Few young people are likely to be obsessed with what happens when they die and regard estate planning as an issue for older people. Yet, on a deeper analysis, this is dangerous thinking. Why? For young people, especially those with children, estate planning is essential. Here are some things to think about.
Caring for the Kids
Assume a young couple, Betty and Bob die in a common disaster (car wreck). Who will be responsible for taking care of their children, Mary, Harry, and Larry, ages 13, 8, and 3? Absent an estate plan, a court will appoint a person or persons (called guardians) to take care of them while under 18 years of age. How will the court know who to appoint? A fight could easily arise between the wife’s and husband’s families over who will be guardians. This problem can be avoided with a will that nominates Betty’s and Bob’s choices for guardians of their children, including a preferred order of alternate choices, in case the first choice fails.
Protecting funds for the Kids
As for inherited property, how is it to be managed while the children are under age? For example, suppose Bob and Betty die, leaving a $300,000 life insurance policy for the benefit of their three minor children. Most likely Bob and Betty have not given much thought as to how their insurance proceeds will be spent for the benefit of their three children. So if Betty and Bob die in a common disaster, who should be responsible for managing the insurance proceeds and other property? Without a proper estate plan, a fight could easily ensue between the wife’s and husband’s families over who will manage these funds. Without a will, one or more persons will still be appointed to serve as a fiduciary (a conservator), often the same person(s) serving as guardian(s). Yet the person(s) appointed to serve as Mary, Harry and Larry’s guardians might not be the best choice to manage the funds. There should be a clear distinction between who should be the child manager (guardian) and the property manager (conservator or trustee). Of course, this problem can be avoided with a will and/or a living trust, which designates the first, second and third choices for managing funds. In the absence of well-planned estate, well intended persons may be appointed to assume such financial responsibilities that they are not equipped to handle.
Disbursing funds
As for disbursing the funds, how is Bob’s and Betty’s property to be disbursed for the benefit of their three children? Most likely their insurance agent helped them fill in beneficiary designations, which required funds to be distributed equally to the three children. But is such a designation fair and what Bob and Betty would really have wanted? Consider the next three disbursing problems:
Disbursing Problem 1:
Equal is not fair or equal
Assume Bob and Betty die in an auto accident, leaving their $300,000 life insurance policy equally to Mary, Harry, and Larry (ages 13, 8, and 3). Each of their guardians (who might be the same person) must hold these funds separately for each of them. Assume it costs $10,000 per year to raise a child. When Mary, the 13 year old reaches 18 (the age the conservator must disburse the funds), she will be $50,000 ahead, having lost only $50000 ($10000 per year for 5 years). The 8 year old will break even at 18 ($10000 per year for 10 years), and the 3 year old will be short $50,000 ($10,000 per year for 15 years). Is this fair? Caveat: $300,000 is used for the simplicity of illustration and is not intended to suggest that $300,000 is sufficient to take care of such a young family.
Disbursing Problem 2:
Pooling risks
Suppose Harry has a serious medical illness. Should the cost of his medical care come strictly out of his share, leaving his siblings’ shares untouched? Or what if Mary wants to go to Yale Medical School and needs more money than her 1/3 but is willing to borrow from the common fund and pay it back so her siblings can later go to other expensive schools? Would it not be better to have the insurance proceeds held in a common fund for the benefit of the three children as a group (commonly called a pot) rather than divvied up individually?
Disbursing Problem 3:
Protecting against youthful inexperience
Most importantly, when Mary, Harry, and Larry each reach the age 18, the conservator must pay to each their respective inheritances. Can Bob and Betty be sure that when Mary, Harry and Larry each reach the age 18, each will be able to keep what they inherit? Or will they be vulnerable to charlatans or others trying to take advantage of them? Or will they be spendthrifts, buying drugs, airplanes and dropping out of school?
SOLUTION
The above problems can be easily solved through proper estate planning including both a will and a trust, specifically designed to benefit children as a group (the pot) and requiring each of them to live until a minimum age (e.g. 35) before being able to take his or her inheritance. The trust can be flexible, allowing earlier payouts with the consent of the trustee. These problems have nothing to do with estate or gift taxes (now applicable to estates over $5,500,000 per person). The cost of setting up an estate plan is often a one-time fee in comparison with those monthly insurance premiums. A properly planned estate can insure the best use of funds to care for minor children. While insurance assures the availability of needed funds, a properly planned estate plan will assure those funds are spent for the purposes intended