Your estate plan determines not just where your wealth will go and how it is delivered. It also informs the care of your minor children if you become incapacitated or pass away. For this reason, parenthood is a common catalyst for many to begin estate planning. Since the stakes are higher, it is prudent for parents to think carefully about their desires and work with an experienced estate planning attorney to draft documents that carry out their wishes.
What Happens to Your Children Without an Estate Plan
If the parents or legal guardians of a minor child pass away without an estate plan, the status of the child’s custody is largely in the hands of the court. The court has no option but to use its discretion to determine what is in the child’s best interest. In the best-case scenario, close family can present a unified plan to care for the child which the court can easily approve. However, if there is disagreement surrounding the care of the child, it could lead to a lengthy legal battle where the court will be making the final call.
Naming a Guardian and Financial Decision-Maker for Your Children
Having a suite of estate planning documents (Advance Medical Directive, Durable General Power of Attorney, and a testamentary document such as a Last Will and Testament, or a Revocable Living Trust) allows parents to make their wishes clear to both family and the court. Estate plans can express intentions for who should serve as a guardian for their child, who they would like to be the financial decision-maker for their child’s inheritance, and how to deliver an inheritance beyond childhood. Preparing sound estate plans that clearly lay out parents’ wishes can reduce the risk of a legal challenge during an already trying time and provide more stability for the child as a result.
Ideally, a guardian should provide a stable, loving home and share the overall philosophy and values of the child’s parents. This is often a close friend or family member. Parents can also list back-up options in case their first choice is unable to care for their child.
Additionally, parents can make a plan for their children’s financial wellbeing and name a financial decision-maker. The financial decision-maker does not have to be the same person as the child’s guardian (although they can be). The financial decision-maker’s job is to work with the child’s guardian to provide for their needs, as well as manage funds, investments, etc. for the child’s long-term benefit.
Although the financial decision-maker can be the same person as the guardian, there are some practical benefits to splitting the responsibility. First, you can choose the best person for each individual task. Different people are gifted with different callings and abilities. If you split the financial and guardianship responsibilities, it allows you to choose the best person for each role. Second, it provides a set of checks and balances. Because there are multiple people involved, there is a natural check on potential mismanagement.
Planning for Your Children’s Inheritance
Finally, parents should consider the delivery of their children’s inheritance in their estate planning documents. It is common for parents to name their minor children as beneficiaries of a life insurance policy; however, because minor children cannot legally receive assets, the funds may be held by the court for years before the child reaches the age of 18.
When a child turns 18, they would then receive their entire inheritance in a lump sum without any further oversight. Generally speaking, many newly minted adults do not have the financial maturity to save, invest, and manage a large portfolio. Through an estate plan, parents can establish a trust overseen by a trustee to gradually distribute their children’s inheritance over the course of several years. For example, the trust could direct the trustee to manage the funds for the child’s benefit with larger distributions staggered across a decade, with the ability to allow funds to be given at any time for educational and medical purposes.
Estate planning, although easy to put off, can make a huge difference in the lives of your loved ones. By thinking through the details in advance, you can have peace of mind knowing that you have set your children up for success.