ESTATE PLANNING FOR YOUNG FAMILIES Why Estate Planning? A couple has a house with a mortgage, a life insurance policy, and two minor children. Do they need to do estate planning? Yes, they certainly do. Many young families put off estate planning. If asked, they may say they are too young, healthy or can’t afford it. Some have trouble just thinking about what could happen if they should die while their minor children and spouse are depending on them. But even a healthy, young adult can be taken suddenly by an accident or illness, and those with young families need estate planning precisely because others are depending on them. A good estate plan for a young family will include: 1. Naming a Guardian to care for your minor children 2. Naming someone to administer your assets (“estate”) such as a trustee (if you have a trust) or executor (if a will is all you need); 3. providing instructions for the distribution of your assets, and naming someone to manage the inheritance for their children until they become adults. It will also include reviewing your insurance needs, the designation on your retirement plans and planning for disability. 1. A Will or a Trust? First, in many respects, a living trust and a will accomplish similar objectives. They are both written documents which indicate how your property will be distributed at the time of your death. They are both revocable and you can amend them at any time during your lifetime. There can be substantial differences, however, depending on what assets you own. If all you have is a will, in order for your assets to be transferred to your children upon your death, a process known as “probate” will have to be opened in your local court upon your death so that title of those assets can pass from you to your children. This can be an expensive process and, because papers filed with the court open to the public, your financial affairs will become a matter of public record. This is not the case with a trust where court intervention is not required. Also, a living trust provides not just after-death property management but also lifetime management of your assets. If you are disabled by accident or illness, the successor trustee who you have designated in your trust can manage the trust property in your place. As a result, the expense, publicity, and inconvenience of court-supervised distribution of your estate can be avoided both during your lifetime and after your death. Are there drawbacks with a trust? Yes – the main one being the expense in setting up which is usually move than a typical will. But if you have minor children – or children with special needs - a trust allows you to establish provisions specifying when a child will be entitled to any assets held in trust and how those funds will be invested and distributed to the children until they are 18 and even beyond. This will all take place outside the prying eyes of the local court. It should also be pointed out that every estate plan which involves a trust will also include a will – usually called a “pour-over” will. For a trust to work, all your assets should be transferred into the name of your trust before you die. So your home, for example, will be held by “George Best, as trustee of the George Best Revocable Trust”, rather than just “George Best.” In case you hold assets at your death which are not in the name of your trust, the “pour-over” will says that “if I have any assets when I die that are not in my trust, I want them to be put (or “poured-over”) into my trust.” 2. Who Will Care for Minor Children – Naming a Guardian If something happens to one parent, the other parent will continue to raise the children (unless he or she is physically or emotionally unable to do so). But who will raise them if something happens to both of you? This is often a difficult decision for parents, but it is very important because if you have not named a guardian, the court will have to appoint someone without knowing your wishes and values, your lifestyle and your child-rearing philosophy. Your estate plan will allow you to make a nomination of guardianship for your minor children. This may be included in your will or in a separate document. When nominating a guardian, give careful consideration to lifestyle and values. In our nomination documents, we encourage parents to include in writing their wishes on how the children should be raised (education, health and religious upbringing are important factors here). You should also consider the physical ability of the possible guardian to raise the children. A small child may be too much for a grandparent. The person being nominated might divorce and remarry or move to another part of the country. Under what conditions would this person be acceptable as guardian? All parents should indicate an alternate choice in case the first choice nominee is unable to accept the responsibility of serving as guardian. Most importantly parents should, discuss their plans with the person being nominated. 3. Providing Instructions for Distribution of Your Assets Most married couples want their assets to go to the surviving spouse if one of them dies. If both parents die and the children are young, they want their assets to be used to care for their children. Some assets will transfer automatically to the surviving spouse by beneficiary designations and how title is held. However, an estate plan is still needed in the event this spouse becomes disabled or dies, so that the assets can be used to provide for the children. Specific Questions to Consider include: When do you think the children should have control receive their inheritance? Would it be helpful if they received the property in stages and not all at once? Would you like to include incentives in the trust, to encourage particular behaviors e.g. going to college; starting a business? Does any child have problems that make managing property a problem? 4. Naming Someone to Manage Your Children’s Inheritance Unless you include this in your estate planning, the court will have to appoint a guardian of their own choosing to oversee your children’s inheritance with no input from the parents.. This may well be a stranger to your family. It will cost money, which will be paid from the inheritance. If the court appoints a guardian, that person will be supervised by the court and will have to seek court approval for major expenditures. Also, the children will receive their inheritance (in equal shares) when they reach legal age, usually age 18. The person you name should obviously be someone that you trust. Issues that you should consider is whether that person needs to be “bonded” i.e. insured, in case that person takes the money for his/her own benefit. Should that person be required to file an account of his/her dealings with the trust funds while acting as trustee. If so, how often should they prepare an account and to whom should the account be provided to? If you feel unsure about the person who you are nominating, you might consider nominating a professional or institutional trustee. You should also provide as much guidance in the document (or perhaps outside it) on how the trust money should be spent for your children. For example, should the trustee buy a car for a minor when they reach 16/17? 5. Reviewing Insurance Needs Part of the estate planning process is to review the amount of life insurance on your life/lives. Income earned by one or both parents would need to be replaced; also, one or more people would probably be needed to take over the responsibilities of a stay-at-home parent. Additional coverage may be needed to provide for your children until they are grown; even more if you want to pay for college. 6. Designate Beneficiaries for Retirement Accounts One simple step to take is to name beneficiaries for your retirement accounts--any IRA or 401(k) account you’ve opened. All you need to do is fill out the beneficiary form provided by your employer or the account custodian. If you want to change it later, you can just fill out and submit a new form. Usually one parent will name the other parent as the primary beneficiary on the beneficiary form. One may be tempted to name your children as secondary beneficiaries but minor children cannot legally inherit money before they are 18. So you should consider naming your trust as a secondary beneficiary of your retirement plan. Contrary to popular opinion, trusts CAN be named as beneficiaries of retirement plans but they must meet certain strict criteria and also receive the consent of the plan administrator. By naming a beneficiary, you make it possible for the funds in the account to go directly to the person (or persons) you name, without probate. That will save your family the hassle and expense of probate court proceedings. 7. Planning for Disability There is the possibility that one or both parents could become disabled due to injury, illness or even a random act of violence. This should be planned for, as well. Both parents need medical powers of attorney (called Advance Health Care Directives) that give someone else legal authority to make health care decisions for you if you are unable to do so. You would probably name your spouse to do this, but one or two others should be named in case your spouse is also unable to act. HIPPA authorizations will give your doctors permission to discuss your medical situation with others (parents, siblings and close friends). Disability income insurance should also be considered because life insurance does not pay at disability. For those assets not under the control of your trust – and for other financial decisions such as signing tax returns, collecting disability benefits etc. which cannot be handled by your trustee – a Durable Power of Attorney for Finances should also be prepared. 8. Putting Your Plan in Place Estate planning will require you to think about family relationships and some decisions may be difficult. But an experienced estate planning attorney will be able to help you through the process, provide valuable guidance and make sure your plan will do what you want when it is needed. If finances are tight, as they usually are for young families, start with the most essential legal documents and term life insurance, then update and upgrade your plan as your financial situation improves. The most important thing is to not put this off. Once your plan is in place, you will have peace of mind that your family will be protected if something should happen to you.