Estate Planning for Parents of Young Children (Part 3)
June 11, 2015 - Posted by: admin - In category:
Parents of young children often need a trust to hold assets for the benefit of such children.
This is the third post on the topic of estate planning for parents of minor children. In prior posts, we addressed the common fallacy that these things are only for the elderly. We also noted that among the first and most basic steps that should be taken by all such parents is to: (a) get a Will through which they can appoint a guardian for their children, if needed; and (b) obtain adequate life insurance that would provide the financial means to take care of their children if such parents were not around to do so. We ended the last post by noting that life insurance companies will NOT pay life insurance proceeds to minor children.
Because a minor child is not able to receive life insurance proceeds, is not wise to name such minor children as beneficiaries of life insurance policies. Rather, one of the best planning methods in situations where minor children are involved is to instead name a trust as the beneficiary of such policies. In stark contrast to the potential problems and delay associated with a minor child being the named beneficiary of a life insurance policy, when a trust is the designated beneficiary, things tend to go very smoothly. Upon receipt of proper paperwork, insurance companies usually deliver a check promptly to the trustee of such an existing trust. The applicable trust agreement sets forth the parameters for which such money, along with all other assets, will be administered. The chosen trustee is legally authorized to handle and distribute such property without court intervention.
One of the many benefits of using a trust is that this arrangement can be fully customized to the individual circumstances and personalities involved. In other words, it might make sense in one instance to leave a great deal of discretion to the trustee–basically to say “do what you think is best with regard to how much money to give the children and the timing of such distributions”. In other instances, parents may desire to be more detailed and strict in the guidelines and allowances given to the trustee to follow and with regard to what property is distributed and when such distributions will take place.
Finally, please do not assume that you can avoid both the problems of naming a minor child and also at the same time avoid the cost and “work” of establishing a trust by simply naming an adult as the beneficiary and then coming to an “agreement” with such adult that he or she will use the life insurance proceeds for the benefit of the minor children. We have seen this approach backfire far often. Even if such consenting adult is honest and trustworthy in all respects, sometimes the spouse of such adult is not so trustworthy. Further, if such adult is the named beneficiary, the money paid to such adult is, in fact, the legal property of such adult. In other words, if that adult beneficiary has credit problems, gets in an accident or otherwise is subject to claims of others, such life insurance proceeds can and far too often does end up in the hands of such creditors, rather than being used for the minor children for whom such life insurance policies were intended. To summarize, while this type of “do it yourself” planning sometimes works, the potential for problems and unintended results is far too great. Most people realize, after learning the facts, that it is far better and safer to do some proper planning now and to pay the associated costs of such planning than to roll the dice and take their chances on DIY planning.