If you are a parent of young children, then concern for them is probably your number one priority. We get it. Our love for our children changes everything about the way we view life, and this love drives us to stop at nothing to protect, nurture, and keep them safe. Unfortunately, we live in a world where kids are not always healthy and cared for, where bad things happen to good families, and where legitimate threats to our children do exist. Sadly, one of the questions you must ask is, “What will happen to my child if I unexpectedly die or become incapacitated?”
Creating an estate plan that is tailored to minor children is one way to ensure your child will be cared for no matter what. Here are four ways you can use estate planning to protect your child in case something happens to you:
Name a Guardian to Love and Care for Your Minor Child
A guardian is a substitute parent. In Virginia and many other states, all parents have the legal right to name a guardian for their children. This person will have the right to legal custody of your child should something happen to both biological parents. If you haven’t named a guardian, the state will decide where the children go in the short term until a judge can review the case and make the final decision. Your child may be placed in an orphanage or with foster parents, or they may end up with relatives or friends you wouldn’t want raising them. While we all would agree that it’s important for the state to have a system to take care of orphans, most people don’t want their children living with strangers or in a group home during such a traumatic time.
In Virginia, the guardian must be named in your will. If you correctly name a guardian, Virginia law requires that the person you’ve named be given immediate and permanent custody of your child should something happens to you.The last thing your child needs is to be separated from people they know and love if they suffer the trauma of losing both parents. Sadly, they’ll have enough to process and work through without being moved from home to home. So when you name a guardian for them, you guarantee your child will be cared for by the right people. In addition to naming one person as the primary guardian, we recommend you include one or more backups in your will in the event that your first choice is unable to step into their role at the time.
(Related: How to Choose a Guardian for Your Child)
Create a Minor’s Trust to Protect Your Child’s Financial Future
By law, children are not in control of their own funds or property until the age of 18. In Virginia, if you die before your child reaches that age, their assets will be managed under Court supervision until their 18th birthday, at which time they would be given complete control of everything. However, most people do not want their child to be in control of large amounts of money at such a young age. Your kid might be incredibly responsible, but if they received your life savings right out of high school, the temptation would be enormous.
To avoid this and to protect your child’s financial future, we recommend you add a Minor’s Trust to your estate plan. A Minor’s Trust is a mini-trust inside your will or trust agreement that states that your child or children will not receive any money from your estate until a certain age (normally 25, but you get to choose). Until then, a Trustee (selected by you) manages the money for the child’s benefit. This trustee can sensibly distribute funds for things like your child’s education, travel, medical bills, and other living expenses.
A Minor’s Trust can ensure that your child is well taken care of, but without giving them free rein with lots of money until they’ve had a chance to mature, learn how to handle finances responsibly, and reach an age where their priorities in life are clearer and more grounded.
Designate Beneficiaries to Protect Your Child
Assets such as retirement funds, financial accounts, and insurance policies allow you to list beneficiaries on them. If you have a minor child listed as your beneficiary on any of these accounts, these funds will go to them at the age of 18 regardless of any minor’s trust you may have set up in your will or trust. Not only that, but these funds are often tax-deferred. This means that income taxes have not yet been paid on these accounts. The government has many rules and requirements for how these accounts must be handled, and if your child does not use them properly, they will incur additional taxes and penalties. The last thing you want is for your child to get a large chunk of money at a young age, make rash decisions with it, and then have the IRS after them, demanding taxes and penalties. To avoid the risk, we recommend that you designate your minor’s trust as the beneficiary of all such accounts. That way, all the money from these accounts will go to be used for your child. Your child will receive the funds when they reach the age you select.
While we believe this is the best way to protect your minor children, there is a downside to this plan. If you put tax-deferred monies in a trust, the trust will most likely have to pay more in taxes than your children would have if they had received the funds directly. However, to most of our clients, this is an acceptable trade-off since it protects their children.
Purchase Life Insurance to Ensure Your Child’s Financial Needs are Met
Lastly, make sure that you have enough disability and life insurance so that your child is taken care of financially if you become disabled or pass away. A good insurance agent can assist you in figuring out exactly how much insurance you need. But be careful. Some dishonest insurance agents will try to sell you more insurance than you need. We recommend that you meet with several different reputable financial advisers or insurance agents and compare what they tell you.
We know your children are your greatest treasure. We know that you, like most parents out there, would do anything to protect and provide for them. A lot of things in this life are uncertain; don’t let your child’s future be one of them.
If you need to create an estate plan to protect your child, schedule an appointment with us today.