Estate Planning for Young Families
Quite often, young parents put off doing any estate planning. It’s usually for the same reasons everyone else procrastinates—they don’t think they’re old enough or own enough, or think it’s too expensive. (See Top 5 Reasons People Procrastinate about Estate Planning.) But young parents must consider what would happen to their spouse and young children if something were to happen to them. While none of us expects to die or even become incapacitated while our family is young, planning for the possibility is the prudent and responsible thing to do.
Your plan should provide for the surviving spouse and children if one of you becomes incapacitated or dies, and for your children if something happens to both of you. If you are a single parent or unmarried couple, you will need special guidance from an experienced estate planning attorney. In addition to general estate planning information provided on this website, the following is particularly important to parents of young children.
Name a Guardian for Your Minor Children
If something happens to one of you, the other parent will usually continue to raise the children. But who will raise them if the surviving parent is physically or emotionally unable, or if something happens to both of you? This is often a difficult decision. But if you don’t name a guardian for your minor children, a judge will appoint one without knowing your wishes, your children or your family members. In most states, a guardian is named in a will. If you have a living trust, your attorney will likely prepare a short will for this. A judge can appoint someone else, but will likely give preference to your choice.
Name Someone to Manage Your Children’s Inheritance
Many people think that if they name a guardian for their children in their will, that person will automatically be able to use the inheritance to take care of the children. But that’s not what happens. When the will is probated (or if you die without a will), the court will establish a guardianship for the child and appoint a guardian to raise the child. However, the court, not the guardian, will control the inheritance until the child reaches legal age (18 or 21). At that time, the child automatically receives the entire inheritance. Most parents prefer that their children inherit at a later age, but with a simple will (which most have) you have no choice.
Court guardianships can be slow to act and become costly. Expenses must be documented, audited and approved by the court. And because the court must do its best to treat everyone equally under the law, it is difficult to make exceptions for each child’s unique needs. All costs are paid from the inheritance, leaving less to provide for the child.
Having a Children’s Trust in Your Will Does Not Solve the Problem
If you have a will that includes a children’s trust in it, you can name someone to manage the inheritance after you die instead of the court. But your will must go through probate first—the children’s trust is funded with your assets after your will is probated and all expenses have been paid. Also, a children’s trust in a will cannot go into effect if you become incapacitated, because your will can only go into effect after you die.
Why a Children’s Trust in a Living Trust is Preferred
When your assets have been transferred to your living trust, the person you have named as trustee to manage your children’s inheritance can immediately start to act at your incapacity or death—without court interference. The court must still appoint the guardian, but this is a minor formality when compared to a court guardianship in which the court also controls the inheritance.
Review Your Life Insurance
During the estate planning process, you will want to review the amount of life insurance you have on both parents. Income earned by one or both parents may need to be replaced. Also, someone may need to be hired to take over the responsibilities of a stay-at-home parent. Additional coverage may be needed to provide for your children the way you want until they are grown, and even more if you want to pay college expenses.
Note: Do not name a child as beneficiary of any assets, including life insurance, or add a minor to a title of any asset, thinking the funds could be used for the child’s benefit. That would guarantee a court guardianship for the child.
Plan for Disability
One or both parents could become disabled due to injury, illness or even a random act of violence. Both parents, like all people over the age of 18, need to have certain documents in place. These include:
Advanced Healthcare Directive (also called Health Care Proxy and Durable Power of Attorney for Health Care): This document lets you legally name someone as your health care agent/proxy to make health care decisions for you if you cannot make them for yourself. If you are married, you would probably name your spouse, but one or two others should be named in case your spouse is also unable to act. Without one, the court could get involved, especially if your family members, an unmarried partner and/or the medical community disagree about your care.
Living Will: This simple document lets your doctors know the kind of life support treatment you would want in case of a terminal illness or injury when death is imminent. It may or may not be honored by itself, but it lets your health care agent/proxy know what you would want so he/she can make these decisions for you.
HIPAA Affidavit: This gives your written consent for doctors to discuss your medical situation with an unmarried partner, family members, close friends, clergy and others you specify.
Durable Financial Power of Attorney: This document gives another person legal authority to manage your assets without court interference. (A “regular” power of attorney ends at incapacity; a “durable” power of attorney remains valid through incapacity.) Your attorney can write it so that it does not go into effect until you become incapacitated.
You may also want to consider disability income insurance as life insurance does not pay death benefits at disability.
Put Your Plan in Place
Estate planning requires us to think about family relationships, and some decisions may be difficult. 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 what you can afford and improve on it as you are able.
The important thing is to take action. Once you have a plan in place, you will have peace of mind, knowing your young family will be protected if something should happen to you.