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Life is unpredictable, but you want your family to be protected no matter what. Estate planning ensures your wishes are fulfilled and your children are protected even if you can’t be there to do it yourself. Wills and trusts help determine who will raise your children and how their inheritance will be managed and distributed.
Estate planning for families with children involves creating a plan to secure their children’s future, both financially and emotionally, in the event of a death or incapacity. Key elements a parent should plan include designating guardians and trustees, naming beneficiaries, and making personal healthcare decisions ahead of time.
It’s hard to think about worst-case scenarios, but preparing for the unexpected is one of the most loving things you can do to protect your children. If something happened to you, who would raise your children? Would they be financially protected, or left vulnerable to decisions made by the court or even an ex-spouse? Estate planning allows you to continue to help and protect your children even after you are gone.
A will allows parents to suggest a guardian for their children. This is a great opportunity to ensure your children are cared for by someone who shares your values and will have the children’s best interests at heart. Otherwise, the court will appoint a guardian without your input or approval. Some criteria to consider when selecting a guardian include:
The division of assets is a main component of estate planning. There are lots of things to consider when thinking about a minor or young adult receiving an inheritance.
Estate planning covers more than the event of your death. In the event you are incapacitated, who will make critical financial and health decisions on your behalf? Having advanced directives in place lets your wishes be known.
There are two main types of power of attorney: medical power of attorney and financial power of attorney. Both are useful in a comprehensive estate plan. Not having these in place can lead to lengthy, stressful court processes for your family. They will already be dealing with enough if you are incapacitated, so help them ahead of time by outlining what you want and who is in control.
If you die without a will, your assets are distributed in strict accordance with intestate succession laws. This may not be what you would have wanted because money won’t be distributed as you chose. For example, money you would have spent on a younger child’s education may be evenly split with older children who you already paid for the education of, effectively shorting the younger child. Spouses are heirs ahead of children, so for blended families, this can cause even greater complications.
Not having a will also means the court will determine who has guardianship over the children, without your input. This may mean the court chooses an older relative or a social worker when you may have preferred close family friends with shared values. The court will also assign a conservator to manage the minor child’s inheritance until they are of age.
Once the children are of age, they will receive their inheritance outright, without restriction. This may not be what you want, since young adults often lack the financial knowledge and the maturity to manage a large sum of money wisely.
For single parents, estate planning is particularly important. In one parent dies, it is likely the other parent will have full custody of the children, unless there is a compelling reason for that not to be the case. It’s also likely they will be the conservator, charged with managing the inheritance on behalf of the children until they are of age.
Ideally, the other parent is trustworthy and honors your wishes and intentions, but that’s not always the case. The guidelines for conservators are not very strict, and an ex that feels entitled, or one who remarries and is feeling pressure from their new spouse, can find ways to spend the money in lifestyle upgrades that ultimately don’t preserve the inheritance for your child’s long-term use.
If you are not confident the other parent would manage the money with your child’s best interests in mind, you can avoid putting all your assets under their control by creating a trust for your children. With a trust, you can specify what the funds are used for and appoint a trustee of your choosing to manage the assets.
Disabled dependents require additional consideration to ensure they have the support you intend to give them without losing their eligibility for needs-based aid like Medicaid or Supplemental Security Income. A special needs trust is specifically designed to meet these needs.
Special needs trusts have some limitations in what they can be used for but ultimately are great tools to increase the quality of life for disabled dependents without them losing government benefits. Parents can select a trustee to manage and distribute the assets.
Don’t put off estate planning just because your circumstances may change. Estate planning documents can be updated as needed to reflect new situations.
The truth is you never know when you or your loved ones will need these documents. It is better to create them early and then make changes as needed than to risk not having them when you need them.
You should review your estate plan documents any time you have another child, divorce, remarry, or go through a major financial change. You should also consider reviewing the documents when your child becomes an adult, marries, has children, or reaches other milestones of their own, as that may affect how you want assets distributed.
A will is an important part of estate planning but is only one option that may not be best suited for your situation.
In a will, you can nominate a guardian to care for your children. However, a will alone will not keep your estate out of probate. Assets distributed from a will are also generally distributed outright, so your child is likely to inherit one lump sum which may not be your goal.
In a trust, you can designate the trustee responsible for managing and distributing the assets in the trust. Trusts can be much more granular in how funds are distributed, which can be helpful for minors and young adults. Funds can be distributed slowly, instead of all at once, which can help prevent young adults from squandering their inheritance due to inexperience. Funds can also be designated for school or other milestones to help support your child the way you would support them if you were there.
