Planning for Minor Children
WHY IS PLANNING FOR MINORS IMPORTANT?
Virtually all parents want to pass their estates to their children. Unfortunately, whether assets are passed to minor children through beneficiary designations, as a result of joint tenancy, or under the terms of a simple will or bare-bones trust, the assets are often passed without adequate instructions concerning the use of the funds.
Minors cannot own and use assets. Before a minor will be able to use inherited assets, the court must appoint a guardian or conservator to manage the assets for and on behalf of the child under the direction of the court. This process can be expensive and time-consuming.
It is much more sensible to pass the assets under the terms of a revocable living trust. Parents may include instructions in the trust regarding the use of assets for the benefit of their minor children, and they may empower a trustee to handle the assets in accordance with those instructions. Parents can specify the amounts and times of distributions and may provide that the children receive their funds at different times or at different ages, depending upon the personality and character of each child.
Revocable living trust planning affords parents the opportunity to provide for individual children according to each child's unique needs and in ways that will best fulfill their desires for each child.
MY SPOUSE AND I WANT TO ENSURE THAT IF WE BOTH DIE UNEXPECTEDLY, OUR MINOR CHILD WILL BE CARED FOR ACCORDING TO OUR WISHES. HOW DO YOU SUGGEST WE APPROACH AN OVERALL PLAN TO ACCOMPLISH THIS?
Adequately providing for your children may be the most important estate planning issue you face. You must first decide who will be the nurturing parent or guardian for your minor child. Who would provide the best home, give the most love, and care for your child’s needs? This person may or may not be the best equipped to handle financial and investment decisions. Therefore, your second decision is to select the proper person or entity that can best implement a financial plan and manage the assets you want to provide for your child.
The next step is to establish a plan which incorporates these decisions. Either a will or a revocable living trust allows you to establish a trust for the purpose of holding assets for the benefit of your minor child. The terms of the trust should provide guidance for the trustee and specify when distributions are appropriate and how they are to be made. Individualized instruction can be designed for each child. You can provide broad, general directions or very specific incentive plans which provide guidelines for college education, the purchase of a home or automobile, a wedding, or other significant events. The essential point is that you must take action and establish a plan. It can always be modified and tailored to meet specific needs over time.
MY HUSBAND AND I ARE EXPECTING OUR FIRST CHILD. DO WE NEED TO WAIT UNTIL AFTER THE BABY IS BORN TO DO ESTATE PLANNING?
No, you can establish a plan immediately, as long as you include a provision in your plan stating that it is made in contemplation of the birth or adoption of a child or children. In fact, before the baby's birth is an ideal time to meet with your advisor to begin considering the changes that the new addition to your family will make for you personally and financially. There are decisions you will want to make about naming guardians for your child. There are decisions about the amount and type of insurance coverage you will need to provide for your child and his or her education expenses.
If you wait until after the birth of the baby, you will probably be too busy dealing with the immediate needs of your lives to find any time for addressing these important issues. Before the sleepless nights and endless diapers bombard you, take time to talk together about your goals and dreams and the way you plan to meet the needs of your little one so that you can prepare an appropriate plan. This type of planning is very positive and can provide a tremendous sense of peace and well-being.
OUR CHILDREN ARE INFANTS. HOW CAN WE MAKE SURE THAT WE ADEQUATELY PROVIDE FOR THEM?
In planning for young children, it is important to assess what their personal nurturing and parenting needs will be, as well as their financial needs, if one or both of you die.
Your personal team of professional advisors can offer assistance and counseling through this process.
Most parents have thought about these issues and realize their great importance. Unfortunately, most of them exercise more caution in selecting a babysitter for one evening than they do in planning and who will care for their children and their money if they die. This is not a deliberate failure or neglect of their children's needs. Rather, they don't plan because they believe "it's not urgent," or "it's expensive," or "it's a negative thing to think about," or because they "just can't decide who to choose." As difficult as such decisions are to address, they are crucial to the welfare of children. If planning questions go unanswered, a child's life can be completely devastated.
When children are involved, it is better to have some kind of plan rather than no plan at all.
WHAT HAPPENS IF I DO NOT LEAVE A PLAN FOR MY MINOR CHILDREN?
If you do not plan for the needs of your minor children, a court will take charge of your assets in a guardianship. Even if you nominate the guardian, it is the court, rather than the guardian, that has the final say. Not only is the guardianship process expensive, but there is no way to ensure that the court will carry out your values and desires for your children. Also, court jurisdiction and the guardianship ends when your minor children reach maturity, which in most states is age 18. At this time, the children are given unconditional control of their property.
In addition, in a guardianship, the funds for each child are maintained in separate accounts. The court does not allocate more money to one child even if that child has greater needs. Thus, if one of your children has health problems or special needs and all of his or her share is used, the court cannot divert part of the funds of another child whose share is more than adequate for his or her needs. All children are treated equally, even if they have unequal needs.
IN PLANNING MY ESTATE, HOW DO I TAKE INTO ACCOUNT THE 20-YEAR AGE DIFFERENCE BETWEEN MY CHILDREN?
Start by asking yourself how you would treat your children if you were still alive when they are to receive they are inheritances. If your oldest children have already been provided with a college education, a wedding, or a down payment on a house, would you want to make sure your youngest children have those same benefits? If your estate is measured in millions, there is enough money available for everyone. However, if you have a more modest estate, you should consider the use of a common trust.
A common trust, which can be incorporated into a will or a living trust, states that, on the deaths of both you and your spouse, all your assets will continue to be held in trust for the benefit of all your children until your youngest child reaches a certain age, which you designate, or until your youngest graduates from college. At that point, the common trust can be divided into separate shares for each of your children. Their separate shares can either be distributed then or continue to be held in trust and be distributed later at specific ages.
This technique allows you to make sure that your youngest children receive the same benefits that your older children received, just as you would have done if you were still alive.
WHEN SHOULD A COMMON TRUST TERMINATE?
There are many alternatives as to when the common trust terminates. One of the most common approaches is to have the trust end when the youngest child reaches a certain age, such as 23, or when the youngest child reaches a certain age or completes college, whichever occurs first. At that time, any remaining trust property is divided equally (or otherwise, as you designate) into separate shares for each child. You can instruct the trustee to distribute the property in a lump sum or in some other way, depending on the provisions in your trust.
WHEN WILL MY CHILDREN BE OLD ENOUGH TO PROPERLY MANAGE THEIR INHERITANCES?
The legal age of adulthood and – unless otherwise planned and provided for by the parents – the time at which a child is entitled to receive his or her inheritance is generally the age of 18, although this age may vary on the basis of circumstance and state law. Since it is often difficult to know how well an 18-year-old will manage money, parents are sometimes concerned about a lump sum distribution to children. In some cases, this is true even though the children are already adults at the time the estate plan is established.
In a revocable living trust, you can provide a trustee with specific directions regarding how and when distributions should be made to your children. It isn't uncommon in the situations just mentioned for parents to stretch out an inheritance over a period of years and stagger the distributions at ages 30, 35, and 40, for example. In this way, if the child mishandles the first distribution, he or she has two more chances to learn to manage the money or property responsibly. Some parents simply plan to distribute the income from the trust quarterly or annually during the child's life to ensure that the child always has access to money, but in small enough portions that poor decision making won't wipe out the full inheritance.
Parents who have such concerns need to know that they can achieve their goal of providing support to their children without worrying that the children will accidentally or purposely undermine that goal.