One of the most common estate planning scenarios I come across is helping young parents provide for the ongoing care of their minor children if the unthinkable should happen to them and their spouse (or another parent). This is a scary and serious discussion for parents that is never easy to have however, it is critically important to ensure that your children are not only are being properly cared for in the event of your untimely death but that your assets are protected and properly set aside for their ongoing financial support. This usually requires setting up some sort of Trust instrument. Fortunately, there are several options to choose from that are easy to put together and appropriately suited for almost any scenario.
Choosing a Custodian or Guardian
Most parents realize the first important decision to make when planning for their minor children is to choose an appropriate Guardian in the event that both parents pass away before one or more of their children reach the age of 18. Often that choice is an easy one – a trusted relative (parents or siblings) or friend often comes to mind. Sometimes, however the decision is more difficult. Parents may disagree on who the most suitable choice is and factors such as advancing age or lack of family stability might render the obvious choice impractical down the road. Here are a couple of things to consider:
- Plan for today! It is difficult to predict what the world will look like 5, 10 or 15 years from now. While it is tempting to try to figure out what the best situation for your child will be some years down the road, the best policy is always to choose guardians who would be the most suitable choice if your children needed care today. You can always update your Will or Trust if circumstances change down the line.
- Be decisive. It is often tempting to list multiple sets of married couples or relatives as options for Guardians or Custodians thinking it helps to avoid having to choose between different sides of the family or between preferred friends or relatives. However, this can lead to a challenging scenario that ends up with an expensive and emotional court case in the event that multiple parties emerge as custodial candidates. You should always name a primary custodian and then a secondary alternate to avoid these confusing scenarios.
Safeguarding Your Assets
In a perfect world, parents have accumulated some sort of financial assets that would be available to help provide for their children financially in case of an untimely death. While you may not have substantial monetary or liquid assets early in your lives, many parents have some significant wealth tied up in their homes, retirement accounts and life insurance policies. It is very important for parents to fully understand the law does not allow children under 18 to directly inherit these assets. Furthermore, most young adults, even if they are 18, lack the maturity to effectively manage what might amount to a large inheritance. Here are some types of trust vehicles that can be easily put together as part of your estate plan to ensure that your assets are held and managed by a trusted guardian, custodian or trustee:
- Revocable Children’s Trust: This Trust instrument, often included as part of a joint family revocable Trust, allows assets to be accumulated during the parents’ lifetime, supplemented upon their death, and held and managed by a Trustee until the children reach a designated age. A Children’s Trust can be set up to hold each child’s share of their inheritance in Trust, to be used to cover basic needs – health care, shelter, food, and education, etc. – until they reach a certain age. At that point, whatever remains in the Trust account is given to them outright. Many parents choose to spread out the distribution to protect their inheritance from irresponsible spending. For example, 25% of the inheritance can be distributed to the child at age 25, 25% at age 30, and the remainder at age 35.
- Children’s “Pot” Trust – This is a type of Trust that is set up when a family has multiple children, and parents want to provide a Trust account that hold assets in a common “pot” of funds to be used for all of their children for a designated period of time. Under a Pot Trust, assets are not split into shares and distributed until the youngest child reaches a certain age – like 30. This type of Trust allows the trustee to make decisions, like a parent would, to deploy Trust assets to meet varying financial needs of the children. The fact remains that children, in many cases, have different financial needs- perhaps one has uncommon health issues, or chooses to attend a more expensive out-of-state college. The Pot Trust allows the trustee the flexibility to meet these varying needs.
- Testamentary Child’s Trust – Sometimes parents do not want to go through the time or expense of creating and funding a dedicated living Trust. Another option is to create a Testamentary Trust. This is a Trust instrument that is created directly in the Will, and does not come into effect until or unless both parents pass away before their children reach a designated age. The Testamentary Trust usually directs the guardian or executor to establish a Trust account upon the death of the last surviving parent, and hold and manage the assets for their benefit until the age of full inheritance. This not only protects the assets and makes sure the guardian has resources to raise the child, but also creates an effective vehicle to receive the assets until the children are legally old enough to inherit. Similar terms and conditions for distribution of the inheritance can be set up as with the Children’s Trust or the Pot Trust.
- Uniform Transfer to Minors Act (UTMA) Trust Accounts – A final Trust instrument that trustees, guardians and executors have at their disposal is the UMTA Account. Most states, including the Commonwealth of Virginia, have adopted the UMTA as a means to legally transfer assets to minors upon the designation of a trustee to manage the account. This can be designated in a Will or a Trust, and helps avoid probate and other complicated court procedures that may be required for an effective transfer of assets. One disadvantage of an UTMA account is that all of the assets in the Trust must be completely distributed to the child when they reach the age of 21.
When considering the future of your minor children in your Estate Plan, it’s important to consider the following points:
- Consider separating the role of Guardian for your children and Trustee of their assets. Often, to ensure that their assets are being used solely for the benefit of caring for your minor children, families choose one trusted friend or relative to raise the children, and a separate friend or relative to serve in the role of trustee to manage their financial assets. This helps avoid the temptation of the Guardian to co-mingle the children’s funds with their own, or spend them in a way that might not necessarily be in the best interest of the children. By separating these roles, you add an extra layer of security for your children.
- Make sure your assets are transferred directly to the Trust instrument you have created for your children upon your death. Remember, children under 18 cannot inherit assets directly. Make sure your beneficiary designations for your insurance and retirement accounts are updated to transfer assets directly to the Trust instrument – not the child. This can help avoid probate and other court actions down the road.
- There is no “one-sized fits all” solution for estate planning for minor solution. Consult with a qualified estate planning lawyer to discuss what may be the best option for you and your family. Often times there are scenarios that require a bit more planning and forethought such as if there has been divorce, or a child with special needs or disabilities. Sometimes creative financial planning tools can be incorporated into the Estate Plan to help achieve goals, such as the use of 529 College Savings plans.
Securing your children’s future through the estate planning process gives parents peace of mind, and can avoid costly, complex, and emotional proceedings in case the unthinkable happens. Setting up a good plan does not always require an expensive, complex process. I urge you, if you have minor children, to take a few moments and think about what plans you have in place, and if they are sufficient to protect your children’s future. I am always happy to provide a free consultation to discuss what might be best to meet your needs.