How Does Estate Planning Protect Minors?

Once you have a child, you’ve got a bundle of joy—and a lifelong commitment to caring for the child, sometimes even after they reach adulthood. What would happen if something happened to you and your partner? To be sure your child or children is/are taken care of, you’ll need to take these estate planning steps, as explained in a recent article from Kiplinger, “To Protect Your Kids, Consider These Estate Planning Steps.”

Appointing a guardian. Planning for the absence of parents from a physical and financial perspective needs to be done. Parents need to establish a guardian and have the person named in their Will. It may be a good idea to name a secondary guardian if something happens, and the primary guardian is unwilling or unable to serve in this role.

Create a trust. Parents should consider creating a trust for their children to ensure that there is money to provide for their care if both parents die. A child under the age of 18 is a minor and, as such, may not legally hold title to property. A trust is used to hold assets for the child’s benefit. The language of the trust would have instructions to provide for the children’s health, education, maintenance and support, rather than distributing the inheritance in one lump sum.

There are two basic trusts to consider. A revocable trust is created during a person’s lifetime and can be changed anytime by the trustmaker. A testamentary trust is created as part of a Last Will and Testament. Neither trust needs to be funded until the person passes away, at which time the property of the decedent is placed in a trust if the Will contains the correct instructions. An estate planning attorney will be able to structure this plan.

Assign a Trustee. This person manages the trust assets for the child's benefit. The person named as a Trustee needs to be a financially-responsible person who can manage the funds for the child(ren). The Trustee can be a family member and not the child himself/herself.  Some people believe that the person chosen to be the Trustee should not be the same person chosen as the guardian. Keeping these roles separate ensures that the guardian will not misuse funds. Another option is to hire a professional to serve as the Trustee. Professional Trustees, including banks or financial advisors, usually charge a percentage of assets. In some cases, estate planning attorneys serve as Trustees for minor children.

Establish terms of distribution. It is up to the parents to decide how their children should receive trust assets. They can mandate principal distributions at certain ages, like a certain percentage at age 25, another at 30 and the balance at 35. While the parent dictates the terms of distribution while the children are minors, the Trustee will be the one to decide on distributions for food, health, education, or extracurricular activities.

How do you be sure there will be money for your children? Parents can purchase life insurance, since most young parents don’t have a lot of liquidity. Term policies are the least expensive and can be for 10, 20, or 30 years, during which the policy is guaranteed if the premium is paid. Whole life insurance is another option. However, it is more expensive.  Each parent can name the other parent as the primary beneficiary, but the secondary or contingent beneficiary should not be the child(ren).  Instead, the secondary or contingent beneficiary should be the "Estate of the Insured," which will ensure that the death benefit flows through the last survivor's Will and into the trust(s for the child(ren).

Start a 529 college savings fund. These accounts can be funded through automatic withdrawals from a checking account, or family members can be encouraged to make gifts to these accounts. In some states, there are state income tax benefits for residents. The growth is tax-free if the funds are used for qualifying educational expenses.

When the child becomes a legal adult. Once a child celebrates their 18^th birthday, they are legal adults, and they are no longer the dependents of their parents. New adults should have, at a minimum, a Financial Power of Attorney and a Healthcare Power of Attorney, so someone can continue to make financial and medical decisions for them in case of disability or incapacity.

If a child has special needs. An estate planning attorney will create a standalone Special Needs Trust or a special needs trust under a parent's Will to hold assets and name a Trustee to manage the funds. This trust allows a child with special needs who may be eligible for government benefits to continue to receive benefits in addition to distributions from the trust.

Reference: Kiplinger (Nov. 19, 2023) “To Protect Your Kids, Consider These Estate Planning Steps”