Why Parents Need an Estate Plan

Everybody should have an estate plan. But, planning is critical for parents with minor children. Surely, one of the things a new parent does is to make sure that they have life insurance to protect their young ones. Well, think of an estate plan as an extension of that life insurance.

First, and most important, every parent should think about whom they would want to raise their children if the parents were gone. This is by far the hardest thing for any parent to think about. But, it is the most critical. You don't want your children to find themselves the wards of the court. Court battles can be messy, and can take time. Meanwhile, the children may need to be in foster care until the case can be completed and a new guardian appointed. You want to make sure that you decide who is going to raise them. Plus, in Virginia, this step is easy to do. Appointing a standby guardian who can act immediately upon an emergency is a simple act of completing a one page document.

Once you know who could be taking care of your children, you need to give them the tools. In this regard, note that leaving a large sum of money to a minor directly is a bad thing. If no one is named as custodian, then there will have to be proceedings to name a guardian of the estate. This includes the appointment of a guardian ad litem to investigate the case. In Fairfax County, I've noticed that not all guardians ad litem understand the law completely and may insist that the money left to a minor, including insurance proceeds, be deposited with the court until the minor reaches eighteen. Plus, we have the added problem that under the law, any money left to a minor directly becomes the minor's money at age eighteen with no strings attached. How many eighteen year olds who you know are responsible to manage thousands of dollars given to them all at once?

The simple and most flexible solution is a living trust, either naming the potential guardian as the contingent trustee to take over after the parents' deaths, or naming another responsible person as the contingent trustee with instructions to cooperate with the potential guardian. Naming the trust as the beneficiary of life insurance proceeds should both parents pass is one way to make sure that all of the money is managed in a single, simple plan.

The point is that all of this is simple to create. It takes just a few meetings with a lawyer to plan, and some thought on the part of the parent. But, for a parent, it is one of the most critical things you can do to protect your children.

Giving a Gift to a Minor Through Your Estate Plan

Whether to a child, a grandchild, a special niece or nephew, many people wish to give gifts to minors through their estate plan. It can be accomplished through a will, a trust, a life insurance policy, or even by naming a beneficiary on a retirement account. Making the gift correctly can avoid a lot of hassle.

In this article, I am not addressing the tax implications through the estate tax, the gift tax or the general skipping transfer tax. I am only addressing the mechanics of how the transfer is made.

Many states, like Virginia, have the Uniform Transfer to Minors Act. If a minor is the beneficiary of a gift from a will, trust, insurance policy or other source, then the gift-giver has the power to appoint a custodian. The custodian then has the authority to hold the gift for the minor until the minor reaches 18, and use the money for the minor’s benefit.

If the gift-giver fails to name a custodian, then this can create problems. In Virginia, the person who wants to hold the property for the minor must then petition the court to be appointed the guardian of the estate of the minor. This is true, even if that person is the minor’s custodial parent. The guardian of the estate must post a bond with surety, and then comes under the supervision of the Commissioner of Accounts. Before using the money for the minor’s support, the guardian of the estate must consider all other sources of income or support for the minor. Generally, this means that the money cannot be used until the minor reaches the age of eighteen. As you can see, the need to go to court and the supervision afterwards creates a hassle and expense.

Other options in this situation can be for the Commissioner of Accounts to hold the money in an interest bearing account until the minor reaches the age of eighteen. Or, if insurance proceeds, the insurance company can hold the money until the minor reaches the age of 18.

Nonetheless, these options all leave something to be desired. It involves giving up control, and/or accepting court supervision.

The way to solve that problem is by leaving the gift through a well crafted trust. By creating a trust, the gift giver can define how the money is to be used, and when the money is to be turned over the to minor. For example, the trust can provide that the money can be used at the discretion of the trustee for the minor’s expenses. The money need not be turned over when the minor reaches age 18. Rather, if there is a concern that the minor would not be responsible enough, then the money can continue to be held in trust until the beneficiary reaches a suitable age, as defined by the gift-giver. Moreover, if the minor is disabled, as defined by Social Security law, then the trust can and should be drafted in such a way so as to avoid disqualifying the beneficiary from government benefits.

Gifts to minors through an estate plan are usually best made through a trust. For advice on how to craft such a trust to suit your specific needs and desires, call me at (703) 837-8832.

Non-Probate Assets Are an Important Part of Your Plan

This article reminds us of how important it is to make sure you are naming your beneficiaries properly. Pay on death accounts or accounts with a death beneficiary are an important part of your estate plan. They are meant to pass property, such as life insurance proceeds, or retirement accounts, without the need to go through the probate court. But, since they are not governed by the court, you need to make sure that you are naming your beneficiaries properly.

For example, when I have a couple with young children, I normally recommend a living trust as the corner stone of the estate plan, so money can be managed for the children should the parents meet an early demise. But, for most young couples, their "wealth" will be held in pay on death accounts like life insurance. For the plan to work, the couples have to change their beneficiaries to the trust.

Likewise, it is important on major life events to change the beneficiaries of the accounts. Such events include a marriage, a divorce, a death in the family, or some similar event. It is a good idea to review the beneficiaries regularly to make sure your estate plan is working the way you intend it to work.

The Utility of a Living Trust

If you've even only thought about planning your estate, many people assume that any plan must include a living trust. While I agree that the living trust can be a useful document, I also believe that it is not for everyone. Before you make any decision whether to create a living trust, take into account your individual situation and the advantages and disadvantages of including a living trust in your estate.

What is a living trust? A trust is merely a legal arrangement where one person, called a trustee, holds property for the benefit of someone else, called the beneficiary. A trust can be created by a person through a will, which is called a "testamentary" trust. A trust can also be created while a person is alive, which is called an "inter vivos," or living, trust.

In most instances, when a person creates a living trust, that person becomes both the trustee and the beneficiary. That way, to the outside world, how the property is held appears no different than if no trust were created. But, if a property is included as part of a living trust, the creator can establish rules about how the property is to be distributed after his or her death. That way, the property can pass to someone else without the need to go through probate. Probate is a court proceeding that can tie up an estate for several months before property can be distributed. In Virginia, when a probate estate is opened, a tax is applied based on the value of the property passing through probate.

Avoiding probate is the primary advantage of a living trust, and the reason this type of instrument was created. One thing to consider is that in Virginia, probate can be expensive.  Filings, such as inventories and accountings, can come with filing fees of hundreds of dollars.  That does not include the lawyer's and accountant's fees in drafting up the filings.  However, there are some disadvantages that need to be considered before you decide to make a living trust.

The problem is that owning property through a living trust can be inconvenient. Property needs to be titled through the trust. Checks drafted on accounts held by the trust need to be signed by noting the signatory is the trustee. Thus, the benefit of avoiding probate should be weighed against the inconveniences and costs associated with setting up a living trust.

For example, in Virginia, real estate passes to the next owner upon the filing of the will. Thus, if the bulk of a person's estate is real estate, probate in Virginia can be a simple process. Moreover, for most pieces of property, the probate tax can be less than the price of establishing a living trust.

What, then, are some of the main reasons aside from avoiding probate to have a living trust?

One is to control the distribution of an inheritance to a minor or person who has not reached an age of maturity. Parents of young children, or even young adults, can establish a trust in order to place a responsible person in charge of an inheritance until the child reaches a certain age. For a plan like this, it may even make sense to designate the trust as the beneficiary of any life insurance or other pay-on-death accounts, such as retirement benefits.

Another reason is to have a living trust is to provide for your care if you become unable to manage your affairs because of disability. By naming a person to step in as trustee if you become disabled, you can ensure that someone can have access to your finances and pay your bills. In many instances, banks and other financial institutions are more willing to work with a trustee than a power of attorney.

Finally, creating a living trust can provide assistance to people who need help managing their money. If there is no one in the family or close friends that would be appropriate trustees, by creating a living trust and naming a professional as the co-trustee, you can provide some assurance that the trust will be managed properly.

A living trust is a very flexible document, and can be a useful tool for your estate plan. Whether to create one, and how to structure it are issues you should discuss with an attorney as you consider your own estate.