You might associate trust funds with spoiled, free spending 20-somethings, but chances are most beneficiaries of trust funds wouldn’t be immediately recognizable. Trust funds are a tool to protect your assets, to ensure that your heirs inherit the assets you want them to and, often, to avoid taxes.

When put that way, it sounds like there’s no disadvantage to trust funds. So why was I told, repeatedly, that setting up a trust fund for my daughter was unnecessary? Trust funds work really well for managing relatively complex inheritance issues, but they are also complex (and expensive) to set up. The cost of setting up a trust fund will vary widely based on what kind of trust fund you’re looking to establish. Most of the expense is in lawyers’ fees and estate lawyers generally charge $250 to $300 per hour. So don’t rush out to set up a trust fund for your kids unless your life is complicated enough to warrant one.

Who Needs a Trust Fund

Whose life is complicated enough for a trust fund? I’m talking about your personal life as much as your financial life, because trust funds are best for people with complicated family relationships.

If you have children from a previous marriage and you want to make sure that your current spouse can live in your home until his or her death and benefit from your other assets but you want to ensure that your children eventually inherit your real estate, whether it’s the home they grew up in or a favorite vacation property, a trust fund can protect your children’s inheritance in case your current spouse remarries after your death.

If you want to control how your money is spent after your death, a trust fund can place restrictions on how and when your beneficiaries get access to their inheritance. You can decide what the money can and can’t be used for, or decide to give your beneficiaries all of the money when the reach a certain age, regardless of how old they are when you die.

If you don’t trust your heirs to handle the money responsibly, either because they are disabled or just plain financially irresponsible, you can set up a trust fund so that the beneficiaries get a certain amount of money per month but don’t have control over the money otherwise. You can also set up the trust to be protected from debt collection, so that a beneficiary with a gambling problem or other financial issues would still be ensured a reliable cash flow.

If you have a lot of money and want to avoid taxes, a trust fund can help you minimize estate taxes and distribute your money directly to your children, grandchildren and even great-grandchildren.

Setting Up a Trust Fund

The biggest downside when it comes to trust funds is that they are expensive to set up. When I was first considering setting up a trust fund for my daughter, I mistakenly believed that I could download a form for a nominal fee and set it up myself. Not so. Setting up a trust fund requires an estate attorney. He or she will be able to counsel you about the best type of trust fund for your situation as well as do the paperwork to set up the trust fund.

When you set up the trust fund, you’re actually creating a separate legal entity. Any property or assets you want the trust to own has to be transferred to the trust—and it’s important to remember that you can’t do that if you still owe a mortgage.

The laws relating to trust funds vary considerably by state. If you live in a different state than your beneficiaries, you might want to consult with an estate attorney in both states to determine which state you should set up the trust fund in.

Who Doesn’t Need a Trust Fund

Now that you know that setting up a trust fund will likely require thousands of dollars in attorney fees, you might be less eager to get one set up. That’s ok: Unless you fall into one of the categories above, a simple Will should be fine. You definitely don’t need to set up a trust fund if:

• Your net worth is less that $100,000
• You don’t own any real estate outright, without a mortgage
• You trust your heirs to use their inheritance responsibly, and/or you trust your spouse to ensure that your children inherit your property and assets even if you die first.

The bottom line is that there’s a reason we associate trust funds with the rich: People with high net worths are most likely to use them, and most likely to be willing to pay to get them set up. Trust funds are a very effective financial tool, but you should consider whether or not it’s really necessary before deciding to set one up.

For more thoughts about family legal issues see our post Estate Planning Basics for Couples.