How Children Influence your Estate Plan
Young Kids Create Special Considerations for Estate Planning
When you have kids—especially young adults or minor children—estate planning is more critical than ever. Children introduce several unique concerns. There are more questions to think about, and there’s more riding on getting it right; so this is a crucial matter to think about early.
There are two central questions to ask yourself at the outset:
- First, who do you trust to take care of your children as you would care for them?
- Second, how and when do you want your children to receive your estate assets?
Choose a Legal Guardian
If you have minor children, your most important decision is who will take care of the kids if something happens to you. This decision can be made by naming a legal guardian; a few things to keep in mind include:
- Does the person live nearby? If not, would they consider relocation? Stability is essential. It’s best to create as few additional disruptions as possible to make adjusting easier on kids.
- Are this person’s finances and relationships stable? Again, stability is vital for kids. You can structure a legal trust to ensure that your assets or life insurance payout aren’t mismanaged, but you should still consider the overall stability of a potential guardian.
- Will the person give your children the life you want for them? What will day-to-day life look like for your children? Will the guardian love and care for your kids? Are this person’s values in line with your own?
- Is the person physically able to care for your kids? Particularly if your kids are younger, consider the likely health and physical requirements of a potential guardian for many years into the future. Especially when considering the children’s grandparents in this role. Even if they seem fit for a weekend visit, how would they handle full-time responsibility?
With these things in mind, most people choose a close friend or family member. Whoever you select, you should make an explicit designation and name alternates in case your first choice is unable or unwilling to take on the responsibility.
How to Distribute Assets to Children
Should you Create a Trust for Kids?
If you have minor children, trusts are an ideal solution. Trusts give you the most direct control of how and when assets are used. There are a variety of types and configurations of trusts which are adaptable to any number of demands.
One kind of trust, the “Minor’s Trust,” creates a number of protections and advantages for your children in the case that there is no surviving parent and the child has not reached a certain age. You can set this up in advance or direct the executor of your will to create a trust for the child’s benefit.
The Benefits of a Minor’s Trust
Creating a Minor’s Trust has several benefits, among them:
- Assets held in a Minor’s Trust can be protected against your children’s creditors.
- The trust terms may prevent frivolous spending of your estate assets, by limiting the use of funds. This limited use may include education, health care, and living expenses (as opposed to a new luxury car).
- Minor’s trusts can be created in your own will or revocable trust, but assets that must be distributed through a will require probate. Skipping probate can be essential in this context because your kids or their named guardians may need more immediate access to the assets to cover the children’s basic needs (see our Probate page).
What Age Should a Child’s Trust Terminate?
This is entirely up to you: parents set the age at which a trust terminates and assets are distributed. A Minor’s Trust can continue well past children reaching 18 years. Ages range broadly, but 25-30 seems to be the most common age range chosen.
Parents often consider the size of the estate that would be left to a child and their opinion of the child’s maturity, education, and responsibility. For example, you can set up any number of non-age-specific conditions, such as graduating high school or college, getting married, having a child, or anything you feel is an important milestone or indication of readiness. Some parents even prefer keeping a child’s assets in trust for their entire life.
This is the beauty of a trust—you can tailor it in precise ways according to your wishes! For a concise explanation of how trusts function, please visit our main Trusts page.
Do you want an Individual Trust or a Pot Trust?
If you parents have more than one child, they may consider leaving their estate in a trust for each child or in one trust for all the children (known as a “pot” trust).
Using individual trusts for each child allows for a more fair distribution of estate assets. For instance, the will can direct each trust for each child to have equal shares of the parent’s estate. In this case, each child has a finite amount of assets available to them.
A pot trust, however, may not distribute estate assets evenly. Instead, it will provide resources to those children who need the greatest support.
For example, if one child has a long-term health issue or significant education expenses, they may require more assistance than the other children. Also, the pot trust generally does not terminate until the youngest child reaches the age set by the parent’s will. This could delay the older children receiving full control of assets until much later.
Children with Special Needs
A special needs trust can help you provide for a child with a disability throughout their lifetime.
If you have a loved one who is currently on a needs-based public benefit like Medicaid or SSI, you need to be careful about how you leave them an inheritance. If they receive an inheritance directly, they may become ineligible for their benefits. However, a special needs trust will help avoid compromising your child’s Medicaid, Social Security, and other governmental assistance.
For more information about how a third-party special needs trust works, see our blog on legal trusts.
Children From a Previous Marriage
Second marriages present another question for parents. If you have children from a prior marriage, it’s important that your will preserves assets for specific beneficiaries without leaving others out. State laws of succession may not line up with your preferences, and if you’re not careful, you can wind up accidentally disinheriting kids from an earlier marriage.
Two good options here are the Marital Trust and the Minor’s Trust: with careful planning, you can be ready for any eventuality and ensure that you are taking care of your spouse and children.
For more details about how Marital Trusts and Minor’s Trusts can ensure that no one gets unintentionally cut out of their inheritance, check out our blog about legal trusts.
Should You Include Life Insurance in Your Estate Planning?
Life insurance makes the most sense for young families—or anyone who has not yet built up substantial wealth—to ensure that their kids’ financial needs are covered for the remainder of their childhoods (at a minimum).
Life insurance options can seem bewildering, but if your main concern is providing for your children then it’s fairly straightforward and affordable. Calculate the cost of raising your children (typically from their current age through college) and then buy a simple term life insurance policy for that amount.
This will ensure that the guardian you select will have sufficient resources to raise your children in the manner you wish and maybe even jump-start a retirement plan or first home purchase.
Be sure to set up the policy’s beneficiary as the trustee of the trust (or direct the executor of your will to establish a trust) so the policy’s proceeds are distributed just as you intended.
Who Should You Choose as Your Agents?
Select an Executor
Who will manage the entire estate and ensure that the conditions of your will are carried out? This is the “executor.” Managing and distributing your assets according to your wishes after you pass can be difficult and time-consuming, so you want to choose someone who is trusted and competent. Usually, the surviving spouse is named as the executor of a will, but you should also name a successor in case the spouse is unavailable.
Choosing a Trustee
A trustee acts like your child’s treasurer. Your trustee manages all financial aspects of your child’s life. This means paying bills, filing any income tax returns due, investing left-over money, and ultimately distributing any remaining funds to your child (depending on the criteria you establish). The guardian and trustee can be the same person, although it’s wise to appoint a co-trustee if the guardian will take on the responsibility of multiple children.
Advance Directives and Power of Attorney
Who will make medical and financial decisions if you’re seriously ill or incapacitated?
Estate planning–especially when you have children–involves planning for incapacity as well as death. If you’re sick or injured and can’t make decisions for yourself, you might not want your kids to struggle with the burden of making difficult health care decisions on your behalf. On the other hand, you may want them making medical decisions or accessing finances without it requiring a legal battle.
Everyone, especially if you have a family or kids, should have an advance medical directive (living will) and durable powers of attorney for health care and for finances.
Children Make Estate Planning more Critical than Ever
Kids create special considerations for estate planning. From deciding on the right type of will or trust for your children, to selecting your agents—and, for minor children, selecting a guardian—getting it right is crucial. At Holman Law, our specialty is long-term planning with compassionate, professional guidance.
Initial consultations are free. If you have kids or adult children to consider in your estate plan, please call us today. We can help you through these important decisions!
Steven C. Holman
Estate Planning and Elder Law Attorney
I love to spend time with my wife and three children and serving the Dallas Fort Worth community. I provide clients with a wealth of knowledge and experience navigating each individual’s Estate Planning needs including Trusts, Probate, Elder Care Law, and Long Term Care Planning. My law firm specializes in assisting clients with complicated legal forms and qualifying for the maximum Medicaid and Veteran (VA) benefits in Texas.