Children: A Reason to Plan NOW!

Four days ago, I had the honor of experiencing the birth of my first child.  (Admittedly, my wife "experienced" it a bit more than I did.)  At that moment, I suddenly understood all the clichés about having children: how it's miraculous; how it changes your life; how you experience an instant love-at-first-sight like none other; how you would do anything to protect them.  That's when I realized: we need to change our Estate Plan!

Having young children is one of the most important reasons to execute an Estate Plan in the first place.  Unfortunately, most young parents don't think about Estate Planning.  They are too busy with work, raising their children, school activities, slumber parties, and family vacations.  It isn't until they near retirement and their children have become adults that most people start seriously thinking about Estate Planning.  However, Estate Planning is probably most important for young parents because young children need much more detailed planning than older children.

Guardians.  One of the biggest issues facing parents with young children is designating legal Guardians to take care of their children in the event of incapacity or death.  Most parents realize that they should nominate Guardians but would rather not think about someone else raising their own children and thus fail to plan.  Unfortunately, without taking the time to designate legal Guardians, parents leave it up to chance as far as who will eventually be appointed as Guardians of their own children.  It's a difficult issue but one in which parents with young children should tackle right away.  It's traumatic enough for a child to lose a parent and there is no need to add uncertainty and family squabbles into the mix.

In selecting Guardians, parents should think beyond the obvious choices.  While close family members often make good candidates, parents should also think about extended family members and even friends.  Sometimes a friend may have closer religious beliefs, moral values, educational values, social values, and child-rearing philosophies than relatives. 

It takes time for a Court to legally appoint a Guardian, even if that Guardian is designated in a parent's Estate Plan.  As a result, it is a good idea to also designate temporary Guardians who can take care of the children until a Court is able to legally appoint the Guardian of the parents' choice.  Without a temporary Guardian designation, children may have to go into the custody of child protective services in the meantime.

It is also important to name alternate Guardians.  Just as something could happen to a parent, something could happen to a Guardian.  Although it's difficult to come up with even one person to designate as a Guardian, designating at least two or three alternate Guardians should be part of every parent's Estate Plan.

Inheritance.  Most parents assume that all their assets – their bank accounts, investment accounts, retirement accounts, homes, other real property – will automatically be given to their children.  While it is true that children are the default heirs of their parents, careful planning is still necessary.  Without proper Estate Planning, the parents' estates will have to be subject to Probate, a very time consuming, public, and expensive court-supervised process.  Furthermore, until the children reach age 18, all assets will likely need to be placed in a custodial account with an adult custodian who will be designated to manage the assets.  Once the child turns 18, he or she will be entitled to 100% of his or her share of the inheritance without any guidance.  Most parents realize that not many 18 year old individuals have the maturity and the foresight to properly manage money.

For most parents, the best solution is to establish a Trust for their children.  With a Trust, the parents can select a successor Trustee, an adult of their choice who will have the responsibility to manage the assets of each child's share of the inheritance.  The Trustee can be the same person designated as the child's legal Guardian or the Trustee can be a different person.  Parents can also select an age in which the children assume management and control over their inheritance.  Until the child reaches that age, the inheritance is still available to the child, but it is in the discretion of the Trustee, usually with certain guidelines established by the parents.

When children reach the designated age to be able to assume management and control over their inheritance, good planning will provide that the Trust remains intact and that the child simply takes over as Trustee, rather than terminating the Trust and distributing the inheritance to the child directly.  By keeping the inheritance in Trust, the child may be afforded some Estate Tax and GST Tax benefits, a degree of divorce and creditor protection, and options in the event the children ever develop Special Needs.

Values.  An effective Estate Plan can also instill parents' values in their children.  Part of this process includes the choice of guardians and the manner in which the inheritance is received as mentioned above.  However, a comprehensive Estate Plan should include an "Ethical Will" – a statement of the parent's life story, childhood, background, and philosophy.  In addition, parents can provide guidelines to the Guardian, the Trustee, and the children directly regarding their approach to life.  Such guidelines can include books or "must see" movies that embrace parents' ideas, views about religion, moral values, personal relationships that the parents wish the child to maintain, activities and hobbies that the parents wish the child to engage, and particular goals the parents wish the children to have.

Comprehensive Estate Planning should be near the top of the "to do list" for every parent.  Unfortunately, it is an issue that most parents never think about in the midst of raising their children.  Those parents who do take the time to execute a comprehensive Estate Plan will be providing their children with an invaluable gift and will be providing themselves with peace of mind.