Estate Planning for Parents

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How to Choose a Trustee for a Minor

Child’s Trust

It is imperative that every parent with young children create an estate plan that includes a trust for any minor children. This will avoid a multitude of issues should you pass away before your child has reached the age of majority, as minor children are not able to own or manage property before they reach the age of 18. As part of the creation of the trust for the benefit of your child, you will need to select a Trustee to manage the trust until the child is mature enough to handle the responsible themselves.

Choosing a Trustee for a child’s trust is much different than choosing a Trustee of an asset protection trust or charitable trust because the duties are very personal. The Trustee refers to an individual or institution who holds assets on behalf of a beneficiary and distributes assets according to the terms of the trust agreement. Therefore, your Trustee will manage assets for the children and make disbursements as you outline in your trust agreement.

When we draft wills for parents with young children, we typically create either a common trust for the benefit of all the children or individual trusts in each child’s name. These trusts do not come into existence until a certain qualifying event. The trust could be triggered upon the death of one or both parents before the child reaches 18, or perhaps older if the potential inheritance is large enough to warrant a more mature age. Many parents are against an 18-year-old receiving a lump sum of million dollars, even if permitted by law!

What traits should you be looking for in a Trustee?

The most likely person to appoint as Trustee is the acting guardian. This way he or she has ready access to funds needed to raise your children. You have already entrusted your children to this person, so why not their money as well? In many cases this is the logical choice. However, a completely different Trustee could be named to act alone or as a co-Trustee with the acting guardian. An independent Trustee may be especially warranted when parents are divorced or the guardian is not financially stable.

In addition, if the guardian may be faced with decisions such as, “do I use this child’s money to add an extension on my house so I can care for them in my home?” or “do I use this child’s money to purchase a larger home that can accommodate us?” it puts the guardian in a precarious decision of having to make possible conflicted decisions and account for those decisions at a later date. If this could be an issue, a Co-Trustee or independent Trustee may be the best option for all involved.

As the name implies, a Trustee should be trustworthy. This type of minor’s trust is usually drafted as a contingency with the “worst case scenario” in mind. Therefore, it is difficult to anticipate the future needs of children when drafting the terms of the trust or even what the world will be like at that time. This is why Trustees of such trusts are given broad discretion to make disbursements for the child’s needs.

The Trustee must be organized. An attorney or tax professional can assist your Trustee once a year or so to make sure that the Trustee is keeping accurate accounts. But a Trustee must keep track of funds expended and keep the beneficiaries informed as to their right to income and principal from the trust. The latter is especially important as your child reaches the age of majority and make begin requesting funds from the trust. At the beginning of each year, the Trustee should work with the guardian in designing a budget.

The Trustee must be savvy enough to make sound investments or utilize a financial advisor. As a fiduciary, your Trustee has a duty to prudently invest the trust assets and is subject to potential liability for mismanagement. A clause can be included limiting the Trustee liability to bad faith, but you certainly do not want to name someone who makes risky investments or refuses to seek out professional advice.

It is always important to discuss with a potential Trustee what is expected. The Trustee will have to carry out the express terms of the trust and so must understand how income and principal is to be distributed and at what intervals. Moreover, you should inform the Trustee what you believe is important in raising your child – such as travel or musical instruction—and include such terms in your will.

While these decisions are not easy to make, it is imperative that a plan be put in place in the event something happens to you. You want your voice and opinions to not only be heard, but be followed. Do not leave these choices to chance or speculation; make an estate plan today!

How to correctly name your child as primary or contingent beneficiary

Almost every parent who comes into our office has erroneously named their minor child as a beneficiary on their retirement account or life insurance policy. If you have ever completed beneficiary paperwork for a retirement account or life insurance policy, you know the distinction between primary and contingent beneficiary. Your contingent beneficiary only inherits when the primary has predeceased you. Although it seems perfectly natural, minor children should never be named outright as primary or contingent beneficiaries.

Most young parent’s biggest assets are their life insurance, IRA or 401k. In fact, new parents often purchase life insurance specifically for the worst-case scenario. So how do you make sure these resources are available to raise your child if you pass away?

In New York minor children cannot inherit assets over $10,000 directly. The asset must be held for the child’s benefit.  This can be done the hard way – through the Surrogate’s Court where a guardian of the property is appointed to manage the funds.  In this scenario, the assets are deposited in bank accounts up to the amount of the FDIC limit and are turned over to that child when they reach age 18. The monies earn minimal interest and require court approval to withdraw for the benefit of the child.  The easy way  is through creating a testamentary trust for your child and naming the child’s trust as beneficiary of the IRA or life insurance policy.

A testamentary trust is created in your will and is only triggered upon your death. If married, the trust only comes into existence upon the death of you and your spouse. The Trust holds assets for the benefit of your children, usually until they reach a certain age at which point any assets remaining pass directly to them. You get to name someone as Trustee to manage the finances and distribute funds related to raising your children. You also get to determine how assets can be used, what age the child can inherit, the type of trust, and even who inherits after your child dies. The funds can be invested and disbursements from this this trust for the benefit of your child do not require court approval.

Once you create a will with a testamentary trust, you need to change your retirement and life insurance beneficiary designation to the trust for the benefit of your children. Without actually making this change, your biggest asset does not go into the trust you went through the trouble of creating. Do not  make the mistake of missing this last step in your estate plan.

Kera Reed, Esq.

How to Choose a Guardian

Choosing a GuardianChoosing who will raise your children in the event you pass away is not an easy task.  Unfortunately, there are no statutory guidelines that courts follow. If a guardian is not nominated by the parents, a family or friend must petition the Court to be appointed and the Court will decide who will raise your children.  In the short term, your children may be placed in foster care while waiting for the appointment.  The good news is that there is a simple way to avoid the Court choosing who will care for your children: the appointment of a Guardian through a Last Will and Testament or a Trust document.  During your life, you and your husband should execute estate planning documents that outline what would happen to your children in the event you pass away.  This article will discuss some considerations to think about as you plan out these documents.

First, you want to make sure the Guardian is up for the task. 
A discussion on whether a proposed Guardian is willing to take your children can be uncomfortable, but it is better to have the conversation up front than having the Guardian turn down the appointment and putting the decision back into the hands of the Court. Next, you want to consider the age and health of the Guardian.
Many young couples initially think of their parents. This may be the appropriate answer for your family, but make sure that their age and potential retirement plans do not conflict with the raising of small children.  Third, geographical location can be a consideration.  If your children are in a certain school and area, it may be important to keep that consistent.  Naming a guardian that lives out of state may make the transition more traumatic for the children. Finally, you should consider the Guardian’s values 
– Are they the same values that are important to you?
– Would they respect your wishes as they raise your children? With respect to your financial estate, it will be important to set up a Trust in your Estate Planning documents that leaves your estate to a Trust for your children.
As minors, your children will not be able to collect money – even if you have a nominated Guardian.  The Trust you establish can hold your assets for the benefit of your children until they reach a certain age and the monies pass directly to them.  The Trustee (who can be the Guardian) will have access to the trust funds to pay for all expenses relating to raising your children.

While this could be very upsetting to think about, having a comprehensive plan in place will make the process go much smoother and ensure the right person is raising your children.

Why Every Parent Needs a Will

Why Every Parent Needs a WillIf you are a parent of a young child, you are probably vaguely aware that you should have a will. But do you know exactly why you need a will?

1. The first is to name a guardian in the event both parents pass away before the child reaches the age of eighteen.

2. The second is to create a testamentary trust to hold assets distributable to the child who cannot legally inherit assets as a minor.

If both parents pass away without a will that nominates a guardian, someone must petition the court to be appointed. This could lead to different family members or friends asserting control, with a judge ultimately deciding who will raise your children.

As to inheriting assets, if a testamentary trust is not set up for the children’s benefit, then a guardian of the property must be appointed by the court to handle the finances. Even if a family member or friend is eventually appointed, the court still appoints a guardian-ad-litem to represent the children’s interests. This is expensive, intrusive and ongoing. An annual budget is required and any deviations must be approved by the court. Additionally, the child will inherit all remaining assets at either 18 or 21 years of age – likely too emotionally immature.

The simple solution to make an already heartbreaking situation smoother for your child and family is to prepare a Will. That way you can choose who will raise your child, who will handle your child’s inheritance and under what circumstances your child will inherit.

Why-a-Parent-Needs-a-Will

A Step by Step Estate Planning Guide for Parents

Art & Illustration

Having a comprehensive plan in place gives you peace of mind in the event of a worst case scenario. Estate planning is essential for parents of young children and there are crucial items to consider with respect to your Last Will & Testament. Burner Law has created a Step by Step Planning Guide for Parents to help guide you through the process of choosing a guardian, leaving Assets to minors or choosing a trustee. This is just a few items you will find in this Estate Planning Guide from Burner Law Group.

Download Estate Planning Guide for Parents

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