As a new or soon-to-be parent, you begin to realize that there is very little you would not do to protect your beloved children. Babyproofing your home and finding the perfect car seat are important steps, of course, but have you created a contingency plan to ensure your child continues to receive amazing care once you are no longer around? Do you know what will happen to your property and how it might pass on to your children?
It is never easy to think of our own mortality, but children have a way of pushing this issue to the forefront. While it is common for adults (including new parents) to procrastinate on this issue, such an approach is never wise. It is impossible to know what the future holds, but with a little advance planning, you can at least take solace in knowing that all will be well with your children should you and your partner pass away or become incapacitated.
Whether you already have children or hope to have them soon, it is time to start thinking about the specific steps you can take to protect them (and the property you intend to pass on to them) via estate planning.
Who takes care of your children if you pass away? What if both you and your partner die or become incapacitated? If you have not already made arrangements to ensure your child ends up in the proper household, you are doing your entire family a disservice. Imagine the peace of mind that will come with knowing exactly how your children will be cared for in the worst-case scenario.
If you fail to clarify your wishes for your children's guardian, a local court may appoint a close relative. This is not always problematic, but what if you view your siblings or parents as unfit for handling caretaking duties? What if a close friend has already established a strong bond with your children and is willing to take over if you pass away? Never assume courts will understand these factors or even take them into account. When in doubt, it is always best to clarify your intentions.
While guardian selection may be an important choice, it is certainly not an easy one. You will need to determine whether you want just one guardian to handle all aspects of caring for your children, or separate people to act as guardians of the estate (managing assets held by your children) and guardians of the person (acting as a substitute parent following the actual parent's death or incapacitation). Furthermore, you can assign multiple guardians if you have multiple children. Many parents prefer not to split up their children, but it is not always possible to find a single guardian willing to take on the responsibility of caring for several children at once.
Ideally, selected guardians should be financially and emotionally stable. They should share your values and general parenting style. This is true not only of guardians who actively care for your children, but also those who exclusively handle your children's finances.
Before you include a selected guardian in your will, it is imperative that you discuss the matter with that person in detail. This person should be fully on board with the idea of caring for your children or handling their financial arrangements in the event of your passing. Only then will you be ready to establish your intentions in your last will and testament.
In the unlikely event that you and your partner pass away around the same time, you might want your children to be named as your secondary beneficiaries. This designation places them next in line behind your primary beneficiary, thereby ensuring that retirement savings, life insurance, and other assets wind up with your children if both you and the initial beneficiary pass away. It is also possible to list a tertiary beneficiary.
As you ponder primary, secondary, and even tertiary beneficiaries for various accounts, keep in mind that your children will not actually be able to cash in on your life insurance policy until they reach the 'age of majority,' which, in most states, is age 18. In cases in which the primary beneficiary is unavailable, the life insurance proceeds may pass to a court-appointed guardian, unless you establish some sort of custodial account in which the funds can be held until your children are of age. Money in custodial accounts can sometimes be spent on a portion of the child's eligible expenses.
Your advance healthcare directive (also called a living will) might not seem directly related to your children, but it can actually play a huge role in how your family functions if you become incapacitated. Your healthcare arrangements may impact where and to what extent you receive care and how your children interact with you upon your incapacitation.
Advance healthcare directives can outline how you want to be cared for if you become incapacitated due to illness or injury. For example, you can specify whether you would want medical professionals to proceed with certain life-saving measures. Additionally, you can authorize somebody to make decisions on your behalf.
If you previously drafted an advance healthcare directive, becoming a parent may be cause for a new edition. Many people find that their healthcare priorities shift upon having children; some may become more or less willing to pursue certain life-saving measures. At a minimum, review your advance healthcare directive upon having children to determine whether changes might be warranted.
As with your living will, durable financial powers of attorney may not initially appear to be directly tied to your children, but like any estate planning consideration it can impact them in surprising ways.
If you become incapacitated, you will want to know who controls your financial situation and which responsibilities they hold. Agents appointed in a durable power of attorney can be granted a variety of financial powers. The following powers are especially common:
Most notably, a person appointed as agent in a durable financial power of attorney can use your assets to cover everyday expenses for you and your family. To that end, you should select somebody who shares your financial philosophy and consistently exhibits sound judgment. You can either grant this person broad powers over your finances or establish restrictions regarding how and when he or she can use your assets.
A trust can be a powerful tool for passing your estate on to your children while encouraging responsible use of the assets contained therein. Trusts are beneficial in that they shield your estate from probate and certain taxes. Parents of young children often prefer to establish revocable living trusts, which can be changed before the grantor passes away. In some cases, however, an irrevocable living trust may be favorable. This type of trust cannot be changed following its creation, except under extreme circumstances.
One oft-forgotten benefit of trusts for parents in certain professions is the avoidance of select lawsuits, which could throw your family into turmoil. Your inability to take property back after creating your irrevocable living trust shields you from creditors or anybody else who might hold a judgment against you.
Another key benefit of establishing a trust is that you can place limitations on when and how your children receive assets. Many parents share a fear of disbursing funds to teenagers who then promptly spend the money in an irresponsible manner. If this is a concern, it may behoove you to space out trust payments. You can opt for an age-based system, in which, for example, your child receives payouts at ages 25, 30, and 35.
In addition to arranging for periodic payouts, you can establish conditions that must be met in order for your children to receive assets. Parents with trusts have been known to make funds contingent on proof of employment or even reports from psychiatrists (to account for those with a history of chemical dependency).
If you are not quite ready to establish a revocable or irrevocable living trust, you may make arrangements for a testamentary trust. Common among parents of young children, this approach is actually carried out through your last will and testament, leaving creation of the trust to your appointed executor. Hence, the trust is not actually created until you and your partner pass away. Keep in mind that, because it is established via a will, your testamentary trust will not bypass the probate process.
If one or more of your children has a physical or mental disorder, a special needs trust (referred to in some jurisdictions as a supplemental trust) will help you set aside money without compromising eligibility for government assistance. Special needs trusts are common among those who qualify for Medicaid or Supplemental Security Income (SSI). By leaving control of funds with a carefully selected trustee, you can ensure that the government ignores these assets when determining your child's eligibility for certain benefits.
Correct wording is imperative in a special needs trust. The document's language should specifically mention that the trust is intended for "supplemental and extra care" beyond that provided by the government.
With special needs trusts, the trustee is not able to provide assets directly to beneficiaries, as such an approach would likely interfere with government program eligibility. Instead, trustees may use funds to purchase a variety of goods or services that improve the beneficiary's quality of life. Examples might include education, personal care attendants, or even summer camp.
If you struggle to find the right trustee or only intend to include a small amount in your special needs trust, you may benefit from inclusion in a pooled trust (often referred to as a community trust). This unique type of trust involves funds 'pooled' from several families. A nonprofit organization is responsible for investing these funds and distributing them to beneficiaries.
Perhaps you drafted previous child-related estate planning documents while you were still married or in a relationship with somebody other than your current partner. If you have another child with a new spouse, you should adjust your estate plan accordingly. Review documents to determine whether they remain relevant based on your current life situation.
If you are like many individuals with blended families, you may prefer to establish a separate trust to ensure that necessary funds reach children from your first marriage. Many estate plans include a combination of joint and separate trusts; these are often referred to as "his, hers, and ours" estate plans.
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