Of course, no one is expecting to die young or while your children are young. But the responsible thing to do, as a parent, is to plan for that possibility no matter how remote it seems. A good estate plan for a young family includes two major features: (1) naming a guardian for your minor children and (2) deciding how your minor children’s inheritance should be managed and distributed to them.
NAMING A GUARDIAN
A guardian is someone you appoint to care for and raise your children if neither parent is able to. This is done by naming the guardian in your Will. It is a touchy subject and many parents put it off because it’s too hard to even think about. I completely get it – I struggle with having to imagine this ever happening, but at least we have some peace of mind of having our sons’ guardians in place for now. There are many factors to consider in selecting who to appoint to serve as your child’s guardians or co-guardians. See more here.
Note that as your children grow, and as your relationships with family and friends change, you can always update your Will to change your children’s guardians over time.
DECIDING HOW YOUR CHILD SHOULD RECEIVE HIS/HER INHERITANCE
How (and at what ages) your children should receive their inheritance? Most people would prefer to maintain as much control over their minor children’s inheritance by holding it in a Trust and the Trustee could be given as broad or restrictive powers as you would like. For instance, a common distribution plan is to stagger the distributions over a period of time, such as one-third of their inheritance at age 21, another one-third at 25, and the rest at 30. And if a child needs anything for specific reasons in between, you can give the Trustee some discretion to do so. Or, if you have more than one young child, you can set up what we call a “pot trust” in which the Trustee has the authority to make distributions to (or for the benefit of) any or all of your children in equal or unequal amounts; the Trustee has more flexibility in deciding how the money can be spent. When the youngest child reaches a certain age, the Trust ends and the balance, if any, can be distributed to the children. A “pot trust” gives the Trustee more flexibility and responsibility.
An alternative to a Trust, but not nearly as flexible, is an UTMA account under which you could designate that the inheritance would be managed by a custodian, but the entire account must be transferred to the child at the age of 18 (although under Michigan law you might be able to specify that this transfer shall not occur until age 21). (Note there are limits as to how much can actually be held in an UTMA account, usually less than $10,000). If college savings is a priority for you, consider the fact that in determining financial aid eligibility, custodial UTMA accounts are not treated as favorably as 529 plans, for example. And there is a risk of the “kiddie tax” being imposed on the child. Thus, if your main priority is to ensure your children get through college with some financial aid, allocating the inheritance to a 529 plan could be a better option over an UTMA account.
Indeed, serving as a Trustee is more work than serving as a custodian under the UTMA. For instance, a Trustee must file annual income tax returns for the Trust. And because the powers of a Trustee are limited to what’s spelled out in the document, the Trustee may have to actually show the document (or at least th part of it that outlines the Trustee’s authority to act) to banks and others with whom he or she deals with respect to your children to prove authority. The powers of a UTMA custodian, however, are set out by Michigan law and most banks and other people are familiar with them and know exactly what authority custodians have.
Ultimately, in deciding what to do about managing your children’s inheritance, consider what the size of their inheritance would be if you were to die today. Then consider how much control you want to maintain over that amount. Remember, as the value of your assets accumulate over the years and as your children grow, you can revise your estate plan. This is one reason why you should always review your estate plan every few years.