There are around four million births every year in the US. That’s a lot of babies to clothe, feed and diaper change. Becoming a parent is one of the greatest joys in life but it also brings with it a lot of responsibilities.When your child is born you might not think immediately about estate planning, but if you’re smart, you will know that you need to consider this question now! Getting this planning done right away is some of the best advice for new parents that we can give.
Every parent wants to make sure their children are provided for in the event something happens to them while the children are still minors. Grandparents, aunts, uncles and other relatives often want to leave some of their assets to young children, too. But good intentions and poor planning often have unintended results. The following points will help guide you through some important steps to ensure careful planning for your estate and children.
Appointing a Guardian
For most young parents, writing a Will is less about leaving their assets than it is about naming guardians for the kids. The guardian you name in your Will is the person who would take over if both you and the other parent were unavailable to raise your children. It may be unlikely, but worth addressing just in case.
If your children ever needed a guardian, the local court would appoint the person you nominated in your Will. Hopefully some people will put themselves forward as candidates, and a judge would then make an appointment based on the information at hand. Most likely, they consider things like financial means, location, relationship to the child. Of course, a judge won’t know any of these people, and so will not be able to take into account things like parenting style, spiritual beliefs and how they interact with the children.
This is where your Will comes in. If you have made an appointment in your Will, the judge will use this as guidance. As long as the appointment is still willing and able, and nothing dramatic has happened to this person in the meantime, then the judge will almost always grant the guardianship to the person named in the Will.
You can name different guardians for different children if you wish.
Many parents think if they name a guardian for their minor children in their Wills and something happens to them, the named person will automatically be able to use the inheritance to take care of the children. But that’s not what happens.
You cannot leave a bequest to one person for the benefit of another. You either leave the inheritance to the child, or to the guardian. You cannot say “I leave $100k to my sister Jane, to take care of my son John”. Jane would be free to spend the money however she wished.
But if the inheritance is for the child, then it would be kept “in Trust” for them until the age that you have specified in your Will. An age that you consider to be suitable for receiving their inheritance.
Setting Up a Trust
When you set up a children’s trust in your Will you name someone to manage the inheritance. This may or may not be the guardian. In many cases it makes sense to have one person managing the trust, and another person acting as guardian. The two people can then work together to balance the needs of the child growing up, with the duty to preserve the balance of the trust, so that there is something left when the child becomes an adult.
If the guardian is also managing the trust, then there are some grey areas; like house renovations, and family vacations which could be for the benefit of the child, but also nice for the guardian.
A Will usually gives the trustee the powers to release portions of the trust for the benefit of the child while they are growing up. It also usually gives the trustee the power to hand the trust over to the guardian if that is considered to be a suitable approach.
It is important to note, that if you don’t write a Will, some of your property might not go to your spouse, but directly to your children (depending on state law). When given a choice, most people prefer that the money go to their spouse, who will use it for the kids.
Naming guardians for your children and setting up a trust can be done by contacting an estate planning attorney or using an interactive online Will service.
Planning as an Unmarried Couple
To make a detailed estate plan you will need to understand the rights of unmarried couples and married couples especially when minor children are involved so that you will know what applies to your family situation. States vary on this matter, but if you die without a Will, and you are not formally married, the chances are that the surviving partner will receive nothing, and the entire estate would pass to the minor children in trust.
Passing Away Without a Will
In the majority of cases, the surviving parent will become the default guardian for any minors, but if you both die, there could be trouble if you don’t have a Will or nominate an alternate guardian. Along these lines, the laws in most states treat married and unmarried couples differently if you die without a Will.
When you die without a Will, you are subject to the intestacy laws of your home state. In most states, your estate is divided between your spouse and minor children. It is a distribution scenario that is rarely described in a Will when somebody actually makes a plan.
If you are not officially married, a surviving partner is merely considered a `friend’ and is not entitled to anything.
Passing Away With a Will
If you have a Will, you can specify who inherits your assets and avoid uncertainty. Additionally, it is easy to address some items that aren’t controlled by intestacy laws or a Will, such as retirement accounts, life insurance and any IRA or 401(k) account you’ve opened. All you need to do is fill out the beneficiary form provided by your employer or the account custodian. If you want to change it later, you can just fill out and submit a new form. By naming a beneficiary, you make it possible for the funds in the account to go directly to the person (or persons) you name, without probate.
These items are controlled by beneficiary designations, which can generally be changed at any time to any person. Similarly, you can add a Transfer on Death feature to certain financial accounts which will provide for a beneficiary without the need to state it in the Will.
It is also a good idea to buy a life insurance policy that would replace your earnings for a few years if you or the other parent died unexpectedly. The survivor would quickly have access to cash to help support the family. Term life insurance, which stays in effect for a set number of years, is often a good choice for young parents. If you’re reasonably young and healthy, term insurance is cheap.
Having a Will won’t solve all of your tax issues as you will need to consider federal and state estate taxes, also known as “death taxes.”
Planning for a tax-efficient transfer of assets at death for an unmarried couple, especially a high net worth unmarried couple, is much more difficult than planning for a married couple. If you are married, no estate tax will be due no matter how much is left to a surviving spouse due to the unlimited marital deduction. However, this deduction does not apply to the survivor of an unmarried couple.
Some states have both an estate tax and an inheritance tax. Therefore, if you’re not married, you have to pay whichever tax results in a greater amount. In the US, there are different tiers to the inheritance tax depending on your relation to the deceased. A surviving spouse is exempt, but a survivor of an unmarried couple is in the tier with the highest inheritance tax rate. And if you’re not married, there is no spousal or survivor benefit when it comes to Social Security.
Funeral & Final Wishes
You also need to consider who can make decisions about your final wishes. If you’re not married, this can be more difficult.
Unless you specify otherwise in your Will, most state law dictates that a surviving spouse controls everything from the funeral to the disposition of your remains. If there is no spouse, the closest surviving adult family members get to decide these sensitive issues and not the unmarried partner.
It may be a good idea to speak to a financial planner to help coordinate the titling of your assets and beneficiary designations and to make sure you have a proper amount of life insurance for your significant other and children.
As we can see, there are lots of things to consider when writing a Will and planning for the well being of your children. Understanding your legal rights under marriage is key. At the same time, on who will be the guardian for your children and providing for their upbringing also presents its own difficulties. The earlier you start your planning the better; this can include visiting an estate planning attorney or using online Will and estate planning software that can be customized to your living situation (such as being a married or unmarried couple). Writing your Will and building your estate plan will put your mind at rest, leaving an invaluable tool to ensure that your family is taken care of even in the worst of cases.
He has over 19 years of experience helping people to write their Will and other estate planning documents. He has been interviewed by many of the major news media outlets, and has contributed to articles in The New York Times, NY Metro Parents, U.S. News & World Report, and other leading publications. He has also contributed to a number of financial planning books.
Throughout his career, Tim has written extensively on the subject of Will writing and estate planning.