics to look for and the potential repercussions the wrong trustee can have on a child’s future.
What are Trust Funds?
A trust is an agreement between an owner of accounts and property (trustmaker) and another person (trustee). The trustee agrees to manage the accounts and property on behalf of a third party (beneficiary). Trust assets may include real property, insurance policies, retirement accounts and other assets. Regularly transferring assets into the trust can help build its value over time.
In most situations, a written document, called a trust agreement, lays out the specific instructions or rules that govern the trust relationship.
As a parent, you want to plan for your child in case something should happen to you. Naming a trustee gives your child someone to handle financial matters as they grow up. However, one of the biggest mistakes parents make when setting up a trust fund is choosing a trustee who doesn’t understand or follow the trust provisions you so carefully laid out.
A fully funded trust can prepare for many goals, such as a child graduating college. However, a big mistake is naming a trustee who cares about the wrong goals or takes on more control over your trust’s assets than you planned for.
What is a Trustee?
A trustee is a trusted decision-maker who handles all matters related to your trust. Depending on the type of trust, you could be the trustee in the beginning. If you pass away or become incapacitated, your trust could name someone else as trustee.
Or you could name a trustee to act immediately as the person meeting the goals of your trust documents.
The Biggest Mistake Parents Make When Setting Up a Trust Fund
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. However, a lousy trustee may work in many ways that hurt your child without breaking the law.
Common mistakes that the wrong person can make include:
1. Mismanagement of Trust Assets:
An unfit trustee may lack the necessary financial acumen or responsible decision-making skills to effectively manage the trust’s assets. They may make poor investment choices, fail to diversify the portfolio, or overlook potential growth opportunities, ultimately diminishing the trust’s value and limiting the child’s financial potential.
A bad trustee may prioritize their own interests over the child beneficiary. They may exploit their position to engage in self-dealing. An example is choosing to gain control and use trust funds for own personal expenses. Another is favoring their own business ventures, disregarding the child’s long-term financial well-being.
Or they may ignore asset protection provisions you’ve put in to manage the money until your child reaches a certain age. Or perhaps you and your estate planning attorney added provisions for avoiding gift taxes. However, a wrong trustee choosing to spend on themselves can destroy your careful tax planning.
3. Neglecting Regular Reviews:
Trusts require ongoing monitoring and periodic reviews to align with the child’s evolving needs. However, an unfit trustee may lack the necessary knowledge. They may also fail to do a review on the trust annually. Neglecting responsibilities can lead to missed opportunities, outdated investment strategies, and failure to adapt the trust to changing circumstances.
4. Lack of Communication:
Open and transparent communication is vital for a trustee to inform the child beneficiary about the trust’s progress and decision-making. Unfortunately, a bad trustee may fail to maintain regular communication, leaving the child feeling disconnected and uninformed about their financial future.
5. Delayed Distributions:
Trust funds should support the child beneficiary in specific circumstances, such as educational expenses or significant life events. However, an unfit trustee may unnecessarily delay distributions or hold assets back. This behavior can hinder the child’s access to vital funds when they need them the most.
6. Inappropriate Influence:
A bad trustee may exert undue influence over the child beneficiary’s decision-making, manipulating them or using the trust’s control as leverage. This behavior can restrict the child’s autonomy and hinder their ability to make independent financial choices.
Inappropriate influence could include influencing young adults to spend on unnecessary items that harm their future financial security. You may lay out financial objectives, but it’s up to the trustee to follow through appropriately. And a minor’s maturity level at age 18 may be different from what you would have hoped for.
7. Lack of Understanding and Guidance:
A trustee should thoroughly understand the trust’s terms, legal obligations, and financial matters to manage the assets effectively. They may lack the incentive to seek professional advice from a financial advisor when necessary.
Parents must carefully consider their choice of trustee and prioritize their child’s best interests when setting up a trust fund. By avoiding these common mistakes and selecting a trustworthy and capable trustee, parents can ensure their child’s future remains secure and prosperous.
What Types of Trustees are There?
When creating an estate plan, there are several types of trustees to consider.
An initial trustee is the decision maker that immediately starts managing the trust’s accounts and property. You may be the initial trustee yourself if you create a revocable living trust. However, for some irrevocable trusts, you must select someone else to be the initial trustee.
The successor trustee is the next in line to manage the trust. This person may need to act when the initial trustee becomes incapacitated, dies, or steps down from their role.
You can have one trustee handle the entire trust. Or you can name co-trustees to manage the estate. You may have two sisters who would work well together to help ensure proper expenditures for the child’s financial future.
You could also name a separate trustee for any sub-trusts you later create. For example, you may name your children as the trustees for the sub-trusts created for their benefit at your death. In this instance, several trustees may act for the sub-trusts.
However, each grown child would only be responsible for their separate trust. They would have no control over other sub-trusts that have their own trustees.
What Does a Trustee Do?
Being a trustee involves many different important tasks, including the following:
Managing Accounts and Property
The trustee must watch the investments if the trust owns an investment account. They must request any adjustments to ensure the best outcome for the trust and its beneficiaries.
Informing Trust Beneficiaries
Although the trustee decides how to use trust accounts and property, they do so on behalf and in the best interests of the trust beneficiaries. A trustee must periodically inform the trust beneficiaries about the trust status. These duties include:
- What the trust owns
- How much the trust is worth
- Income received by the trust
- What expenses the trust has paid.
Acting as Point Person for Trust Matters
If beneficiaries have questions about the trust, the trustee is usually best suited to answer them. The trustee is also responsible for filing tax returns and participates in any lawsuits involving the trust fund.
What Should a Chosen Trustee Look Like?
While it may be advantageous for a trustee to be financially savvy or have a background in tax, law, or finance, they are not required qualifications. When considering potential trustees, we recommend looking for someone with the following qualities:
Ability to Ask for Help
The trustee does not have to be an expert in every area of trust administration. They can get assistance from financial advisors, tax preparers, and attorneys at the trust’s expense to fully carry out their responsibilities.
Trust administration is a process with specific legal steps. The trustee must compile a list of everything the trust owns and keep accurate records of income and expenses. Being too general with this information can cause tension between the trustee and beneficiaries. Generalities may even lead to legal action.
Depending on what the trust owns, how many beneficiaries there are, and the trust distribution plan, there may be many moving parts. In addition to managing the trust, the trustee must ensure they do not mix their own personal affairs with those of the trust.
Excellent Communication Skills
Although the trustee has authority over the trust, they are supposed to act in the best interests of the beneficiaries. It is crucial that the trustee clearly communicate with the beneficiaries, deliver necessary information, and be available to answer any questions that the beneficiaries may have in a timely manner. A trustee must also be able to get along with the beneficiaries.
State and federal laws, as well as instructions within the trust, must be followed. A trust may have provisions allowing a trustee to use discretion in some matters. However, there are other instances where the trustee must do certain things in a specific way. Failing to comply with the rules can subject the trustee to potential civil and criminal penalties.
Who Could Be An Excellent Trustee?
Although the choice of trustee is a very serious matter, you have several options available depending on your circumstances and what matters most to you.
It is common for clients to select family members (spouse, child, parent, sibling, etc.) to be their trustees. Family members likely have an intimate knowledge of your wishes and values. This knowledge makes trust administration easier if you give your trustee discretion.
If your trustee is also a beneficiary, they could choose not to accept any compensation for acting as trustee because they will already receive something as a beneficiary of your trust. However, allowing the beneficiary to be the trustee of your trust could jeopardize or limit the protection of their inheritance.
Close friends likely understand your values and wishes, making any discretionary decisions easier. However, depending on your family dynamics, your close friends may not want to get involved in any conflicts that arise.
Also, if friends are not beneficiaries, they may want compensation for the work as trustee. Paying a friend as trustee may leave some beneficiaries feeling disgruntled that your trustee is getting money from the trust.
Professional Third Party
If protecting your beneficiaries’ inheritances is essential, a professional may offer additional protection. Because administering trusts is their profession, they will likely understand every need and have the tools to efficiently and accurately make the best decisions. However, because trust administration is their job, they will require compensation and will inform you of their fee. This amount will likely be higher than a family member or close friend would seek in compensation.
Our Experienced Estate Planning Attorneys Can Help
Our experienced estate planning attorneys at Vail Gardner Law help families navigate the complexities of trust funds. We ensure estate plans protect the best interests of children or other named beneficiaries.
We understand a trustee’s critical role in safeguarding a child’s financial future, and we are well-versed in the legal requirements and considerations specific to North Carolina. Whether you need guidance in selecting a trustworthy trustee, reviewing existing trust documents, or addressing concerns regarding an unfit trustee, our knowledgeable team is here to provide the support and expertise you need.
With our personalized approach and commitment to excellence, you can trust us to help you make informed decisions that lay a solid foundation for your child’s prosperity.
Contact Vail Gardner Law today to schedule a consultation and take the first step toward securing your child’s financial security.