By Nicole Plottel
Estate Planning can be confusing and intimidating, but it does not have to be. Here are five things all young families should know:
1. Estate planning is not only for the wealthy or the elderly.
Estate plans are necessary for everyone. You are not alone in thinking “I will make a Will once my kids are grown and I have an estate worth passing on to them.” Many new parents think they are too young, too healthy or cannot afford to establish an estate plan. Whether you own your home or not, and whether you have $5.00 or $500,000.00, your most valuable assets are your children and for them, it is worth planning. A good estate plan for a young family should address who will manage your personal and financial affairs if you are unable (called an “Agent”), who will administer the estate when you die (“Trustee” or “Executor”), who will care for minor children (“Guardian”), and who will manage the children’s inheritance and in what specific manner.
2. Designate who will take care of your children…or the court will appoint someone for you.
If both parents are deceased, the Court must appoint a Guardian for their minor children. Guardianship is further divided into Guardianship of the Person (who will physically take care of the child) and Guardianship of the Estate (who will manage the child’s money). Anyone can actually petition the Probate Court to become a Guardian, but only the Court can appoint the Guardian after evaluating the best interests of the child. The Judge gives much deference to the person(s) nominated by the parents in their Will(s). To avoid a potentially devastating family feud, the best thing parents can do is nominate a series of Guardians, both for the Person and the Estate, in a properly executed Will.
3. Leave clear instructions for your loved ones: Trusts vs. Wills.
Wealth is only one factor in deciding between a Trust and a Will. Understand that Wills, by themselves, do not avoid a Probate procedure at death. A “Probate” is a Court supervised proceeding used to wind up a deceased person’s legal and financial affairs at death. If there is a valid Will, the Court ensures the terms of the Will are fulfilled and the assets are distributed to the named beneficiaries. If there is no Will, the Probate Code provides a hierarchy of heirs who should inherit that person’s estate. The person administering the Estate (“Executor”) and the Executor’s Attorney are both entitled to be paid a percentage of the estate. To give you an example, the combined Executor’s and Attorney’s fees to administer a $300,000.00 estate would be $18,000.00 plus another $1,800.00 or so in additional costs.
Establishing a trust may not only avoid this expensive and public proceeding, but can provide clear instructions for the ongoing management of your children and their estate. Most parents are uncomfortable with the idea of an 18 year old managing any amount of money, let alone a large inheritance. Leaving assets to your children via a Will, or designating minor children as beneficiaries of a life insurance policy, will require a Guardianship of the Estate. This means the Court will supervise how the Guardian uses those funds until the child reaches the age of 18, at which point the Guardianship terminates and the child receives the money outright. Establishing a Living Trust with ongoing support provisions allows parents to maintain some control and encouragement over their children, even after age 18. For example, a typical testamentary Child’s Trust may distribute money outright only upon certain milestones (such as graduation from college) or upon certain ages (age 25, 30, and 35). The Trust remains private and is typically managed by a trusted loved one (called a “Trustee”), who follows your instructions in caring for the children until they become mature enough to manage it on their own. You do not need to be a millionaire to leave assets in trust for your children. Trusts can be incredibly useful tools in passing more than just money to your children: they can pass on your values and beliefs long after you are gone.
4. The Modern Family: Special circumstances require specialized planning.
Trusts can also be customized to address special circumstances, such as a blended family or children with special needs. For example, in the case of a second marriage with children from prior relationships, it is critical to have clear instructions as to what happens at the first spouse’s death and what happens at the second spouse’s death. Failure to address these issues can result in a messy battle dictated by the Court, with outcomes that may be inconsistent with your wishes. Likewise, leaving assets to children with special needs may have harmful effects on the public benefits on which they depend, such as Medi-Cal or Supplemental Security Income (SSI). With the use of a Special Needs Trust and a carefully drafted estate plan, parents can still leave assets to that child without disrupting his/her Medi-Cal or SSI.
5. Every adult needs Powers of Attorney, regardless of wealth, age, or marital status.
As parents, we are so focused on our children that we tend to neglect ourselves in more ways than one. People often think an estate plan is solely intended to distribute assets at death, perhaps avoid a probate or even minimize estate tax exposure – all relevant issues involving your wealth and your death. Equally important, and often overlooked, a good estate plan authorizes someone to properly manage your affairs while you are living, regardless of your age or the size of your estate. Executing appropriate durable powers of attorney, both for healthcare and financial decisions, regardless of whether you are married, single, wealthy, or not, is the most important component of a comprehensive estate plan. Do not presume that your spouse has the inherent authority to make life sustaining decisions for you if you become unable – he/she does not! If you lose capacity to make these decisions, a court may appoint someone to make them for you (called a “Conservator”). Likewise, you no longer have the authority to make these decisions for your 18 year old child if he becomes incompetent. While it may feel premature, any children 18 years or older should obtain an Advanced Health Care Directive.
As parents, we are inherently concerned about the future of our children: we feed them nutritious food, we save for their education, and we hold their hands to cross the street. A proper Estate Plan is one more way of protecting our family and insuring our children are cared for.
For more information on estate planning please visit www.harrisplottel.com.