Given how much parents of young children have on their plates, it’s understandable that estate planning isn’t typically at the top their to-do lists. But the truth is, once you have children, estate planning becomes a necessity regardless of your current financial situation. Consider the following questions:
- Who will take care of my minor children if I pass away?
- How can I ensure my assets and possessions are given to the right people?
- Will my children be adequately provided for if my surviving spouse gets remarried?
Each of these issues is important for young families to plan for regardless of the size of their estates. Here are a few ways estate planning can help you solve these problems.
Choosing a Guardian for your Children
Undoubtedly, the idea of someone else raising your children can be disconcerting. But making sure your family is protected, during even the most difficult times, is what estate planning is all about. Ensuring your children are placed in the right environment, with the right guardian, will make a world of difference in the event you and your spouse/partner are unable to care for them. And their well-being is what truly matters.
One approach to this difficult question is to make a list of potential guardians and then identify the qualities you would want a guardian to have. Some qualities to consider include the person’s age, health, lifestyle, parenting philosophy, proximity to other family members, and religious/spiritual beliefs. Also, don’t eliminate a potential guardian based strictly on his or her income. That’s what your estate plan is designed for: for example, a trust funded by a life insurance policy or other assets will ensure your child is well provided for and that someone is making sure the funds are used wisely.
Property and Financial Assets
Minor children cannot directly manage property or assets granted to them by your estate plan until they reach 18 years of age. As such, simply naming them as a beneficiary in a will, or on your life insurance policy, creates a problem if both parents pass away: who will manage the assets on your children’s behalf until they reach the age of majority? If you haven’t planned ahead, a court will have to appoint a conservator to manage the assets until your son or daughter is legally eligible to do so. This process can be costly and significantly delay the distribution of your assets to your children.
A better approach is to establish a trust. While it’s common for people to hear the word ‘trust’ and think of the super-wealthy, trusts are important estate planning tools for people of all income levels. So what is a trust? A trust is a legal entity that can own and manage assets for the benefit of a certain person or group of persons, known as the trust’s beneficiaries. Of course, trusts can’t do these things by themselves; they are done on the trust’s behalf by its trustee, or manager, who is legally bound to oversee the trust according to the rules set out by trust’s creator.
When establishing a trust, you select who the trustee will be, which assets should be transferred to the trust, and establish the rules that the trustee must abide by. The trustee will then distribute the trust’s assets to your loved ones in a responsible manner until they are able to manage the assets on their own.
Trusts also give your minor children an added layer of protection should they be placed in the care of a guardian. For example, if you name a trustee who is not the guardian of your children, potential conflicts of interest can be avoided. That can help guarantee your assets are being used for their intended purpose: providing for your children.
It’s common for a married couple to agree to gift all of their assets to the surviving spouse, with the idea that the surviving spouse will pass on the remainder of the estate to their children upon death. If, however, the surviving spouse enters a new relationship, your surviving spouse’s new partner has a potential claim to your remaining estate. In other words, the assets you intended for your children, like the proceeds of your life insurance policy, may wind up in the hands of a stranger. A well-crafted estate plan, however, can ensure your surviving spouse and children are the only one’s benefiting from your hard work.