The Best Inheritance Parents Can Give a Child Is Their Time (and a Competent Estate Plan)
/Many people consider their own estate planning for the first time when they become parents. And while having a child certainly is not a prerequisite for estate planning, it does add a level of urgency to the process as new parents fret over how to ensure that their children are properly cared for in the event that one or both parents are not able to do so.
However, the importance of parents having an estate plan does not diminish once one’s children reach adulthood. The estate planning goals simply shift, from providing for the child’s immediate needs to enhancing the child’s own assets, or even setting the stage for generational wealth.
Understanding these different estate planning goals can help parents to determine the best estate plan for their needs.
Estate Planning for Parents of Young Children
The primary estate planning goal for parents with young children is ensuring that the children will be cared for in the event that one or both parents die before the children reach adulthood.
The best way to accomplish this goal is by working with an experienced estate planner to prepare a Will that names a guardian for minor children and that provides for any inheritance to pass in a manner that is practical and protective.
Appointing a Guardian
Appointing a guardian for minor children is arguably the most important estate planning measure that parents can take. A guardian is the person who will be responsible for raising minor children in the event that both parents die (or in the event that one parent dies and the other is unable to care for the children). If one does not appoint a guardian for minor children, then the court will appoint someone as the guardian – and this person may or may not be the person the parent would have preferred, or even chosen at all.
Therefore, choosing a guardian is necessary, but it is not always easy. Indeed, choosing a guardian can be difficult, but there are certain considerations that can help parents determine the guardian who would be most appropriate:
Do you want your child to be raised with certain social, cultural or religious values?
Do you want your child to be raised in a certain geographic location?
Do you want your child to be raised among family members from either or both sides of the family?
Does the proposed guardian have the emotional and financial wherewithal to care for your child?
With whom would your child feel most comfortable?
If your first choice of a guardian is unable to serve, who would you want to serve as successor guardian?
Is there anyone you specifically would want to exclude as a potential guardian in the event that the individuals you name cannot serve?
The appointment of a guardian can be conditional. For example, one could appoint Person A as guardian, but only if Person A resides in a certain geographical area, or only if Person A practices a certain religion, etc. If Person A fails to meet these conditions, then Person B will step in as successor guardian.
Uncertainty over who to appoint as a guardian can cause delays in the estate planning process, but parents should not let indecision over a guardian derail the process altogether. Although parents understandably feel pressure to choose the “perfect” person as guardian, they should do their best to move forward with the person who best meets their criteria at this time – they can always amend their Wills if they change their minds later.
Trusts
Determining the most appropriate structure for passing assets to children is another important step. If one does not create a plan for how their assets will pass upon their death (via a Last Will and Testament), then state law dictates how and to whom the assets will pass.
In New York, if you are married with children at the time of your death and you die without a Will, your assets will generally be distributed as follows: the first $50,000 will be distributed to your spouse, and the remainder will be split equally between your spouse and your children. This distribution scheme may be problematic for many reasons.
First, most people want their spouse to inherit all of their property, especially if the children are young or if all of their children are children of that relationship.
Second, the law provides for children to receive their inheritance outright if they are over the age of 18, or upon attaining the age of 18. While an 18 year old is technically an adult, most parents would agree that even the most mature 18 year old is probably too young to responsibly handle even a modest inheritance.
Third, property will be distributed based on value, not type. This means that your property may be distributed among your heirs in a manner that you would not have intended – for example, your jewelry may be distributed to your son, not your daughter, or family heirlooms from your relatives may be distributed to your spouse, not your children. This also means that your heirs may become joint owners of your property – for example, your spouse may end up owning ½ of the marital home, with your children (who may not be your spouse’s children) owning the other ½.
While there is no one-size-fits-all plan, it is often advisable to include trusts for the benefit of children. A trust is a relationship between two people whereby one person, the trustee, agrees to hold property for the benefit of a third party, the beneficiary. Assets that are held in a trust for the benefit of children can be managed by an adult or an institution (e.g. a bank or trust company) and used to pay the child’s expenses. When the child reaches adulthood, the remaining assets can be turned over to the adult child, or they can be held in continuing trust for the adult child’s lifetime.
Trusts for children can also be combined with bequests to a spouse. For example, a common estate planning structure for parents who are married or in a committed relationship is for each parent to leave everything to the surviving parent in a trust for the benefit of the surviving parent and the children. The surviving parent can use the assets from the predeceased parent to cover household expenses, including expenses related to the care of their children, and when the surviving parent passes, the remaining assets of the predeceased parent are distributed to trusts for the benefit of the children.
The value of the trusts in this example is twofold. First, by leaving assets to the surviving spouse in trust, rather than outright, the predeceased spouse can safeguard these assets for the children’s later inheritance by (a) protecting the assets from the surviving spouse’s creditors, (b) preventing the surviving spouse from unreasonably spending down the assets and (c) ensuring that the surviving spouse does not disinherit the children from the remainder of the deceased spouse’s estate (this is particularly relevant when the predeceased spouse’s children are not also the children of the surviving spouse). Second, by arranging for the predeceased parent’s assets to pass to the children in trust, the children will not only get the benefit of creditor protection, they will also get the benefit of the trustee’s skill in managing the trust assets.
Life Insurance
Term life insurance is a good idea for all families who rely on the earnings income of one or both parents to meet their expenses – which is most families. Term life insurance can, at a minimum, provide income replacement for families in the event that an income earner dies unexpectedly. Term life insurance can also provide for more than income replacement – if a family has the means to pay increased premiums for a larger death benefit, life insurance can be used to ensure that there are funds available to pay for college education, to pay off a home mortgage, or to relieve the surviving spouse from the burden of working outside the home altogether.
While many people will purchase a term life insurance policy for the parent who is a wage earner, it is important to recognize that stay-at-home parents also provide a valuable service to the family and, if they die while their children are minors, the surviving spouse will likely incur additional expenses to replace these services. For example, a surviving spouse will have to pay for childcare, housekeeping and home management services that had previously been performed by the deceased spouse, putting an extra burden on the surviving spouse’s income. Therefore, for some families, it may make sense to purchase term life insurance for a non-wage earner spouse as well to cover the value of the services that spouse provides to the family for free.
Estate Planning for Parents of Adult Children
While parents of adult children do not necessarily have to consider the immediate needs of their children in crafting their estate plan, it is still important that parents consider an estate plan that complements their own unique family dynamics.
Trusts, Again
Many of the estate planning vehicles that are relevant to new parents are also relevant to parents of adult children, such as trusts. Third party trusts, such as those discussed above, are an excellent way of leaving assets to adult children because they can protect the adult child’s inheritance from the claims of creditors. This is particularly beneficial to adult children because, by the time the parent dies, the adult child is more likely than a minor (or even young adult) to have creditors (e.g. in the form of student loans, or an ex-spouse), or to be employed in a profession where malpractice liability is a fact of life (such as an anesthesiologist). By placing the adult child’s inheritance in trust, the parent can ensure that inherited assets can be preserved for generations to come.
Trusts are also a key estate planning device for parents with adult children who are disabled or suffer from addiction, or who are receiving (or may in the future receive) government benefits. First, it is a reality that not all adult children are able to handle the responsibility of even a modest inheritance – whether it is due to a physical, mental or emotional impairment, or a condition such as drug or alcohol addiction – and a trust can provide the adult children with the oversight required to ensure that an inheritance is not mismanaged or squandered. The trustee of the trust for the adult child can be an institution, such as a bank or trust company, or an individual, such as a relative or family friend, and can work with the adult child or at their own discretion to make sure that trust assets are properly managed for the benefit of the adult child.
Second, if an adult child is receiving, or is likely to receive, government benefits, a trust is absolutely necessary to ensure that the child does not lose his or her eligibility for these benefits. A supplemental needs trust is one kind of trust that parents can utilize. It provides that trust assets can be used for the benefit of the adult child, but in a way that will not disrupt his or her eligibility for government benefits.
Equality v. Fairness
For parents with young children, equal and fair are usually the same thing – to treat children fairly, assets are divided among them equally. However, by the time children have reached adulthood, fair and equal are not necessarily the same thing.
For example, siblings from the same family may find themselves, as adults, in vastly different financial positions. One child may be in a very comfortable financial position, while the other struggles to make ends meet. For these siblings, is an equal inheritance a fair inheritance? Or siblings may find themselves similarly situated in terms of finances, but one sibling has had the benefit of financial support from their parents throughout adulthood while the other has “made it” on his or her own. Is an equal inheritance a fair inheritance in this situation? While there is no “right” answer to the question of equality v. fairness, it is something that parents should consider when preparing their estate plan.
The distribution of real property among adult children often implicates the tension between equality and fairness. While the inheritance of an interest in real property may be desirable for some, it may be burdensome for others. For example, assume that parents left a Martha’s Vineyard vacation home, in equal shares, to their two children – a daughter who lives in New York and a son who lives in California. While the property would be very valuable to the daughter, who could easily drive up on the weekends, it may be impracticable for the son to use the vacation home with any regularity, given that he lives so far away. The son may want the daughter to buy out his interest, but if she does not have the liquidity to do so, the son would be stuck with his inheritance tied up in the vacation home – unless he brought a partition proceeding and forced the sale of the property. With proper planning, parents can avoid these types of problems that can arise after their deaths.
The bottom line is, estate planning is important for parents, and it is doubly important that they consult with a qualified estate planning attorney who can guide them through all the issues that can crop up, whether one’s children are young or adults.