Estate Planning For Families With Minor Children

Estate Planning For Families With Minor Children2018-08-31T13:52:25+00:00

ESTATE PLANNING FOR FAMILIES WITH MINOR CHILDREN

If you fail to leave instructions for how your children are to be taken care of in the event of your death, some stranger in a probate court will make those decisions for you. No one knows or loves your children more than you. No one knows better than you their individual needs and how to best protect them. Why would you leave such important decisions to strangers?

When planning for minors, typically our clients ask us four major questions:

• How can I best make gifts to minor children during my lifetime?
• Who should be named my child’s guardian if I suffer an untimely death?
• How should I leave property to my children if they are still minors when I die?
• How can I plan for a child who is disabled or has other supplemental needs?

Planning in this area involves far more than mere economics. It involves creating an environment that will allow underage children to experience both loving care and economic security as they grow into adulthood. This planning should begin while we are still alive. One estate planning opportunity we have is our ability to make lifetime gifts to our children.

When planning their estates, many parents and grandparents want to learn the best way they can make lifetime gifts to children or grandchildren. These gifts are usually intended to build a college fund for the child while also reducing the donor’s taxable estate. Although these parents and grandparents are to be commended for their proactive approach to protecting their loved ones, there are several pitfalls for the unwary in such lifetime planning.

Financial professionals often advise parents to establish custodial accounts for minors under the Uniform Transfer to Minors Act (UTMA). These accounts are easy to recommend because they are easy to establish and require few formal documents. The problem with this recommendation is that the child will be given all of the account assets when he or she turns twenty-one.

There is nothing magical about reaching one’s twenty-first birthday. Not all children are financially mature at that age and many need further guidance. If there are substantial sums in the account, the biggest question many children often face is, “What color should the Porsche be?” Some of the best parents in the world have raised children who cannot handle money. This lack of control is a major drawback that makes an UTMA definitely not the right vehicle for the parent or grandparent who desires to guide the child’s use of the assets.

If you want to retain control over how and when distributions are made from a child’s account, a Minor’s Demand Trust is an excellent option that should be explored. With a Minor’s Demand Trust, the parent or grandparent retains control over how the trust assets can be used while still escaping gift taxes that would otherwise be due. To accomplish this two requirements must be met. First, annual gifts are made that are kept under the annual gift tax exemption. Second, each time a gift is made the minor is given the legal right to demand the gift during a specified period of time (a window of opportunity). This withdrawal right poses no particular problem because, since the child is still a minor when the gift is made, it is of course the parent who decides whether to exercise the child’s withdrawal right. The parent can simply waive the demand right and instead invest the funds for the child’s future needs.

Another benefit of a Minor’s Demand Trust is that distributions are not limited to educational needs. The Trustee can use trust assets for the benefit of the child as desired or deemed appropriate.

Perhaps no issue is more difficult for parents to address than who will take care of the children if the parents are unable to care for the children themselves. This question is so important that we have devoted the entire next chapter to it.

Once you decide how to best make lifetime gifts to provide for a child’s future educational needs and financial security, and determine who will be the child’s guardian, the next step is to protect the inheritance. A “simple will,” suggested by some attorneys, is not an adequate tool for this important task.

Such “simple wills” can subject your children to unnecessary and intrusive court proceedings, excessive costs, lost privacy and extended delays. Moreover, with ongoing court proceedings, every trip to the attorney’s office or courthouse reminds the children of their loss. Instead of accepting such questionable advice, consider consulting an experienced estate planning attorney who can efficiently and creatively set up a Living Trust that incorporates your most cherished values, hopes, wishes, dreams and aspirations for your minor children.

A major planning difficulty we often see stems from the desire of many parents to treat all of their children equally. As a result of this desire, it is not uncommon for parents to divide their estates into equal separate shares for each child. While this simplistic approach sounds equitable, it can lead to drastically unfair results. What is fair is not always what is equal. The truth of this is seen in how most of us raise our children.

When asked, most parents admit that they do not use a ledger to keep track of money spent on each child. For example, if one child displays musical talent most parents would not hesitate to invest in piano lessons and even buy a piano if the family can afford it. Having made such a large investment for one child, they do not immediately give an equal amount to the other less talented children.

The problem with taking an automatic “equal division” approach in planning your estate is that it imposes a rigid one-size-fits-all plan on the children regardless of their age, economic circumstances, or their individual needs, strengths and weaknesses. Of course we all love our children equally but we should never fail to plan for them as individuals.

In our experience, the use of a “Common Trust” for minor children more closely mirrors the flexibility that parents use in raising their children. A Common Trust comes into effect upon the deaths of both parents. The alternatives in design are almost endless, but the cornerstone of every Common Trust is to provide for all your children’s needs from a common source just as if you were still alive. Authors and preeminent estate planning attorneys, Robert A. Esperti and Renno L. Peterson, have aptly nicknamed this kind of trust a “soup-pot trust” and describe it as follows:

“Can you recall your mom’s soup specialty? If it was like our moms’, it had just about everything in the pantry and refrigerator in it. When it was ladled out, the hungrier children at the table got more than those who weren’t as hungry. Some got more meat, because it was their favorite; some got more vegetables or rice or noodles. If a particular brother or sister had a penchant for a particular ingredient, that ingredient was always found in abundance in his or her bowl. Mom controlled and monitored the whole process to make sure that everyone was nourished and as happy as possible, and she ultimately decided who got what.” (Esperti and Peterson, Loving Trust, Viking Penguin, 1994).

In an estate plan that incorporates a Common Trust, the Trustee serves as the “mom” in the soup story told above. The Trustee decides who gets what based upon the individual present and anticipated needs and desires of the children and the available trust assets. Since the Trustee’s job is to follow the Trust’s instructions, it is a good idea that those who desire to incorporate a Common Trust into their estate plan give their Trustee guidance as to the specific needs of each child.

While it is a good idea to place assets in a common trust while the children are young, at some point the trust will have fulfilled its purpose and it becomes time to distribute whatever remains to the now older, and hopefully mature, children. The question then becomes, “What is the right time to end the Common Trust?” While this is an individual decision based on the family situation, most common trusts contain instructions that state that the Trustee should keep funds in the Common Trust until the youngest child reaches a certain age or finishes college. If the Common Trust were ended and the assets distributed when the oldest child reaches a certain age or finishes college, the youngest child could be deprived of the opportunity to receive Trust assets for education or other needs. It is much more equitable to keep the Common Trust intact until the youngest child receives the same level of care that was given to older siblings.

To alleviate the danger that the older children may feel that they are being punished by having their inheritance delayed until a much younger sibling grows up, trust instructions can be included that allow the trustee to advance money or property to an older child for extraordinary needs or opportunities. This “advancement” is then taken out of that child’s share when the Common Trust is terminated and the assets distributed among the children.

Another good idea to use in planning for your children is to build incentives into the Trust to motivate the child to live responsibly and develop good work habits. For example, incentives can be drafted that reward the children for maintaining a good grade point average, graduating from college, that assist with a down payment on a home, or match earned income among many other possible incentives. The possibilities for designing incentives that are individually tailored for the needs of your children are limitless.

When the time comes for the Common Trust to be divided, there are two main options. One can decide that all of the trust assets should be immediately divided and distributed outright to the children to do with as they please. This option is appropriate if the children are all older, leading successful lives, and the parent does not feel the need to protect the inheritance for a variety of reasons. Alternately, instead of just surrendering total control of the inheritance to the children, the parent can decide to keep each child’s inheritance in a protective trust established specifically for that child. These protective trusts contain instructions for the management and distribution of trust assets tailored to the individual needs of a specific child. Again, the possibilities and alternatives for designing these trusts are endless.

Property can be kept in trust for a beneficiary’s entire lifetime. In this situation a trustee is appointed to decide when and how much of the trust assets to distribute. This type of planning makes sense not only if a child has spendthrift tendencies or a drug or alcohol problem, but the trust can also provide protection for your child from a failed marriage or claims of creditors.

If you have a child who will never be able to handle money, keeping that child’s inheritance in the trust with instructions to the Trustee to provide for his or her health, education, maintenance, and support would be a wise and loving choice.

Alternately, a parent can decide to space trust distributions over several years. This prevents children from misspending the entire inheritance all at once by giving them time to mature. The last thing a parent wants is to destroy a child with an inheritance.

If your child has reached maturity and is fiscally responsible, the trust instructions can be quite flexible and allow
withdrawal of trust funds whenever he or she wants. Although the child has access to the funds, if properly drafted, the Trust will protect the inheritance from creditor claims, lawsuits, and divorcing spouses. In our litigious and divorce-prone society, such protections are becoming increasingly necessary.

Unfortunately, in some families a child may never be able to provide for himself or herself due to a physical or mental disability or some other special need. In these cases special planning is needed for the special child.

The most effective way to make sure a special needs child is properly provided for upon your death is to create a Special Needs Trust for them. A Special Needs Trust is administered by a trustee whose duty is to provide for the financial and medical needs of the special child in accordance with the written instructions in the trust. A Special Needs Trust will protect the assets you leave for the use of the child from the unscrupulous. A minor may also need a guardian who will oversee the child’s emotional, religious, and social needs.

A Special Needs Trust can be drafted to meet the needs of the individual child. The instructions in the Special Needs Trust should also be designed so that the child does not become ineligible to receive federal or state benefits to which the child may be entitled. This can be accomplished if the trustee’s power is discretionary and the trustee can withhold or distribute funds depending on the child’s condition and the availability of state or federal funds, within the restrictions imposed by state and federal law.

The Special Needs Trust may contain instructions that surplus income may be accumulated if necessary to avoid
disqualification for government benefits. The trust should also contain provisions that prohibit the child from transferring income or principal of the trust to any person.

A Special Needs Trust can also be created to provide for the needs of an adult who is unable to care for himself or herself. All of the previously addressed issues relating to a Special Needs Trust for a child also apply to a Special Needs Trust created for an adult.

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