[This post is Part Three in a four-part series discussing estate planning for Millennials. You can find links to the other posts in the series here.]
When you have a kid, everything else usually takes a back seat.
Sleep? Forget about it.
Free time? Never heard of it.
There's often no time for fun things like hobbies or other activities — which means that it can seem like there is definitely no time for un-fun things estate planning.
But what if something unexpected happens:
What happens to your child if you or your spouse suddenly die or become incapacitated?
Who takes care of your child's medical needs and daily care?
Who manages your assets until your child reaches adulthood?
You might think that the answer to these questions is obvious, but the law might not agree. And your own written notes or spoken instructions generally aren’t legally enforceable.
To address these sensitive questions, you should have an estate plan.
Why do I need an estate plan?
I have talked a lot about the importance of having an estate plan. That doesn't change when you have kids.
In fact, having children makes having an estate plan even more important.
There are generally two sides of estate planning: Who takes care of your SELF if you become incapacitated and who takes care of your STUFF when you die.
But when kids enter the equation, you need to consider a third perspective: Who takes care of your CHILDREN when you can no longer do so.
Caring for your children.
Contemplating your death can be even more depressing than watching Mufasa die in The Lion King.
However, just like you have to watch in terror as Mufasa gets trampled to death by a horde of wildebeests in order to experience the magic of “Can You Feel the Love Tonight”, you need to consider what happens after your death in order to ensure your children are provided for.
So what would happen to your children if you died tomorrow?
You may have a parent or other relative who you want to take care of your kids, but that relative will not have any legal authority unless and until a judge grants it.
Your relative would need to obtain a guardianship over (or adopt) your children before they would have legal authority to manage their care and provide for their well-being.
Any type of court proceeding can be expensive and stressful, even if it’s uncontested.
A contested guardianship or adoption can be traumatic.
Without any type of plan in place, you are opening the door to the possibility that your family could end up fighting over your children. Nobody wins in that scenario.
Responsibly managing and preserving your assets.
What about your assets, your stuff?
After you die, your stuff is distributed only in one of two ways: (1) with probate or (2) without probate.
Probate can be time-consuming, expensive, and stressful. It is not unusual to see probate cost $10,000+ with attorneys’ fees, court costs, and other expenses.
And that’s just if the probate is uncontested.
The better option, in most cases, is to use estate planning to avoid probate altogether.
Related post: 5 Ways to Avoid Probate
Whatever the case, if your children are minors, they will not be able to access those assets until they reach age 18. In the meantime, a guardian, conservator, or trustee would manage that property for your children.
Taking care of your children and taking care of your stuff all requires time, money, and court proceedings. There are also many ways things could go wrong.
Are there any relatives you do NOT want to take care of your kids?
Is there anyone you do NOT want to be in charge of your assets?
Do you want to leave certain funds for your child's education?
Are there any other special instructions you want to leave behind?
Without an estate plan, you are leaving all these issues up to chance.
How can I provide for my kids in my estate plan?
Providing for your children is one of the most important aspects of estate planning.
So how can you use your estate plan to provide for your children's care? How can you ensure that your estate will be distributed responsibly and for your children's benefit?
Nominate a guardian for your children.
When it comes to your children's care, the options are fairly straightforward.
Although you cannot avoid the need for a guardianship or adoption in the event of your death or incapacity, you can nominate a trusted relative or friend to serve as guardian if it ever becomes necessary.
This nomination can be included in your Last Will and Testament, in a Living Trust, or as a separate document. If the guardian is otherwise qualified to serve, this nomination will help ensure the court appoints the right person to take care of your kids.
Related post: What Is a Nomination of Guardian?
Along with a Nomination of Guardian, you may also wish to leave instructions for the eventual guardian.
What values do you want to instill in your children? What concerns do you have about their care? What records does the guardian need to know or have to properly care for your kids?
Choosing a guardian is an incredibly important decision. Take the time to consider not only who you want to take care of your kids but also what they will need to know.
Appoint a trustee or conservator to manage your children’s assets.
You have nominated a guardian to manage your child's care. Awesome.
But what about your assets?
Under the Uniform Gifts to Minors Act (UGMA) and its extension, the Uniform Transfers to Minors Act (UTMA), children generally cannot access inheritance until they turn 18.
However, are 18 year-olds always the most financially responsible people?
Even if they are smart, young people can make mistakes.
If this inheritance is supposed to get your children through their all the way through school (or at least, as far as possible), it is crucial to ensure your assets are cared for even after your kids turn 18.
There are two main estate planning options to manage your children’s assets after they reach age 18: a living trust or a custodial account.
A living trust is one of the most popular estate planning options.
Related post: 8 Reasons You Should Have a Living Trust
With a trust, you appoint a trustee to distribute funds to your child in a way that best provides for their care, either according to your specific instructions or the trustee’s discretion:
Would you want your child getting $100,000 right when they turn 18?
Would you want to spread out the distributions to give him or her time to appreciate that wealth and to make more responsible decisions?
Would you want to incentivize certain behavior to help your children continue to grow?
That last point is a very popular part of trust planning.
You can use a trust to specify certain events (e.g., going to college, getting married, buying a house) at which you want the trustee to distribute funds to your child.
I often see clients provide that their children must graduate with a college degree (or some educational equivalent) to receive inheritance, or that their children are entitled to one-third of their inheritance at 25, one-third at 30, and the remainder at 35.
You can get even more specific.
If you want to make sure your children don’t stop working and rely entirely on their inheritance, you can tie annual distributions to their earned income.
In other words, a beneficiary would only receive something as long as he or she is working.
A custodial account, on the other hand, is a type of financial account where you designate a custodian (which is somewhat similar to a guardian) to manage particular assets for your children's benefit.
But whereas a trust can last (essentially) forever, a custodial account only lasts until the child reaches a certain age, which varies from state to state.
Custodial accounts are not quite as flexible as living trusts, but in a broad sense the custodian essentially serves the same purpose as a trustee.
There are other options to pass your wealth along to your children, such as a last will and testament.
Related post: What is the Difference Between a Will and a Trust?
However, those options do not give you the same measure of control over your assets — and, in the case of a will, do not avoid the need for probate.
What else should I include in my estate plan?
Aside from the basic estate planning documents discussed above, I generally recommend that everyone have a Durable Power of Attorney and/or Advance Directive for Health Care.
These documents ensure someone can take care of you if you become incapacitated.
I also recommend leaving an estate planning “letter of instruction” to tell your representatives everything they need to know to manage your estate.
Related post: Why You Need to Have an Estate Planning Fire Drill
Consider writing different letters for your trustee or personal representative and your designated guardian or conservator for your children, since different information may be relevant to different individuals.
Lastly, I highly recommend that you create a digital estate plan detailing how you want your online assets disposed of and the information your representatives will need to access those accounts.
Depending on the laws in your state, you may need to appoint a separate "digital executor" in your estate planning documents for this purpose.
But with the amount of pictures, movies, music, and other assets online, failing to ensure those assets are properly disposed of could mean your family loses years of value and/or memories.
Provide for your children through estate planning.
You do everything you can to protect your children. But failing to have an estate plan can leave your kids and other loved ones vulnerable and can open the door to a number of other problems for your family and your estate.
To learn more about creating or updating your estate plan to make sure it best provides for your loved ones, contact the experienced Oklahoma City estate planning attorneys at Postic & Bates today for a free, no-obligation consultation appointment.
David M. Postic is an attorney at Postic & Bates, P.C. His practice focuses on estate planning, probate, real estate, trust administration, business planning, and adoption.
You can email David through our Contact Us page or by calling our office at (405) 691-5080.
[As with all our blog posts and other publications and resources, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]
