5 Questions Every Parent Should Ask: Estate Planning with Minor Children
A few weeks ago I shared some common reasons people opt for a Trust. However, there is one big reason people opt for trusts that I did not discuss. Minor’s Trusts. Why didn't I discuss these trusts? Because this discussion deserves an entire article dedicated to Minor's Trusts.
If you have children under the age of 18 it is incredibly important that you discuss a trust with your estate planning attorney to be sure your efforts won’t be in vain. Here are 5 questions you should ask your estate planning attorney:
*Please note every time “child” is used in this post, I am referring to a person under the age of 18, legally termed a “minor”. The proper term in a legal setting referring to your children under the age of 18 is “minor child” or “minor children”.
1.) What happens if I list my Trusted family member or friend as beneficiary of my life insurance?
Your child does not receive the money and it is now available to the said person’s creditors and heirs. Surprisingly, when people hear my answer they are not as worried about the fact that their child doesn't receive the money because they “trust” their relative or whoever they name, will use it for the purposes of taking care of their child. Here’s the problem with that:
Most people NEVER communicate to this person that the money is to be used to take care of their children. They assume this relative knows. Do you know what assuming does? Well, let me just say this, assuming in this type of situation typically does not go well. But here are two situations that could happen to even the most trustworthy people:
1) Let’s say you did communicate it to this relative, everyone understands what the money is for, and the person you have listed is incredibly trustworthy (Honestly, a lot of the time this is the case, because the person you chose to take care of your children is actually trustworthy. I mean, its why you chose them in the first place). Here is the problem, because you listed this relative/person on the life insurance policy, it goes to them individually. What does that mean?
That means, if for some reason they get sued —- the money you intended to be spent for your children, now is subject to a lawsuit. You may think, “Come on now, people are not sued that often, you are jus a lawyer and see it everyday so you think its more prevalent”. Well, I will just leave it as this, Forbes has several articles dedicated to the discussion of the risk of being sued and what factors increase your likelihood of becoming a party to a lawsuit.
2) What if this person dies? Because the money you intended to be spend on your children, went to the guardian/relative/friend individually, it now goes to the that person’s heirs. Your children get cut out. They get nothing.
These two situations have nothing to do with the trustworthiness of the person who is responsible for your children. It simply has to do with the way the law is written. Fortunately, this can all be avoided by creating a Minor’s Trust.
2.) What happens if I list my child as a beneficiary of my life insurance?
A lot more things than you probably want to happen. The good news is the money will eventually go to your children. That is after court fees, attorney fees, and constant court oversight. Why is that? Money cannot go directly to a child. It has to go to someone who can manage it for them. If the money isn't in a trust for a trustee to manage for them, then we have to set up a Guardianship of the Estate of your child or we can place it into the court registry to hold until your child reaches age 18. Guardian of the Estate is kind of like a Trust that is overseen by the court. The Guardian has to ask permission from the court for various expenditures that is over the monthly “allowance” set by the court. This means hiring a lawyer to file the appropriate paperwork and waiting for the court to process and approve or disapprove requests for summer camps, vacations and or other expenses. These fees add up quickly, and the money you intended to be used to pay for summer camp ends up going to pay for an attorney to file paperwork, and represent your child in court to ask permission from the court.
Whenever you have a Trust set up, there is very little court involvement. In fact, the only time the court gets involved is when your Trust Protector or Beneficiary files a lawsuit against the Trustee. That is a lot less than guardianship, and ultimately a lot less in legal fees. Additionally, your Trustee gets access to spend funds for your children much quicker than a guardian would. So your child wants to go to summer camp? You have a trust that allows the trustee to pay for summer camp? Then your trustee pays for summer camp. End of story. No extra hoops to jump through, no extra permission from the court. The money you set aside for your child gets directly spent on your child.
3.) Does my child get my property anyway if both my spouse and I die?
Maybe. There are so many factors that go into this question. And this is the last thing you want to leave to chance. Sometimes your property goes to your kids (after the guardianship process that I briefly discussed in question 2 occurs), but thats after legal fees, and sometimes it doesn’t. This is why 1) its important to talk to your estate planning attorney, and 2) to be honest with your estate planning attorney. If you had a child that was adopted by another family, you need to tell your attorney, if you were married and are not sure the divorce ever went through, you need to tell your attorney. If you had children that a former spouse/boyfriend/girlfriend/one-night-stand, is now taking care of and you have no relationship —- you need to tell your attorney. When you enter my conference room, it is a no judgement zone, and most importantly it is a confidential zone. If you’ve lived a few decades, there is a chance that you may have done a couple things you may do differently now. That is okay. You also may not want to change a thing. When you come into our office, there are no assumptions. You are free to feel how you feel. We discuss some tough stuff sometimes, and there is no prescribed way to feel. Let us walk through the process with you, illuminate the path, make things clear, and not stuck with my answer of “maybe”.
4.) What should I consider when selecting a Trustee?
Trustworthiness. As it is implied in it’s name, you should always involve people you trust. Since there is little court oversight, you should always select people you trust. Even though, a trustee opens themselves to a lot of responsibility, and in turn liability when they assume the duties as Trustee, you still want someone you trust. Sometimes the best person to serve is the Guardian of your children, and sometimes its not. Here are some questions I ask clients as we consider who to nominate as Trustee.
- Is the person your thinking about selecting good with money?
- Are they detailed oriented?
- Are they organized?
- Are they responsive when you try to get in touch with them?
- Are they wise enough to know when they are in over their head and need to consult with other advisors?
Asking someone to serve as a Trustee is asking a lot of a person. Sometimes we have people in our families that embody every quality you would want in a trustee. Sometimes we don't have those type of people in our circle, and that is okay. Sometimes it makes sense to talk about a corporate Trustee.
5.) Is a minor trust the only document I need to protect my children?
No. You should also have a document naming the guardian of your children. The Trust only takes care of your child’s financial affairs. A guardian is how we name someone to make decisions in regard to the “person” or your child’s physical well being.