Protect Those You Love Most: Estate Planning for Families with Children

When creating wills and trusts involving children or grandchildren, parents are faced with tough decisions about how to leave their assets to their children. While each person needs to consider their own situation and unique children, there are a few general issues that everyone should consider.

Choosing a guardian for your children.

It’s hard to imagine someone else raising your precious baby, but if something were to happen to you and your partner, you’d want to be sure your little one was in the very best hands. That’s why parents should pick a legal guardian — the person who’d raise their child if both parents die before the child turns 18. Why is this so important? Failing to pick a guardian means the courts will choose one for you — and it may not be the person you think is best.

Read more about choosing a guardian.

Assets of minors should always be held in trust. You do not want children under 18 inheriting assets and in Pennsylvania minors cannot own assets on their own. If there’s a chance that a child or grandchild will inherit assets, through your will or by virtue of being a beneficiary of a retirement account or life insurance policy, you should consider having that child’s inheritance held in trust. Without designating a trust to hold the money, one of two things will happen. One option is that the money will be paid into a minor’s account, earn very little interest and be released to the beneficiary when they turn 18. If the amount is significant, most people would not find this to be a desirable outcome. Another option could result in a legal proceeding to appoint a guardian to hold and invest the beneficiary’s money. This is a costly proceeding and may result in someone you don’t know or would not choose managing the money.

Coming into a substantial inheritance at 18 isn’t necessarily a good thing. In most states, without provisions in a will or trust that provide otherwise, the guardian has to turn over control of the assets to the children once they turn 18. When you are 18, an inheritance of $500,000 seems like it will last a lifetime. And it can, if you are prudent and live frugally. But most 18-year-olds will use up the trust money on a lifestyle that they cannot afford. Flash forward 20 years and the 18-year-old is now approaching 40, with little money left and no means to support himself.

A Trustee can help your beneficiaries be wise with their inheritance. While they are under 18 (or older if you decide to defer distribution to a later age), their trustee will control the money for them. If you’ve already decided that your sister Sally will be a wonderful guardian for your children because she has a great relationship with your kids and a cozy home, think carefully about if she will also be a strong guardian of their money. If she’s not the best a managing her own finances or has someone in her life whose influence you don’t really trust, it is best to leave the kids’ inheritance in the hands of a more qualified trustee.

Create separate shares for kids in their 20’s. Most people with kids who are young adults will divide the trust money into separate shares for each child. That way each child has their own share and can take money as needed. This equitable approach takes into consideration that each child has different needs. If one child wants to go to medical school, why should the other children pay for it?

Protect your “problem” child. Giving a large sum of money to a child with a substance abuse problem (drug addiction, gambling, etc.) could have fatal consequences. The only way to protect a child from himself is with a lifetime trust.

Giving your kids a longer leash. If you are confident your child could handle the money and want to turn it over to her at a certain age, the best practice is to distribute it in stages. A typically scenario is giving the child one quarter of the assets at age 25, one half of the remainder at age 30 and the rest at age 35. This distribution could comprise any ages or percentages you choose. Another suggestion is to bring the child on a as co-trustee at age 25 so he gets used to managing the trust money.

Planning for a child’s death. What happens to the trust money if the child dies and there are still monies held in trust? You can direct that the monies go to her children, if any, or to your remaining children. Some people will give their children special powers to direct where the money goes when the child dies. These are called “powers of appointment.” The thought is that after you are long gone, your child should have flexibility to alter the distribution of the trust money among the child’s own children. After all, your grandchildren may end up with some of the same issues you considered in planning for your children – creditors, divorcing spouses and addictive behavior. Your child should have the flexibility to change the trust distribution if needed. You can also give your child the ability to leave the trust money to his spouse. Some people feel strongly against this, but if your child has a loving spouse and they are living prudently, perhaps you would want her to be able to live in the same lifestyle she enjoyed when your child was alive.

There is a lot to consider when leaving assets in trust for children. Don’t let the considerations overwhelm you or keep you from planning. We make it easy to protect your family and get your wills done. We guide you and your family using our flat fee billing methods so there is never a surprise with one of our invoices. We prepare thousands of wills, trusts, powers of attorney and healthcare directives annually for people all across Pennsylvania just like you.  You can get the process started here or call 412.391.1014 and we’ll connect you with one of our estate planning attorneys.