Estate Planning for Young Children
When you’re a new parent, it’s only natural to focus on the new life that you’ve just created. But it’s equally important to think ahead, and to make sure your child or children are protected if anything happens to you. Selecting guardian and fiduciaries for your minor children is essential for their physical and financial well-being if you were to pass away prematurely. Estate planning for young children is crucial, but also brings in some unique challenges.
There are three critical issues when dealing with minor / dependent children.
Who Will Take Care of Your Children If You Can’t?
If one biological parent is alive, then that parent will (continue to) be their legal guardian, absent a court-proven case of unfitness. But if both parents pass away, or the surviving parent is deemed unfit, a new guardian will need to be appointed. While every family is unique, there are some overall criteria that most parents will want to consider for the guardians:
– Do the guardians share your faith, values, and life priorities?
– Do your children already have a positive relationship with your minor children?
– Would your children need to uproot their lives and move away, or can they remain close to their friends?
– Do the guardians need to drastically change their lives, or will the addition of your children into their family be a relatively smooth transition?
– Consider naming only one member of a couple, in case that person predeceases or gets divorced
– Have you discussed the possibility with the guardians?
– Do you have a backup?
What about their financial situation?
Are your finances sufficient to provide for your children until they become self-sufficient? This is especially important for younger couples who haven’t had as much time to build their net worth, and whose younger children will be unable to provide for themselves for a much longer time. Recent estimates show that it costs roughly $750,000 to raise a child from birth to 18, if you include childcare, extra-curricular activities, and college savings. At a minimum, basic care for food, housing, clothing, and health care, is an average of about $14,000 per year.
– Is your appointed guardian able to cover those costs themselves?
– How would they feel about that added burden?
You could, and many people probably should, supplement their nest egg with life insurance, and we at Pierro, Connor & Strauss will gladly coordinate with your insurance agent, or assist you in any way we can to ensure you get the coverage you need.
Who Will Manage The Money?
If the biological parent is alive, do you want him or her to control your children’s inheritance? Is your self-selected guardian capable of managing funds on their behalf? Especially if it’s someone you love, it’s difficult to consider, but the person looking after your children has a conflict of interest when it comes to your children’s expenses. When it benefits them as well, they may be a little more inclined to use your child’s money to pay for a vacation, or to spend a little bit more than would be wise on hobbies, activities, and entertainment.
And if there’s (more than enough) left over after your child turns 18, should he or she get full control right away? Think back to when you were that age – were you responsible enough to handle it? What about without parental guidance?
There is a solution!
Instead of leaving money to your children directly, place your assets into a Trust. A Minor Trust could restrict distributions to health, education, maintenance and support. If your children need a roof over their head or food on their plate, the Trust will cover that. If they get sick or need money for an education, the Trust will cover that. But a months-long trip to Europe or a brand new sports car? Those might be out of the question!
Rather than the guardian, you could name a different trusted family member or close friend to be the Trustee, to look after the money. The upside is that they likely know the strengths and weaknesses of your loved ones, and there’s a good chance they can guess what your wishes would be. Moreover, they probably won’t charge much, if anything, to oversee the inheritance. The downside is they may not have the experience and skills needed to manage funds and budgets, or they may be distracted by their own life and financial responsibilities. Also, it could make for some awkward family dynamics.
You could appoint a professional fiduciary, such as the trust department of a bank. The strengths and weaknesses are the opposite of naming a trusted friend or family member – the professional fiduciary will be an expert at managing the funds and will be readily available, but won’t necessarily know what’s best for your child.
A third option gives you the best of both worlds, the friend or family member provides the personal touch, while working in conjunction with the professional trustee who manages the day-to-day management of the funds, and who can act as a “no-man”.
If there’s enough left over, rather than pay out a lump sum the day they turn 18, keep the Trust in place until your child is older. Many Trusts don’t grant full control until the child is older, and, hopefully, more mature. Or there could be staggered distributions, such as a third at age 25, a third at age 30, and the rest at age 35. You could even opt for regular payments every month. A good estate planning attorney will help you design a plan that’s right for you and your children.
Bonus: Protecting Your Family Wealth from Divorce, Lawsuits, and Bankruptcy
Once your money becomes your children’s money, it’s subject to any problems faced by your children. If they end up in a bad marriage, their spouse may have a claim against their assets. Depending on the State they choose to live in, they could lose half in a divorce. If there’s an early death, in most States the spouse is entitled to part of the estate. Or perhaps your heir gets into an accident, he or she could lose everything in a lawsuit.
Rather than leaving assets to your adult children, or letting a Minor Trust terminate after a certain age, the assets can remain protected in an “Access Trust”. As the name suggests, the beneficiary controls the Trust, they can be their own Trustee. That means they can manage the money however they like, spend it however they like, but if there’s ever a legal action against them, technically it’s not their money, it’s your money held in trust for them. It can’t be touched by creditors, or judgments, it can’t be lost in a lawsuit, and it certainly isn’t subject to divorce. You’re guaranteed to keep the family legacy in the family!
We at Aloia, Roland, Lubell & Morgan are happy to help you plan ahead. Please don’t hesitate to contact us at (239) 971-9750 to schedule a free consultation to discuss your particular situation, and to obtain a personalized recommendation of the best way to plan for your future.
