Providing for Your Minor Children after You Die
Deciding on a guardian for your minor children may very well be the most vexing decision you’ll make regarding your estate planning. Not only must you trust the appointed guardian to raise your children as you’d want them raised, but you also need that person to be financially responsible with your children’s inheritance. For example, how can you ensure your funds will be used properly—especially if the person you trust most to raise your kids isn’t necessarily the best with finances?
This question and the options are multifaceted, so let’s discuss one aspect at a time.
The Question of Guardianship
As we’ve discussed, the person who raises your minor children and the person who handles their inheritance don’t have to be the same person. If necessary, you can appoint one guardian to serve each function, naming one as the guardian of the person and another as the guardian of the estate. In this arrangement, you entrust one person with your children’s assets and another with their care, while enabling each to interact with the other. This dual guardianship model gives many parents peace of mind—knowing they don’t necessarily have to risk their children’s inheritance while ensuring that they are raised according to the family's values.
While guardianship of the estate is an option, for many families the best strategy for financially providing for the children is to use a Trust. In that case, a Trustee fulfills the responsibility that would otherwise belong to the guardian of the estate. The Trust assets can be released to the children or the caregiver incrementally according to age, needs, and guidance you’ve included in your Trust. For example, the trustee could distribute money for the child’s medical needs, education, and support needs until age 18 and then manage for the money until the child is a financially mature adult. These options and details can ensure that the assets are there when they’re needed for your family.
Transferring an IRA to the Children
Back in the day, and by that, we mean December 2019, Individual Retirement Accounts
(IRAs) were an excellent vehicle to pass along wealth for minor children’s welfare—
because, they HAD the ability to grow over time and provide a lifetime of financial
benefit to your children. Now a beneficiary has to withdraw the entire balance within 10
years of the death of the owner unless it’s a minor. Then the clock starts once a child
turns 18.
Again though, those days are over. The SECURE Act ended what we commonly called
“the stretch.” We could bore you with the details of what used to be, but the bottom
line is that transferring IRA’s for the benefit of young children is not the protected
vehicle it once was. But just because this option isn’t what it used to be does not mean
you’re out of options.
Planning for the welfare of minor children after your death is neither simple nor pleasant to consider, but it’s absolutely necessary for peace of mind. Determining the right person(s) to be the guardian of your children requires careful thought, but you don’t have to sacrifice your children’s inheritance for their proper care. With the right financial plan, you can manage both facets successfully.
3 Decidedly Dumb Ways to Leave an Inheritance for Your Children
Up to this point, we’ve talked about naming guardians and the potential to set up a Trust. However, estate planning offers many ways to leave your wealth to your children, and it’s just as important to know what not to do. These are a couple of rather common methods we see, but are textbook examples of what not to do or try....
“Oral Wills”
If you feel you have a good relationship with your family and/or don't have many assets, you might be tempted simply to tell your children or loved ones how to handle your estate when you’re gone. However, even if your family members wanted to follow your directions, it may not be entirely up to them. Without a properly written and signed document, any assets you own individually must go through probate, and “oral wills” have no weight in court. It would most likely be up to a judge and the intestate laws written by the legislature, not you or your desired heirs, to decide who gets what. This is one strategy we definitely don’t recommend!
Joint Tenancy
In lieu of setting up a Trust, some people name their children as joint tenants on their accounts or properties. The appeal is that children should be able to assume full ownership when parents pass on, while keeping the account assets or property out of probate. However, this does not mean this option is safe; it doesn't insulate your estate from taxes or creditors, including your children’s creditors, if they run into financial difficulty. Their debt could even reach into your account and drain the balance or result in a forced sale of your property. Please speak with an estate planning professional before simply adding a name to your accounts or property.
Giving Away the Inheritance Early
An alternative and recent trend is to give children their inheritance early–either outright or incrementally over time. But this strategy comes with some things you need to consider first. For example, if you want to avoid hefty gift taxes, you are limited to giving each child $15,000 per year. You can give more, but then gift tax returns are needed (and do you really want to involve the IRS?). Another important factor to consider is if situations change that would have caused you to re-evaluate your allocations, it would be too late. You don’t want to be dependent on them giving the cash back if you need it for your own needs.
Shortcuts and ideas like these may look appealing on the surface, but they can actually do more harm than good.
How to Protect Your Child’s Inheritance from His or Her Untrustworthy Spouse
So, you were diligent and planned for your children when they were young. Now they’re all grown up with families of their own (time to discuss the importance of naming a guardian and getting their estate planned). No need for you to worry about planning anymore, right? Well...
Parents who develop an estate plan often do so to provide for their heirs financially. Many want to make sure hard-earned assets, family heirlooms, or closely held businesses stay within the family. Indeed, a common question is what cost-effective options are available to protect an adult child’s inheritance from a spouse in the event of untrustworthiness or divorce. Thankfully, there are many ways to structure your child’s inheritance to help ensure it will remain in the family for future generations. Let’s look at a few of the options now.
Create a Trust
A Trust involves three parties: (1) the person creating the Trust (you might see this written as the “settlor,” “Trustmaker,” or “grantor.”), (2) the person or entity holding the Trust property for the benefit of the beneficiary, known as the “Trustee”, and (3) the person(s) that benefit from the creation of the Trust, known as the “beneficiaries.” Choosing a Trustee who is independent can be a great way to eliminate any arguments that one beneficiary has more control to receive assets than what is actually provided in the Trust documents than other beneficiaries, a helpful situation when you have an untrustworthy son- or daughter-in-law.
A lifetime Trust is a type of Trust that - as is evident from its name - lasts for the lifetime of the beneficiary and passes to the next generation of beneficiaries upon his or her death. Assets in a lifetime Trust are protected against commingling in the marriage and, therefore, cannot be pursued by a spouse. When assets are held by a Trust, your children - and, by extension, their spouses – cannot freely access these assets. Therefore, even in the event of a divorce, an ex-spouse cannot pursue them.
Use Pre/Postnuptial Agreements
In addition to creating a Trust to protect your children’s inheritance from an untrustworthy spouse, your children can use a prenuptial or a postnuptial agreement as a tool for asset protection. A prenuptial agreement (created and signed prior to marriage) and a postnuptial agreement (created and signed after the marriage- sometimes years after) are documents that detail an agreement between your child and his or her spouse about the characterization of assets owned at the time of marriage and those earned after marriage. This legal document also provides the couple to agree upon the division of assets in the event there is a divorce or their death. It may be an uncomfortable suggestion to bring up with your children, but it can be an incredible benefit in the event of a later divorce.
Other Planning Ideas
Beyond the actual legal tools, it is important for you to let your wishes be known to the family. One way to do this is to have a family discussion about your estate plan, explaining your intentions and reasons as to why it is set up in this manner. Additionally, using clear language in your estate planning documents that specify the intent or purpose in leaving the inheritance to benefit descendants - and not their spouses - can further solidify your wishes are followed. Finally, choosing a Trustee that is independent will keep control over the funds in the Trustee’s hands and not your child’s untrustworthy spouse. This will also allow you to manage or overcome any conflict that you may not have been expecting.
Bottom Line: Seek Out Estate Planning Help
“An ounce of prevention is worth a pound of cure.” - Benjamin Franklin
If your goal is to protect your children and leave a legacy for your family, the time to plan is now and to keep planning in the future. We describe an estate plan as “living documents” because as your life changes, so should your documents.
Whether you have no estate plan, or have one that more than a few years old, Worley Elder Law is here to help you create or update your estate plan to ensure your unique wishes and goals are followed. Call 941-448-1302 or email us at Info@WorleyElderLaw.com today to schedule your consultation.