Hi, I’m Alan Khalfin, Managing Partner at Vaksman Khalfin. Today, I wanted to talk with you about three things to consider when estate planning for minor children.
The three things to consider when estate planning for minor children are:
- Who will act as their guardians should you pass away?
- Who will administer your estate to ensure they have the financial resources that they need?
- Third is, how those assets will be distributed to them, and under what conditions?
First, we’re going to talk about appointment of guardians for your minor children. This is one of the most important elements of estate planning for minor children. As if you don’t document your wishes as far as guardianship, then the court will decide for you. What you want to do is execute a will where you nominate the people that should have guardianship over your children should you lose the ability to do so.
By guardianship, we mean custody. These are the people that will have physical custody of your children. These people are appointed in a will and we suggest that you appoint a first level of folks that will take the kids, and then ideally, several backups in case the first level guardians are unable to act.
The next important consideration for estate planning with minor children is who will administer your estate. The person that you select to administer your estate has the power to distribute assets to your children, to invest those assets, and has full control over your estate following your demise. The title of this ‘estate administrator’ depends on what type of estate plan that you have. If you have a will-based plan, then that person is called an executor. If you have a living trust-based plan, then that person is called the trustee.
If you have minor children, then a will-based plan is generally not the way to go and you should strongly consider a living trust-based plan for two reasons. The first reason is that assets distributed to your children through a trust avoid probate. In other words, they don’t have to go through a year and a half long court process before being distributed to your kids. During a large part of that process, the assets cannot be utilized.
If you want to ensure that there are assets immediately available for your children’s use, you should do a revocable living trust so that you can avoid probate. Also, the revocable living trust can hold those assets pending your child’s life, and therefore, impose restrictions.
This brings us to the third consideration for estate planning with minor children, that is, how will those assets be distributed and under what conditions? We typically don’t recommend that the assets are distributed to your children right away after your demise. If your children are 18 or older, then that is exactly what will happen if you don’t plan accordingly.
What we typically recommend is parents create a living trust, transfer your assets into the living trust, and then have in the living trust a distribution schedule for your children. We often call this stage distribution and the way it works is like this. If you and your husband, if you’re married, would pass away, then your successor trustee who you’ve appointed in your trust would have a schedule under which he or she should distribute assets.
You may specify one-third at 22, one-third at 25, one-third at 30, or whatever schedule you would like and the trustee would be obligated to follow that schedule. By doing this, you can make sure that the monies are not distributed right away, that the monies are used responsibly and that there are monies left over when your children are older and are ready to buy a house, start a business or get married.
Now, a lot of families put their house in the living trust or their personal effects. However, we often see families designate minor beneficiaries on financial accounts; bank accounts, brokerage accounts, life insurance and retirement accounts. This is typically not a great way to plan for your children, because it will create a lot of complexity when you pass away. Instead, we recommend that you set up a revocable living trust and name the trust as either the owner or beneficiary of those accounts. That way, should you pass away, the trustee can claim those funds for your children right away because they’re in a trust and then the trust would set out a distribution schedule that the trustee would follow.
One other important consideration for estate planning for minor children is that you may set up these distribution stages, but you might be concerned about the child needing money for health, for education or emergencies prior to each of these stages arriving. Well, when we prepare a revocable living trust, in addition, specifying various stages for distribution, our trusts include language for the trustee to distribute to your children to pay for their health, education, maintenance, and support.
Therefore, all of their costs and living expenses are covered, and at each stage, the amount distributed is what’s left over and that amount then gets put in your child’s name for them to spend as they please.
To recap, there are three important considerations for estate planning with minor children. The first is, who will take custody of your children should you pass away? The second is, who will administer your estate and ensure that the kids are provided for? The third is, how the assets will be distributed and under what conditions. All of these elements are extremely important to consider, and all of them should be documented in an estate plan.
Thank you for listening. If you have any questions, please give us a call.