One of the first times people start thinking about having a Will is when they have their first child. A Will is an important part of planning, but when considering the risk of losing one or both parents for a young child a comprehensive estate plan is the only way to ensure the financial well-being for them. Everyone’s situation is different, but here are several issues that should be addressed:
Guardian Nomination: Clear direction from you, the parent, as to who the best person to raise your children should be included in your plan. Only you know which of your family members, or even friends, would be best situated to raise your children consistent with your hopes and values. By nominating a guardian in your Last Will and Testament, you are able to give clear direction as to whom you want in that important role.
Trustee Usage: The person you name as Guardian doesn’t also have to be the person in charge of your child’s finances. By utilizing a trust, you can name a trustee who has legal control of the child’s finances. A common mistake I see is the naming of a parent or a sibling as beneficiary of a life insurance policy and when I ask why the answer is “I’m giving my father my life insurance because he would use it for the benefit of my children.” I’m sure he would and have no doubt he wouldn’t honor a moral obligation and promise like that. What I do know, is that if your 75 year old father is in a nursing home and receives your life insurance proceeds that money is going to the nursing home and not to your children. The trust creates a legal obligation for the trustee to use the money for the children and the funds cannot be taken by the trustee’s personal creditors.
Delayed Financial Distributions: Children given money outright would have full control of those funds as long as they are 18 or older. Right when a child might be going to college they could gain full control over a significant amount of money. Oftentimes it makes more sense to delay distributions to children over an extended period of time, with initial outright distributions not occurring until the child is 25 or later. This doesn’t mean they can’t use the money prior to those dates, it just means they must go to the Trustee and ask the Trustee whether they can have money for education expenses, a new car, a down payment on a house, etc.
Life Insurance and Disability Insurance: Funding your estate plan is just as important. Young parents don’t often have a robust balance sheet from a financial perspective. With a new mortgage, school loans, and just the beginnings of retirement accounts, there isn’t usually a lot of equity. Life insurance fills the important role of providing that equity to pay for a child’s expenses. Disability insurance plays the important role of replacing your income in the event that a parent suffered from a disability. An additional reason to look at both of these issues sooner and at as young an age as possible is that your health and underwriting risk is not likely to improve with time. Now may be the least expensive time to buy a long-term life insurance policy. Many of us have friends who have devastating cancer diagnosis at a young age which would in many cases prevents them from obtaining affordable life insurance. As attorneys we do not sell life insurance but still educate our client’s on the need.
Ownership of Assets: A comprehensive estate plan looks at each of your assets to ensure the ownership of that asset is both consistent and advantageous to your planning. A common issue we spot in young families is that frequently young families buy their first house before they are married. As a result, ownership of the house at best is held jointly with the right of survivorship by both parents, but at worst, ownership of the house is solely in the name of the parent that had the best credit rating at the time of purchase. For most young families, parents should hold title as tenants by the entirety. This is a form of ownership that not only provides that the survivor automatically owns the property if one parent died, but there is also significant creditor protection. A solely owned home by a deceased parent would need to pass through probate and pass by all of that parent’s creditors before the surviving parent could take title if you rely only on a Will to make this transfer. We also review to ensure a homestead declaration is in place.
Beneficiary Designations: A comprehensive estate plan also ensures that any account that has a beneficiary designation – such as life insurance and retirement accounts – have the correct beneficiary. Undoubtedly retirement accounts started before marriage and the first child may still name a parent or sibling as the beneficiary and these all need to be updated. Furthermore, when using a trust the trust can be named as the direct beneficiary of funds allowing the terms of the trust to control the distribution of those funds.
While these are some of the main estate planning issues a young family faces, there may be other issues unique to your situation. That’s why comprehensive estate planning with an attorney provides significant value. Some people opt to use a fill in the blank form on a website or software package to prepare estate planning documents. Hopefully this demonstrates why such documents are not a substituted to well thought out comprehensive estate plan.
Guardian Nomination: Clear direction from you, the parent, as to who the best person to raise your children should be included in your plan. Only you know which of your family members, or even friends, would be best situated to raise your children consistent with your hopes and values. By nominating a guardian in your Last Will and Testament, you are able to give clear direction as to whom you want in that important role.
Trustee Usage: The person you name as Guardian doesn’t also have to be the person in charge of your child’s finances. By utilizing a trust, you can name a trustee who has legal control of the child’s finances. A common mistake I see is the naming of a parent or a sibling as beneficiary of a life insurance policy and when I ask why the answer is “I’m giving my father my life insurance because he would use it for the benefit of my children.” I’m sure he would and have no doubt he wouldn’t honor a moral obligation and promise like that. What I do know, is that if your 75 year old father is in a nursing home and receives your life insurance proceeds that money is going to the nursing home and not to your children. The trust creates a legal obligation for the trustee to use the money for the children and the funds cannot be taken by the trustee’s personal creditors.
Delayed Financial Distributions: Children given money outright would have full control of those funds as long as they are 18 or older. Right when a child might be going to college they could gain full control over a significant amount of money. Oftentimes it makes more sense to delay distributions to children over an extended period of time, with initial outright distributions not occurring until the child is 25 or later. This doesn’t mean they can’t use the money prior to those dates, it just means they must go to the Trustee and ask the Trustee whether they can have money for education expenses, a new car, a down payment on a house, etc.
Life Insurance and Disability Insurance: Funding your estate plan is just as important. Young parents don’t often have a robust balance sheet from a financial perspective. With a new mortgage, school loans, and just the beginnings of retirement accounts, there isn’t usually a lot of equity. Life insurance fills the important role of providing that equity to pay for a child’s expenses. Disability insurance plays the important role of replacing your income in the event that a parent suffered from a disability. An additional reason to look at both of these issues sooner and at as young an age as possible is that your health and underwriting risk is not likely to improve with time. Now may be the least expensive time to buy a long-term life insurance policy. Many of us have friends who have devastating cancer diagnosis at a young age which would in many cases prevents them from obtaining affordable life insurance. As attorneys we do not sell life insurance but still educate our client’s on the need.
Ownership of Assets: A comprehensive estate plan looks at each of your assets to ensure the ownership of that asset is both consistent and advantageous to your planning. A common issue we spot in young families is that frequently young families buy their first house before they are married. As a result, ownership of the house at best is held jointly with the right of survivorship by both parents, but at worst, ownership of the house is solely in the name of the parent that had the best credit rating at the time of purchase. For most young families, parents should hold title as tenants by the entirety. This is a form of ownership that not only provides that the survivor automatically owns the property if one parent died, but there is also significant creditor protection. A solely owned home by a deceased parent would need to pass through probate and pass by all of that parent’s creditors before the surviving parent could take title if you rely only on a Will to make this transfer. We also review to ensure a homestead declaration is in place.
Beneficiary Designations: A comprehensive estate plan also ensures that any account that has a beneficiary designation – such as life insurance and retirement accounts – have the correct beneficiary. Undoubtedly retirement accounts started before marriage and the first child may still name a parent or sibling as the beneficiary and these all need to be updated. Furthermore, when using a trust the trust can be named as the direct beneficiary of funds allowing the terms of the trust to control the distribution of those funds.
While these are some of the main estate planning issues a young family faces, there may be other issues unique to your situation. That’s why comprehensive estate planning with an attorney provides significant value. Some people opt to use a fill in the blank form on a website or software package to prepare estate planning documents. Hopefully this demonstrates why such documents are not a substituted to well thought out comprehensive estate plan.
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