Minors/children


Admittedly if you have minor kids, you are going to make plenty of mistakes.  One of my personal bests was letting by daughter eat a whole bag of chocolate chips to teach her a lesson – not a good idea.  But I am not alone; many families out there make even bigger mistakes by not having some basic estate planning issues covered once they have children.  Here are some of the most common problems we see for these families:

 1.             Naming a minor as a direct beneficiary on retirement assets, life insurance or a POD account.  I covered this problem in my May 2009 newsletter but it bears repeating – do not name a minor as a direct beneficiary…ever!  Minor beneficiaries create unneeded administrative problems and usually require the creation of a court ordered guardianship.  The added expense often takes a substantial toll on the financial resources intended for the beneficiary.

 2.             Not having a Will and assuming that a surviving spouse will inherit the entire estate.  It is true that if a husband and wife own property jointly or have life insurance and retirement that passes by beneficiary designation, then those assets will almost always pass to the spouse even if there is no Will.  However, some assets can only be transferred under a Will or by default under the North Carolina intestacy laws.  If one spouse has a substantial amount of liquid assets or real estate in his or her individual name and there is no Will, the intestacy laws dictate that some of those assets must be divided between the children and the spouse. 

3.             Not having a Will and failing to name a personal guardian for the children.  When a couple has their first child the choice of guardian is typically the most important decision in their estate planning.  If something happens to both of them who will become the child’s surrogate parent and where will they live?  This is a personal and often a very difficult decision, but it is something that deserves attention.  Ultimately the courts will decide the choice of guardian, but they rely heavily on the nomination of the parents provided in the Will.

 4.             Not having enough life insurance to provide for surviving spouse and children’s education.  Even though most families now have two wage earners, this doesn’t obviate the need for a decent amount of life insurance to cover the risk that one spouse may die unexpectedly.  In that case a surviving spouse is left with the substantial task of raising kids and being the primary source of financial support for the family.  Most families also want to ensure that there are enough funds for college education for the children.  When all the costs of child care and college education are added up many families simply don’t have enough life insurance in place to foot the bill.

 5.             Assuming that there are no estate tax concerns if you are just starting to build your net worth.  Most young families start out with a zero net worth and they don’t think of themselves as wealthy enough to be concerned about estate tax.  However, many of these families have avoided the mistake in number 4 above and have substantial life insurance in place.  Remember life insurance is usually counted as part of your estate for estate tax purposes.  When the life insurance proceeds are added to other assets many young families are bumped into a net worth that does have estate tax exposure and they need basic tax planning in their documents.

The best advice I can give is simply to begin the process.  Talk to your advisors about these issues once you have children. Oh and if any of you have suggestions on how to get melted chocolate out of carpet….

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What’s the worst mistake you can make with beneficiary designations? Naming your estate?  Naming nobody?  Actually, the worst mistake you can make is naming minors as beneficiaries.  Believe me, people do this; I know from several bad experiences (fortunately not my clients).  Usually this mistake is just based on a lack of understanding how beneficiary designations work as compared to a Will.  People assume that a Will, with all its fancy legal words and formality, will control all of their assets.  Wrong.  The Will only controls property that is subject to probate, basically property that is in your individual name and does not have a beneficiary designation.  Life insurance, retirement assets, and pay-on-death accounts all have beneficiary designations and those designations that you filled out while you where sitting on the couch watching American Idol — that is what controls in the distribution of those assets.

Now you are wondering why is it a problem for these assets to go to my children if both my spouse and I are gone, that is what I want.  If you have named a minor as beneficiary directly, then the options for long term management of the assets are very limited.  North Carolina law typically requires that a guardianship be created to handle management of the funds until the child reaches age eighteen.  At age eighteen the child will receive complete access to the funds; eighteen with money to burn!  Also, the guardianship requires someone to qualify as guardian and regularly account to the court.  The guardian will have to be bonded which can be surprisingly expensive depending on the circumstances.  All of this creates extra trouble and expense which will only reduce the assets ultimately available for the child.  Although North Carolina law does also provide for a custodianship for minors, which is a less formal type of guardianship; I have found that the custodianship is only available in very limited cases.

One of the main benefits of having a Will when you have minor children is that you can avoid all of this trouble by allowing for a hold back trust.  In this case the crucial step in any estate plan is to ensure that you have beneficiary designations which are consistent with your Will.  Generally your initial beneficiary would be your spouse and, for minor children, your contingent beneficiary would be the holdback trust that is created under your Will or under a separate trust document.  If you want to add  a minor grandchild as beneficiary, the same rules apply; so if you don’t have a trust set up for the grandchild talk to your advisor about other options.  Obviously, there are other matters that play into beneficiary choices such as income tax planning or creditor protection, but I encourage you to check your current life insurance, retirement assets, and other pay-on-death accounts to confirm exactly what beneficiary designations you have.  Details are pretty important in this line of work.

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