Setting Up a Trust Fund for Your Child Might Be an Expensive Mistake

Most of us aren't building wealth Scrooge McDuck style, hoarding piles of cash just to swim in them. Sure, you might like the idea of blowing a stack on yourself now and then, and investing for retirement is crucial. But if you're building wealth, you're probably doing it for your loved ones too—so you can pass on a legacy and set your children, grandchildren, and other family members up for success.

Setting up a trust fund lets you pass on your wealth to your family in a more measured, meaningful way. Plus, it can also help you protect your assets from estate taxes or lawsuits.

That said, setting up a trust fund can be costly, and it ends up being more time and money than it's worth for many people. Here's what you need to know about trust funds and whether or not they're worth it for you.

A trust fund allows you to put assets into an account that belongs to another person—a beneficiary such as your child—while still controlling how those assets are distributed to that beneficiary. Instead of giving your assets directly to your child (as you would with a will), a trust fund acts as an intermediary that holds those assets and then pays them out to your child according to a schedule you help determine.

Trusts give you more control over when your assets are distributed as well as how they're used. This means you can ensure your money is used for certain purposes, such as education. You can also make sure your child doesn't quit their job and blow through your hard-earned savings in a few months by dictating that a small percentage of the trust is paid out on an annual basis.

You don't have to be rich, or have any assets at all yet, to set up a trust fund. Some institutions will have minimum requirements for how much money you need to start a trust fund, but even if they do, it's often not much.

However, there's a reason for the "trust fund kids" stereotype (that they all come from ultra-wealthy families). With all the legal and financial fees you'll have to deal with, it can be expensive to set up a trust fund. If you've ever had to pay a lawyer, you know they aren't cheap—and trust attorneys can be particularly spendy given their expertise in both financial and legal spheres. You'll probably end up paying at least a few thousand dollars in legal fees to set up a trust for your child.

For some, setting up a trust fund can be the difference between leaving an inheritance and leaving a legacy. Trusts give you the ability to control the details of how and when your assets are used, which might be appealing if you want to ensure your family makes good use of the money you've saved. Other than that, though, there are a couple more key benefits to setting up a trust. 

Keep in mind that most of these benefits apply only to irrevocable trusts, or trusts that remove assets from your estate and thus usually can't be modified after they're created without the permission of their beneficiaries.

They may lower the estate tax when you leave an inheritance

While there are still taxes involved with trust funds, if they follow certain legal requirements, they might help you avoid estate taxes. When your assets are passed on after your death, they often trigger an estate tax, which can be up to 40%. If you set up a trust correctly, you can decrease the size of your estate and minimize the amount of estate tax taken from any inheritance you pass on to your children and other family members.