Estate planning has many key objectives, but in my opinion, the most important of them all is the protection of vulnerable beneficiaries – especially minor children.
I have met with and personally know many of young parents who are homeowners who have some savings, retirement and a term life insurance policy, and yet have not done any estate planning. It cannot be stated strongly enough that is more important for those parents to plan their estate at this time in life than at any time after their children reach adulthood.
The Consequence of No Estate Plan
In the scenario described above (homeowners with savings, retirement accounts and life insurance), if there is no estate planning – the house, investment accounts and cash will, by law, go through probate. This results in substantial cost and more importantly, significant delays in getting assets available for the minor child.
Additionally, since the child is not yet an adult and needs someone to manage the assets that are left, a guardian of the estate must be appointed. The role of the guardian is to collect, invest and distribute the money for the child’s benefit. All of this is accomplished in probate court, which in California is notoriously congested and difficult to get through.
A typical probate lasts 12-18 months. An estate with a gross value of $500,000 could cost $30,000 in court costs and attorney and executor fees. Guardianship isn’t always cheaper in the long run because after the long appointment process is over, the guardian will have to submit accountings and report to the court at least biannually, which are prepared and submitted by attorneys. Once the child turns the ripe old age of 18 he or she is entitled to receive everything outright, with no further supervision.
I can tell you that if I received a few hundred thousand dollars at age 18 it probably would not have gone well. Certainly not responsibly.
The Benefits of Proper Planning
So the question is, how can proper estate planning create a better scenario for the protection of your child? We start with the trust agreement, which appoints the trustees, names your child as a remainder beneficiary, and describes how the trustee should manage and distribute the trust assets in the event of your death. The trust agreement usually appoints a loved one (or a professional) to take over the management of the assets as trustee. The plan provides detailed instructions for how the trustee may invest and distribute the assets for the child’s benefit until an age that the parents believe the child may be better able to responsibly manage the money (e.g. ½ at 25 and the balance at 30).
Until the child reaches the age of final distribution, the Trustee has full discretion over distribution, and can pay for anything that you allow – for example, college, health insurance and other health care needs, monthly stipends, cars, vacations, and down-payments. It’s all depends on the language that we put into the trust agreement.
Peace of Mind
The effect is that in the event of the tragic death of parents leaving a young child (or children), all of the assets that those parents saved and acquired intending to provide for their family remain held privately in trust and are immediately available for the care of the child, without excessive costs or delays. It’s less expensive, easier, and a more responsible way to leave money for your children.
The most important time to create the trust is when those children are young. It does cost a bit to set up, but is worth every bit in peace of mind.
The Gift of Planning
If you have grown children but don’t think that they can afford an estate plan for their own families, an estate plan also makes a fantastic gift idea! As always, remember to call or set up an appointment if you have any questions about this or any other estate planning issues.