Estate attorney Michael F. Brennan talks about changes new parents should consider making to their Estate Plan in this Guest Post
Calling life hectic after the birth of a child is one of the sure understatements any parent can make. Aside from learning how to “do life” with another new face in the family, there are a myriad of other concerns that have all of a sudden entered into the stream of consciousness. How am I going to pay for college? Who will take care of my baby if something happens to my spouse and me? How do I know that my child will be in good hands?
Estate planning- that is, the process of ensuring that in the event of death or incapacity affairs are managed in a desirable way- is something that many people put off (some estimates have less than 40% of the population having even a simple will). But, with the addition of a new generation to the mix, many parents feel the sudden motivation and desire to plan in order to ensure their child will be taken care of if catastrophe strikes.
So what should new parents consider when tackling their estate planning? Here’s a list of the top 5 areas to take a close look at:
1) Consider guardians and trustees
In the event you are unable to care for your children, it’s important to add a clause to your will which specifies who should have responsibility for raising them. For example, suppose a young couple has a three-year-old toddler, but neither parent has a will nominating a guardian for the child. Tragically, both parents are killed in a car accident leaving their families to decide what is best for the child. Imagine all of the various grandparents, aunts and uncles that may feel like they would be best suited for caring for the child as well. The room for disagreement is obvious. Without any set of written instructions chances are that more than one family member would assume they are in the best position to raise the child which could lead to a mess in the courts and strained family relationships.
By naming a guardian for your children in your will you can avoid this undesirable, but far too common result. A will can designate a person who will care for your children in a manner that you would approve of, can avoid family conflicts over the care of the children, and can even specifically exclude someone from caring for the children.
When thinking about a guardian, it’s important to consider a number of things like;
- The physical location of the guardian- Remain mindful that a physical relocation of the child could cause unnecessary stress on him.
- Lifestyle- While an aunt or uncle may seem like an otherwise great fit to raise the child, consider his or her lifestyle, including work schedule and social habits.
- Religious, political and moral beliefs- Ultimately this person is stepping into the parent’s shoes so he or she should share the same values.
- Financial situation- In the event that you have not been fortunate enough to leave substantial financial assets for which to raise the child with, consider whether the potential guardian would be able to afford to raise the child in the lifestyle to which he is accustomed.
- Desire to serve- ASK, ASK, ASK. While an individual may seem like a perfect fit otherwise, he or she may simply not be ready or willing to be a parent. It’s important to make sure that the person would be ok with the potential relationship.
Similar to the appointment of a guardian for any minor children, it’s important to consider naming a trustee that will be responsible for any of your assets that pass to the minor children since the children cannot legally manage the assets for themselves. A trustee will be responsible for managing the funds on the children’s behalf until they are old enough to manage them.
2) Review any dispositive scheme- who should receive your assets?
Often times parents want their assets to pass to each other and then to their children. It’s important to review any previously executed wills, retirement accounts, insurance policies, real estate titles and TOD account designations to ensure that those wishes are reflected. Often times people plan prior to getting married or prior to having children, and their estate plans reflect that position in life. In order to consider the tiny new addition to the family, it may be necessary to change a will to remove your siblings as beneficiaries or change an insurance policy beneficiary designation to flow to a child rather than a spouse or other relative. Consider what happened to actor Heath Ledger. When he died, he had a will, but it was written three years prior to his death, prior to his relationship with Michelle Williams and prior to the birth of his daughter, Matilda Rose. As such, his will still left everything to his parents and sister instead of to Michelle and his newborn daughter. Don’t get caught in that trap.
Additionally, intestacy laws- that is, the laws that govern the disposition of property in the absence of a will- can sometimes lead to strange outcomes regardless of who may be closest to you during life. For example, famed rock guitarist Jimmy Hendrix died without a will at the age of 27. Under state law, his dad, Al, got everything, leaving his close brother Leon with nothing. When Al died years later, he cut Leon out of his will entirely in favor of his adopted daughter through a later marriage- a daughter that Jimmy never even knew.
Just like any other life-altering event, the birth of a child is a great time to review an estate plan with an attorney to ensure it still reflects your wishes.
3) Think about education
The cost of higher education in the US is at an all-time high. Add in possible costs for private pre-collegiate education, professional or doctoral education expenses and things can quickly get out of control for even the most financially stable parents. Further, transferring large sums almost always will trigger tax liability if done willy-nilly. By planning early, there are ways for parents to grow an education fund for their children. Setting up 529 plans or other investment accounts can offer certain tax benefits. Another option is creating educational trusts for children. This can ensure that parents retain the maximum flexibility with fund management without the necessity of locking into a specific investment scheme or company.
Individuals are permitted to make annual tax-free gifts of $14,000 (adjusted annually for inflation) to an unlimited number of people which enables parents who think ahead to transfer substantial wealth to their children free of any taxes. For example, a married couple could transfer $28,000 per year to separate trusts created for each of their children limiting the spending of trust assets to educational expenses. If the parents remain trustees of the trust, they will be able to manage the growing trust funds for their children, grow the investments and pay for the education of their children.
Discussing the possibilities available to you with your attorney and financial advisor can ensure that you’re able to provide for your children’s’ educational needs while maintaining management and control over assets and reducing tax liability.
4) Retitle assets to avoid any unnecessary transfer delay
In the event you or your spouse passes away your assets will be transferred either to those individuals that you name in your will or according to the intestacy laws of the state in which you live. This is done through what’s known as probate. Probate is the legal process by which certain assets, like personal possessions, most bank accounts, some real estate, and various other assets are legally transferred in the event that their owner passes away. The problem with probate is that it can be an expensive and slow moving process which may delay the ability of a spouse or children to access assets that may be needed immediately.
A common option to avoid the delay and costs of probate is to transfer assets to a living trust. A living trust is basically a separate entity for legal purposes that holds title to your assets while you are alive. You continue to manage them as you would if you owned them outright, however, upon your death, the assets pass according to the terms of the trust agreement instead of a will. This is beneficial because trusts are not subject to probate like wills are. Instead, the assets transfer immediately according to the terms of the trust agreement.
A couple with young children can establish a living trust which directs that, in the event one of them passes away, all assets will transfer outright to the surviving spouse. That means that they can be used immediately to pay liabilities, or otherwise be managed in a way that maximized benefit to the surviving spouse and children. The trust can then name a successor trustee and the minor children as the contingent beneficiaries so that, in the event both parents unexpectedly pass away, the successor trustee can manage the assets for the minor children.
5) Gifts and Taxes
Thanks to a last minute legislative action by congress at the beginning of this year, taxes are less of a concern to most couples in the estate planning arena than they could have been. Married couples have had the ability to pass unlimited amounts to each other free of gift tax, but starting with 2013, married couples can shelter upwards of $5.25 million each ($10.5 million total) from estate tax on transfers to other individuals, including their children.
For couples with assets worth more than $10.5 million, congress also made permanent a mechanism known as portability. Portability is the ability of a surviving spouse to claim any unused exemption amount of a deceased spouse. For example, say that a husband dies leaving $3 million to his children outright. That $3 million is not subject to estate tax because it is below the $5.25 million limit. The surviving wife could act to claim the remaining $2.25 million exemption that the husband did not use. Upon her death, she could then effectively give away $7.5 million free of any estate tax (her $5.25 million exemption plus her husband’s unused $2.25 million exemption).
Obviously, by raising the amount that individuals are entitled to pass free from estate tax, congress has removed it as a concern for a large segment of the population. However, for couples with assets totaling more than $10.5 million it’s important to discuss possible ways to reduce the value of the estate through trusts and gifting prior to death in order to minimize tax liability. Also, for couples with a net worth of a few million dollars, it’s important to remain mindful of portability so that it can be preserved in the event of one spouse passing so as to maximize the amount that can eventually be passed to children.
Whether you just became a new parent or had your fifth child, the birth of a child is a good time to review your estate plan to ensure that it reflects your wishes and new family situation. A little bit of planning now can go a long way towards lending some you some comfort in the future knowing that your family will be taken care of.
Michael F. Brennan runs a virtual law office helping clients in Illinois, Wisconsin, and Minnesota with estate planning. He can be reached at firstname.lastname@example.org with questions or comments, or check out his website at www.thevirtualattorney.com
The information contained herein is intended for informational purposes only and is not legal advice, nor is it intended to create an attorney-client relationship. For specific legal advice regarding a specific legal issue please contact me or another attorney for assistance.
A client sitting in my office was visibly upset. Their parent had just died, and my client was responsible for handling their estate. An attorney sent over the most recent copy of the parents will, in which they left their estate equally to their 3 children; my client and their two siblings. When they contacted the insurance company however, they found out that their parents had listed a charity as the beneficiary of their life insurance policy. The client then contacted the custodian of their parents IRA only to find out that only one child had been listed as the beneficiary of the IRA account. The beneficiary designations had been put in place several drafts of their will prior, and hadn’t been updated in over a dozen years. Their question to me was “What can I do?” Unfortunately, the answer was “Nothing.” Read more..
One of the most difficult conversations I have with clients is about their estate plan. It is a topic that forces us to face our mortality, and accept that world will continue to turn after our death. Crafting an estate plan allows you to be sure your wishes are fulfilled, even after you have died. There are some basic estate documents that everyone needs to have in place. There are others that you may need depending on your unique circumstance. You should speak with a qualified financial planner or estate attorney to determine any additional documents you need to have.
Last Will and Testament – The will is a legally binding document that outlines where your assets go after your death. This is where you decide who gets your prized baseball card collection, the corvette, and your home. This is also where you decide who will become your children’s guardian (also called a Nomination of Guardianship provision), and who will be in charge of managing your estate (ie. Executor). You can also attach a non-legally binding letter to the will called a Letter of Last Instruction, which allows you to outline wishes for things such as your funeral, do you want to be buried or cremated, and more.
Powers of Attorney (POA) – There are two primary types of POA; Healthcare and Financial. These documents let you to decide who will make medical and financial decisions for you in the event that you are not capable of making decisions yourself. The same person does not have to be the POA for both; it may be advisable to have a different person serve in each capacity. An important point is that you name a contingent POA should the primary POA be unwilling (or unable) to serve. For example, if you name your spouse as your primary POA and you are both in a car accident, who would you want to make medical and financial decisions for you?
Living Will – This document outlines your desires for medical treatment in the event of scenarios such as being in a permanent vegetative state, terminally ill but still strong, or imminently dying. You might remember Terri Schiavo, a young woman whose family fought a very public court battle on the decision to keep her on life support many years after an accident left her in a vegetative state. If she had a living will, her family would have known her wishes. Unfortunately, after the accident is too late to make your wishes known.
Ethical Will – Estate documents tend to be very cold, harsh writings, full of legal jargon. Although they may outline the what of your wishes, they don’t usually outline the why. The ethical will gives you the chance to tell your story without all of the lawyer talk. This document can be anything you want it to be, and is your opportunity to tell people what you want them to know after your death. This might be a general letter of life lessons you learned or an explanation of why you left your money to charity instead of your kids. One man wrote a letter containing advice learned from 90 years of life experiences to his 4 year old great grandson to be opened on his 20th birthday. It could be an audio or video recording, a book, or pictures. It can be anything that allows you to tell your story.
Although thinking about your death is not a happy topic, it is something that must be thought through. Do not leave your family without guidance on what your wishes are. Court battles, strained family relationships, guilt, and more can be avoided by drafting these basic estate documents.
Do you have these documents in place? If not, is there a reason?