Trust funds are very popular for college planning. They can be set up by families, but they are most often used by students themselves. When you set one up, it can be a little bit overwhelming because there are so many details to remember. In this article, we will look at the biggest mistake parents make when setting up a trust fund for their child and why it is important to keep things simple.
The first mistake that I see many parents make when setting up a trust fund is to not select a great way to pay the beneficiaries off early. A great way to do this is to use a tuition and fee payment scheme. This is a great way to get money off quickly and allows the beneficiary to receive the money early. If the parents want the money sent to the beneficiary straight away then this is the best way to go, but it can take ages for the money to reach the beneficiary if the parent does not do something special when setting the funds up.
Another mistake parents make when setting up a trust is distributing the assets out of the trust direct to their children at specific ages or stages, instead of holding those assets in a flexible lifetime trust that will protect their kids’ inheritance from future divorces, creditors or accidental lawsuits.
Another big mistake parents make when setting up a trust fund for college planning is to not consider the income potential of their child once they are older. Parents need to think about the long term needs of their child and work out how much they can afford to spend on tuition. This may mean working out how long they plan to study, how much they want to study and how much money they have available to spend each month. It also means looking at the cost of the college itself. This is very similar to setting up any other fund and the biggest mistake parents make when doing this is to assume the cost of tuition will always be the same.
Once the family has decided the type of education is best for the child, they should then look for the right attorney to help them with the process. The best way to go about this is to make a list of potential candidates and then interview each one. There is nothing wrong with being prepared with a list ahead of time and then doing the interview, but you should also make sure the prospective attorney fully understands the process and the implications of the trust being setup. Ask plenty of questions so that you are comfortable with the knowledge you are gaining from the interviews.
Another important factor in the creation of the trust is the location of the funds. The IRS has some specific rules surrounding the location of these funds and you need to make sure the trustee will follow the regulations carefully. Some states have more lenient rules than others when it comes to the location of the funds, so make sure the state the trusts are created in will allow the trust to be structured accordingly. Some of the factors that are looked at by the IRS when it comes to the location of the funds include the desirability of the property being transferred, the standard of living of the beneficiaries, and the amount of access the beneficiaries will have to the funds once they are setup.
It is common for people to set up insurance policies to provide the beneficiaries with some of their inheritance. While this is a nice way to ensure your family has some stability in the future, it should not be the main reason why the trust fund is established. Insurance policies are generally seen as a good way to provide some extra income for the beneficiaries and so should not be the only thing you use as the basis for the formation of the trust. If you do not want the insurance policies to be used for any other purposes then it is important to find someone else to create the fund.
Some people think that putting all the assets into a trust will make it harder for them to access in the event of an emergency. However, the IRS has made modifications to the tax laws so that the situation is actually the opposite. While the IRS will consider the value of the asset less than the amount that the individual paid into the policy, the IRS has left the option open for individuals to decide whether or not they want to take out separate policies to provide access to the trust funds. While it may not always be beneficial, there are still situations where the assets of the beneficiary will be better off using separate policies. Putting the majority of the estate planning assets into a trust does not mean the assets are inaccessible because the tax consequence may make that scenario not worth the possible benefits of setting up the trust funds.
When setting up a trust fund, parents should be aware that there are many options available. They can also be very creative and choose several different options to make it even more beneficial for the beneficiaries. Parents should consider the age of the individuals who will be beneficiaries and the amount of access that each of the individuals will have. It is also a good idea to make sure that the trust fund has been set up at the proper estate planning retirement planning custodian so that all of the proper documentation is in place. There are many great ways to make your family’s nest egg work together to benefit everyone, and setting up a trust fund is just the beginning.