Question: I recently completed my estate planning which included doing an irrevocable trust to protect my assets in case I need Medicaid in the future. I have nominated my 35 year old daughter to be my Trustee. What kind of estate planning should my daughter be doing? She is married and has two small children.
Answer: People often put off estate planning far too long. But it is just as important for young families to do their planning as it is for older family members to do asset protection. I always recommend the following basic documents to my young clients.
Any one over the age of 18 should have advance directives. These are documents that you execute in advance of needing them which designate someone to make medical and financial decisions on your behalf if you were disabled. These documents include a healthcare proxy, living will, HIPAA release form and durable power of attorney.
The healthcare proxy designates a person to make medical decisions if you were unable. The living will is a statement of your wishes with regard to ending life-sustaining treatment if you were in a vegetative state. Finally, the HIPAA release permits your healthcare agents to obtain protected medical information from your medical practitioners.
The durable power of attorney designates a person or people to make financial decisions for you. A traditional power of attorney becomes effective when executed by the persona designating the agent(s). A springing power of attorney only “springs” into effect when a physician signs an affidavit that you are incapacitated. While the springing power of attorney may sound preferable, it can be difficult to utilize in a crisis because physicians may be uncomfortable to sign off on incapacity.
In addition to the advance directives, young families should have Wills which provide who will inherit their estate if they should pass away. It is important for a young person with minor children to leave assets to those children in a trust rather than outright. In New York, a person under the age of 18 cannot manage their own assets. If a minor inherits property, and it is not in a trust, a guardian must be appointed for that child to manage the money until they are 18. Any funds that are given to that child must be liquated and placed in a non-interest-bearing account. Once they attain the age of majority, all the funds must be turned over to them. In the case of retirement funds, this is particularly disastrous because the potential for tax deferral over the child’s lifetime is lost. All the money in the retirement fund must be liquated and will be income taxable to the child. If the child is under 14, they are taxed at their parents’ income tax rate.
It is also important to select a guardian and trustee in a Will. The guardian is the person that will care for the child should both parents pass away while the trustee is the person who will manage the money left to that child. These roles can be fulfilled by the same person or one can designate different people for each role.
Once the Will is executed, make sure to update your beneficiary designation for all your accounts. If an account has the minor children listed as the beneficiary, this designation will trump the Will provisions. Be sure to meet with an estate planning attorney to help streamline your plan.