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 with 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?
Make no mistake: Estate Planning with children is essential. Most children are simply unable to fight off the bad fortune that can happen after you die, as they may have to wait years for the money you’ve set aside for them or, even worse, they could end up in the hands of an uncaring, incapable guardian.
If you’re like most parents, the thought of dying unexpectedly and leaving children behind is nothing short of a terrifying nightmare. As unthinkable as this situation may be, it happens more often than it should, and without an Estate Plan in place, your kids may have lifelong repercussions.
But if you’re ready to secure their future with a carefully crafted Estate Plan, the process involves appointing people to serve in critical roles and mapping out your distribution of assets, and here are three problems you’ll need to solve right away:
1. Who will care for your children?
Some parents are in total agreement over who they would like to care for their kids if misfortune strikes. Others can’t decide; finding themselves locked in an ongoing argument over who has the kindness, resources and common sense to raise their children. Whatever your situation, a choice must be made.
But before you determine who you’ll mark down as a guardian in your Will, Trust or other Estate Planning documents, here are just three things you need to consider about your potential caretaker:
- Stability is important. Does your proposed guardian live close to your kids’ school, so your children can keep their friends and teachers?
- If you’ve raised your children in a religious household, will your guardian continue that legacy and regularly take them to church, temple, mosque or some other place of worship?
- Will your guardian live close enough to family members so your children can continue relationships with their grandparents, cousins or other relatives?
A great choice for a guardian understands the gravity of what you’re asking of them and is 100% committed to nurturing, supporting and guiding your children through a life without you. Make sure the friend or family member you name in your Estate Planning documents has the foresight and resources to build the positive environment your children deserve.
2. How will your children receive your assets?
If you’ve feathered your nest with real estate, money or other assets, you’ll naturally want your children to receive financial support right away if something terrible happens. What you don’t want is to grant your children access to these resources all at once, only to have them squander money you’ve set aside for college on a trendy new car or other expensive item du jour.
With a properly implemented Revocable Living Trust, you can chart a financial path for your children so that the money and assets you leave them last as long as possible. You can set things up so your kids receive a specific amount of money for education, health and other expenses, or you can release your assets to them in increments at ages 25, 30 or 35.
As much as we all hope our children will be cautious with money, even disciplined kids (and many adults) will wrestle with responsibility if they suddenly receive a large sum of income. Your Living Trust is a key piece of the financial puzzle for your children.
3. Who will administer your Estate?
In the hallowed words of comic book legend Stan Lee, with great power comes great responsibility. And the Trustee of your estate will be one of the most responsible – and powerful – people in your Estate ecosystem. Your Trustee should not only be reliable, but ready to spring into action if the unfortunate time ever comes.
It’s a tall order. If you pass away, your Trustee, whether it’s a friend, family member or professional fiduciary, will be neck-deep in a long list of time-sensitive tasks, from making certain your debts are paid off to representing your family in Probate or another court proceeding.
For the person who routinely works long hours, being a Trustee may be too burdensome, and the same goes for people who are disorganized, unable to communicate well, or incapable of diffusing tension among your family members.
Ultimately, your Trustee must do right by your children, parachuting in to meet deadlines, gather documents, and distribute your assets in a swift manner. Finding the person who checks off all the right boxes is an extraordinary challenge for many parents, which is why so many choose attorneys for their probate and trust administration.
If you’re struggling to plan for a tragic event that suddenly leaves your children parentless, you’re not alone: Some studies show that more than 50% of people haven’t even created a Will. But as a parent, you have a special responsibility to craft an Estate Plan that charts the lives of your children, because once your life ends, your kids must carry on.
Now, we’re going to talk about the 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.
