- February 28, 2022
- Posted by: Michael Gunning
- Category: Wills & Trusts
Trusts are complicated legal instruments that require an attorney with a keen eye and foresight. If an estate planner fails to make specific considerations, they may endanger their reputation and the financial security of a beneficiary. To avoid being caught in this trap, here are some typical blunders to avoid when creating trusts for minors
Not Choosing the Correct Trustee
Many people overlook essential aspects such as age, health, distance, and prejudice—all of which are critical in deciding who would be your best option for a trustee. We realize that our clients would rather not spend too much time thinking about what would happen to their children if they died prematurely. As such, folks are often quick to choose a close family member—their sibling or parent to act as the trustee.
The trustee’s incompetence, negligence, or inability to effectively manage the trust may lead to mismanagement of the fund, jeopardizing the trust’s ability to meet the beneficiary’s needs.
To help our clients to avoid these potential problems, our attorneys may:
- Assist you in making an informed decision about who to choose as a trustee (family member vs. bank/professional)
- Advise appointing co-trustees (one who has a positive relationship with the beneficiary and another who is financially literate).
- In the event of the first trustee’s death or incapacitation, name a successor trustee.
When passing on assets to future generations, your family should never forget that not all beneficiaries are competent or ready to handle a large inheritance. Many attorneys recommend to use incentive provisions in trusts to prevent a beneficiary from making poor financial decisions (such as blowing all their money on Las Vegas or purchasing their friend’s Ferrari).
An incentive provision, for example, may require a beneficiary to complete a certain level of education, reach a particular age, maintain employment that produces income (whether full-time or part-time), or join the family business before receiving payments from the trust.
Although trust incentives encourage good behaviors, they may also discourage undesirable behavior. For example, if a beneficiary became hooked on drugs or alcohol, specific protection measures would come into force, freezing all trust payments until the recipient was tested. If the test revealed positive results, the trust could pay for rehabilitation and resume payments until after treatment is completed.
Not Including Asset Protection Provisions
Every day, divorce, vehicle accidents, and bankruptcy occur. Your children are likely to encounter one or more of these events throughout their lives. As a result, it’s critical to include asset protection provisions and language in your will to protect the beneficiaries (and their inheritance) from their would-be creditors as well as future ex-spouses.
The terms of the trust protect only assets held in a trust. The first step is to include spendthrift provisions in the trust to prevent a beneficiary from assigning it to a creditor. As a next step, we will ensure that a customer’s assets are aligned with the trust. Finally, you should develop a method for monitoring and verifying your assets over time.
Failing to Account for Creditor Claims
It’s important to remember that while your children are the primary beneficiaries of your trust, you also have creditors to worry about. Any creditor can make a claim against a beneficiary’s trust if they have outstanding obligations at the time of their death. This might lead to the trust being unable to pay for the beneficiary’s education, housing, or other essential needs.
If a trust is not named in the will, no one knows who gets what from the estate, which may lead to problems. If you don’t want your estate to be entangled with creditors’ claims, have the trust name specific beneficiaries and how much they’ll get. This will ensure that any creditor demands are paid off before the estate is divided among the heirs.
Failing to Update a Trust When the Beneficiary Reaches Adulthood.
As your children age, their needs and maturity levels will change. It’s essential to update your trust accordingly to reflect these changes. This may include changing the trustee, adding or removing incentive provisions, or changing the payout schedule. If you fail to make these changes, the trust may not meet the beneficiary’s needs in the future.
Worse yet, your trust can become invalid if it does not meet current state laws or has become outdated.
If you’re planning for a minor’s trust, please get in touch with our office so we can schedule a proper consultation and get to know your family’s unique circumstances.
Call us at 509-328-2150 to get more information, or use our contact page to email. Want to learn more? Visit this helpful resource from Trust&Will.