Estate planning for minor children is critical for young families. However, must people don’t know where to start to ensure that their family is protected. There are four major issues that need to be addressed: 1.) select a guardian, 2.) select a trustee to manage the child’s inheritance, 3.) design the child’s trust, 4.) ensure that all beneficiary designations for your assets are correctly listed (e.g., retirement accounts, life insurance, etc.).
The most important planning aspect for minor children is designating a guardian. A guardian’s duty is to raise the children when the parents are incapacitated or deceased. Parent’s often struggle with selecting a guardian because they are trying to find someone that can raise their children as well as they could. Once they realize that no one can raise their children nearly as well as they can, parents then refocus and select the best option. Other times, parents struggle with naming a guardian because they simply disagree. This is a much more difficult issue to address, but when faced with the pros and cons of each prospective guardian, the best option usually surfaces. Here are a few factors to consider while you are going through this process:
- Who would maintain the most consistency in the child’s life? Including staying in the same geographic area, school, etc.?
- Who reflects your parenting style the most, including values and religion?
- Does your child already share a relationship with the prospective guardians?
- Who has the capacity to handle raising your children? Do they already have their hands full with their own children? Are they youthful enough to keep up with children?
In addition to naming a guardian, parents must also decide who is the best choice to manage the children’s inheritance. That is, the trustee is responsible for managing the money and determining how the money is spent. Often, parents will select the same person to be trustee that is serving as guardian. However, some guardians are simply not very strong with managing money. In that case, it makes sense to select a separate trustee. If the guardian and trustee are different, then it’s important to ensure that the guardian and trustee can effectively communicate.
A child trust is the preferred tool to manage a minor’s inheritance. Using a child trust allows for highly customizable withdrawal rights, including tiered withdrawals. In lieu of allowing a minor to fully withdrawal all the money when the child is 21, many people prefer to gradually grant their children withdrawal rights as they mature. Holding inherited assets in a child trust is meant to protect the assets from creditors, failed marriages, and the child’s own financial immaturity.
A reasonable indicator of financial maturity is the child’s age. For example, it is common for parents to set up tiered withdrawal rights for their children as follows: one-third of the assets at 25 years old, one-third at 30, and the remaining balance at 35. Since age alone is not always a good indicator of maturity, the trustee may be instructed via the child trust to delay or fast-forward the tiered withdrawal rights dependent on other factors (e.g., recent history of drug/alcohol abuse, credit history, mental/medical conditions, marriage issues, continued higher education, etc.), which may serve as a better indicator of the child’s financial maturity.
A child’s inheritance may come from outside of the Will via beneficiary designations for retirement accounts and life insurance. It is critical that parents confirm that their children are listed as the contingent beneficiaries (after your spouse, if you are married) on the beneficiary designation forms. Listing your children by name is especially important for retirements accounts (e.g., 401k, 403b, and IRAs) because of potential income tax pitfalls.
If parents have planned for guardianship, trusteeship, the child’s trust, and for beneficiary designations, then they can be confident that they have taken the first steps to protect their family.