Estate Planning Tips For Parents with Young Children
A few useful estate planning tips for parents with young children, specifically regarding appointment of a legal guardian and management of a minor child's inheritance.
Appointment of a Guardian for Minor ChildrenIt is not uncommon for parents with young children to pose the question "Why do I need a will?" In my experience, this is generally in response to the fact that younger individuals tend to have more debt than assets. As such, they do not feel there is much need to set out instructions as to how what few assets they have should be distributed upon their death. However, a will provides another function (aside from directing passage of assets) which may prove more valuable to parents. The will is the vehicle in which to appoint a guardian for your minor children in the event you pass away before your children reach the age of 18. In choosing who to appoint as guardian, you may wish to consider several factors, such as the proposed guardian's age (are they likely to be around after you've passed away?) and where they live. For example, your sister may seem like the ideal candidate due to the fact that she has a great relationship with your kids, but you live in Connecticut and she lives in California. Do you really want to uproot your children and move them across the country at a time already made difficult by the loss of their parents? In the event you (and you children's other biological parent) die and a guardian has not been appointed, the appointment will be left up to the probate court.
Prepare a Will to Avoid "Laws of Intestacy"No one is required to prepare a will during their lifetime. As such, it is not uncommon for individuals to die without a will, a.k.a. "intestate." If you die intestate, most (if not all) states have default rules directing where your assets will pass upon your death known as the "laws of intestacy." In general, these default rules direct that your assets pass to your next of kin, but exactly which next of kin receive your assets can vary. The outcome is different if you're married and do not have children, if you're married and have children, if you have children but are not married, etc. While the default rules may accomplish your overall goals, they may also result in some unintended and undesirable results. For example, let's assume you're married with one child (age 5) and the child is the biological child of you and your spouse. If you die intestate, the laws of intestacy in Connecticut provide that your spouse gets the first $100,000 of your assets, plus 1/2 the balance, and your child gets the remaining 1/2 (Please be aware that the laws of intestacy only apply to assets individually owned by you, so they do not apply to assets jointly owned or assets with a beneficiary designation, such as life insurance or retirement accounts). If your individually owned assets include your house and/or ownership in a business, your spouse could end up jointly owning your house and business with your 5 year old. So while the end result is generally what you wanted (i.e. provide for your spouse and child), the specific result may not be what you intended. The simple way to overrule the laws of intestacy is to create a will.
Consider Holding Children's Inheritance in TrustTrusts can be very beneficial, particularly when your intended beneficiary is a minor child. One of the primary benefits of a trust is that you can choose when your child will receive their inheritance, even if such time is well after you die. For example, you can prepare a trust directing that you do not wish your child to receive their inheritance outright until they reach age 30. If you then die while your child is only 8 years old, your child's inheritance will be held in trust and managed for his or her benefit until she reaches age 30, at which time she will receive the inheritance outright. In the meantime, the Trustee (person in charge of managing the trust) will be able to make distributions for the child's benefit (ex. paying for school tuition, clothes, etc.) as the Trustee deems appropriate. The Trustee is also someone who will be chosen by you. It can be your spouse, a family member, friend, or even an attorney or other professional.
Updating Beneficiary DesignationsIt is not uncommon for many younger individuals to have started working, and establish a retirement account, prior to getting married and/or having children. For this reason, the initial beneficiaries of the retirement account may be your parents or siblings. If you intend for these funds to pass to your spouse, or children, you will need to update the beneficiary designation forms to reflect this. If you have chosen to create a trust to receive your children's inheritance, you should also name the trust as the beneficiary of any amounts intended to pass to your children instead of naming your children individually.