It takes special care to create an estate plan that efficiently distributes your assets and meets your goals for every person and cause important to you. But no part of the process means more to most people than that which involves their children. After all, for most of us, our children are our most important legacy, and how your estate documents treat them will have an impact long after you’re gone.
To help organize this process, it is useful to think of children in three categories: minors, young adults, and fully grown adults with spouses and children of their own.
Children from infancy through high school have a different set of needs than children of other ages. One is simply to be able to rely on an income for daily needs that approximates your income in case you’re no longer there for them. Since the parents of young children usually don’t have large savings or net worth, the challenge is to provide an instant estate for which life insurance may be the best answer.
There are a number of rules of thumb for how much life insurance to buy — from four to 10 times your annual income. The right amount should be the result of a thorough needs analysis of your entire family, which can be accomplished by asking your spouse and yourself a series of probing questions, including:
- How much do you already have saved?
- Will your spouse be able to work full- or part-time? If so, what will child care cost?
- Will your children go to public or private elementary and secondary schools?
- How much will your children need in college funds by the time they’re ready to attend?
- How much will your spouse need for retirement, and how much of that will he/she be able to accumulate on his/her own?
After you determine how much life insurance to buy, you need to think about who will raise your children
if you and your spouse both die before they become adults. This calls for naming a guardian in both of your wills. If you don’t have a will, a state court will appoint a guardian for you, and it may not be someone you or your spouse would have wanted for this role. In addition, parents might also wish to designate a person to manage the children’s assets, known as a custodian or trustee. It can be the same person as the guardian; but designating an unrelated third party, like an attorney, banker, or trust company officer, who can be charged with thinking only of your children’s welfare, appeals to some people.
Among the other major decisions, you have to make is whether and how to split your assets among your surviving spouse and your children and, if you leave some assets directly to your children, how to determine the split among them. Often, it may make sense to leave all or most of your assets to your spouse and, for assets you bequeath to your children, divide them evenly. But this might overlook such considerations as children with certain medical needs or special abilities.
Once children reach the age of majority — which in most states is 18 — a new set of considerations enters the picture. By this age, your children no longer require a guardian and are legally capable of spending their money any way they want — and therein lies a potential problem. You may leave $250,000 for college but instead, your children decide to waste the money and skip college.
One way to control how the inheritance is spent is to establish a trust with a schedule for distributions. One option is to delay a full distribution until they reach a certain age, like 25 or 30. Another choice is to give them a series of partial distributions at ages that make sense given what you know about your child. Another strategy
that is becoming increasingly popular is the incentive trust. This vehicle makes payouts contingent upon your child’s achievement of specific accomplishments — like maintaining a certain grade point average; graduating from college, graduate, or professional school; marrying; or buying a home.
Many of the same kinds of considerations that apply to minors and young adults can also influence your decisions on how much money to leave to your adult children. Do they, their spouses, or their children have special medical needs? Have your adult children fallen on hard times or are they irresponsible with money and would only waste it? How many children do they have, and how much help will they need to finance their educations?
If your estate is much larger than you and your spouse’s combined estate-tax exemptions, you might want to shrink it with an aggressive campaign of gifts to your children and grandchildren. On the other hand, any funds you leave to your children might encumber them with estates equally as large as yours or larger with the same tax challenges. In this case, you might want to transfer some of your assets to a generation-skipping trust, which bypasses your children and names your grandchildren as the beneficiaries.
Don’t go it alone when mulling over these decisions. Please call if you’d like to discuss this in more detail.