Who Would Care For Your Children If You Were Unable To Do So?
Did you know that couples with minor children should take special considerations when undertaking legacy planning or what some refer to as estate planning? In this stage of life, many are in the beginning of their career/s. Their estate may not be large enough to be affected by estate tax, but there are many non-tax reasons for couples with young children to have a legacy plan in place. If not, the children’s care will be decided by the State.
A legacy plan refers to a set of legal documents that usually includes: a will, a power of attorney, and an advance medical directive, but should also include a nomination of guardian, and letters of instruction to the guardian.
The will is a critical legacy planning document because it designates how assets will be distributed after death. In most cases, married couples leave their estates to each other upon the first spouse’s death assuming that the surviving spouse would use the estate assets to provide for the surviving children. When both parents die at the same time leaving minor children behind, their care and the distribution of estate assets can become more complex. If the unthinkable happens, the care of the children should not be left to the government.
Legacy Planning: Where to Start
1) Who will care for your children if you (and your spouse) are unable to do so?
If you have the “Do Nothing Plan” in place, the state will take control of your property and your children’s care. Instead, consider a Nomination of Guardian and/or execute a Child Care Authorization. Also, name a guardian in the will; someone you would trust to make decisions for your children. When designating a guardian, remember to consider their geographical proximity to the children’s current place of residence, differences in lifestyle or religious beliefs, and their financial situation. Both parents should name the same guardian to avoid confusion. It is also important to discuss your intentions with the prospective guardian prior to nominating or designating them as it is a major responsibility.
2) How will estate assets be distributed to minor children?
If the “Do Nothing Plan” is in place and both parents pass away, a child may inherit their share of their parents’ estate but the funds will be held in an account controlled by a guardian. The guardian of the estate may not be the same person as the guardian of the child. Access to estate funds must go through the guardian of the estate. The guardian needs court approval to spend principal from the estate. When the child reaches age of 18, assets in the estate would be distributed directly to the child regardless of whether she is prepared to handle the financial responsibility. To avoid the state taking control, parents can create a minor’s trust to hold assets for their children. The minor’s trust is created through a will and names a trustee to manage, invest and distribute assets in accordance with the terms of the trust. Trust terms can designate distributions for health purposes, education, maintenance, support, etc. This type of trust typically terminates at a stated age, not necessarily at the age of 18. The minor’s trust may distribute principal in increments based on the age. For instance, the child could be eligible to demand 25% of the principal at age 25, 25% at age 30, and the remainder at age 35 or some other distribution at the discretion of the principal.
3) Without a nomination of guardian, you will have no say in who cares for the child.
It will be determined according to state law. Nominating a guardian for your child allows you to indicate who you would like to take care of your child in the event you pass away or become unable to care for your child. Although the Court is not required to appoint the guardian you choose, nominating a guardian is a way to make sure the Court knows your wishes and, absent some compelling reason otherwise, your choice will be approved.
4) Does your child have special needs that will need to be taken into consideration in your legacy planning?
Parents of a special needs child or children may create a Third-Party Funded Special Needs Trust. In this way they can hold assets for the child in lieu of a minor’s trust. The special needs trust is generally funded with inheritance monies.
To complete the basic legacy planning, parents of young children would also need to execute an advance medical directive and a power of attorney. The advance medical directive designates an individual’s last wishes in regard to end-of-life situations. The power of attorney authorizes an agent to act on the principal’s behalf in medical and financial matters.
If you are the parent of a minor child, get in touch with one of the experienced personal and family wealth planning attorneys at Dolen, Tucker, Tierney & Abraham. We can help you identify the solutions that suit your needs. Our Everyday People Wealth Planning Program (sometimes called estate planning) is designed for each client on a case by case basis.