There are several estate planning steps you can take for your children regardless of income. If you are a struggling mom or dad and don't have enough money to start a trust for your child or purchase life insurance, don't let that stop you from making an estate plan. You can still create estate planning documents that will greatly benefit your child. You can nominate a guardian and choose a trustee to manage assets your child may inherit. If you are willing to put in the time and effort, you can create essential estate planning documents inexpensively. Those few steps could protect your child if something happens to you.
A Guardian for Your Children
If you have a minor child and do not have a will, move it to the top of your to do list. The starting point is to decide whom you think is suitable to be the primary caretaker for your children. Once you choose a guardian, you need to discuss it with that person and make absolutely sure he or she is willing to assume that kind of responsibility and expense. See
guardianship.There are many factors to consider when choosing a guardian. Does the guardian have the longevity and endurance necessary to raise your child? Does he or she share your values and parenting style? Is the guardian financially able to provide a home and childcare? Does your child have an established relationship with the guardian? For a sample letter to your child's guardian, see
guardianship letter. Choosing a guardian can be a difficult step in the estate planning process. It's almost certain you will conclude there is no perfect person to raise your child. Your options may be so disappointing, you may procrastinate and put off making your will. However, no matter how you feel about the choices, it is important to do something, to establish a plan for the care of your child in your absence. For help, review our free
Estate Planning Guide for Parents.
If something happens to you, your choice of guardian as stated in your will is reviewed by a court to determine if your choice is in the best interest of the child. In most cases, the parent's nomination is followed, unless the proposed guardian is deemed unfit. If the child has a surviving biological parent, the court will typically choose the biological parent to raise the child, despite any preferences expressed in the deceased parent's will, unless the court determines the biological parent would be unfit.
It is important to write a detailed letter explaining your selection of the guardian and attach this letter to your will. See letter to child guardian. You may also want to write a letter to the person you named as guardian outlining your preferences on how you would like your child parented, what type of education you want for your child, religious preferences, your child's medical history, etc.
Note, in all but a couple of states, you cannot use a living trust to name a guardian and must do so in a will. See wills and trusts.
Children with Special Needs
If you have a child with special needs, it is especially important you set up a thorough estate plan. If your child is receiving public assistance, such as Medicaid, you should consult an attorney to prepare your estate plan. This is one of the most complex areas of the law, so educate yourself and use qualified legal counsel, especially if you want to establish a special needs trust.
Providing Financial Security for Children
When you nominate a guardian, you also need to consider providing for your child's living expenses if something happens to you. If you need help determining how much should be set aside in a trust to provide for your child's medical, educational, and living expenses, you should consult a financial planner. See find a financial planner.There are several ways to fund these expenses as part of your estate plan. If you have enough assets already in bank accounts, brokerage accounts, college funds, real estate, and other assets, you can have your estate plan drafted in a way that these assets can be used to fund a trust for your child. If you are doing so through a will, rather than a living trust, be aware of the delays and costs associated with probate, and consider a plan to make money available for your child's care on a more immediate basis, such as through life insurance or pay on death accounts, while your estate is going through probate. One of the advantages of living trusts is the trustee can get access to your assets much more quickly for the benefit of your beneficiaries rather than going through probate.If you don't have sufficient assets, another option is to purchase life insurance in an amount adequate to cover your child's future expenses. It is important to name the beneficiary of the life insurance policy in a way that works with your estate plan, especially if your child is a minor. One option is to name your living trust, or the successor trustee, as the beneficiary. In this type of arrangement, your successor trustee can use the life insurance proceeds to pay your child's medical, education, and living expenses, and otherwise manage the funds for your child's benefit. An alternative is to use your state's UTMA and name an adult as the policy beneficiary. This adult can serve as custodian of the funds for your child.
If you have a life insurance policy and are concerned about estate taxes, consult an attorney. If you are the owner of the policy, the proceeds will be included in your estate for purposes of estate taxes. There are several ways you can avoid this, including using an Irrevocable Life Insurance Trust or transferring ownership of the policy to someone else.
Choosing a Trustee
Usually it is recommended that the same person who is the child's guardian or caretaker be named the trustee of any trust for the child. This is generally the most practical arrangement since the child's guardian will be making regular expenditures to provide a home for the child and pay medical and educational expenses. Nevertheless, if the person you choose as guardian is not good with money, you can appoint a different individual or institution as trustee.Ideally, the trustee should be someone who is detail oriented, organized, good with record keeping, and prudent with money. The trustee should also be someone that will make decisions in the best interest of your child. While you can also name a bank,
trust company or other financial institution as trustee, be aware of the expense involved. Typically, a bank will not want to serve as trustee on a trust fund of less than 250,000 dollars. You can name an institution rather than an individual if you feel you have no good alternative, but due to the expense, this decision needs to be carefully considered.Once you select this person, you can name him or her as trustee of any trust created for your child under your will or living trust, and as custodian of any UTMA. See Gifts to Minors UTMA.
Leaving Money to Children
If you have money or property spread out in different accounts or forms of title, it can be difficult to begin the process of deciding how to leave money to your children. If you have several children, children from different relationships or other heirs you need to provide for in your will or trust, it can be challenging to make sure you divide your property equally or fairly in the way you intend.
One of the quickest ways to get started is to use our Estate Planning Worksheet. You can print a copy of this free estate planning form from our website, then complete it as you go through the process of considering how you want to divide your assets among your children and other heirs.
While no one ever needs to see the form after you complete it, some people find it helpful to take the form with them when meeting with an estate planning attorney, financial advisor or accountant, because it allows you to create an organized list of the information you need to plan your estate. This form can also be a useful in reminding you to add beneficiary designations on accounts, make changes to deeds, etc. To get Pennybornís Estate Planning Worksheet, see free estate plan forms.
Estate Planning for Single Parents
If you are a single parent, estate planning should be a high priority to ensure your children will have both emotional and financial security if you cannot be there for them. To learn how to quickly put together an affordable estate plan if you are raising minor children alone, see single parents.