5 REASONS WHY ESTATE PLANNING IS IMPORTANT TO YOUR CHILDREN BY BRANDON CULTER
With the start of every New Year comes countless resolutions. One notable resolution people make is to complete their estate plans, especially those who have children. However, even for many of these people, a few weeks go by and suddenly this resolution begins to fall by the wayside. For some, it’s the day-to-day time constraints on their schedules that make them decide that estate planning can wait. For others, it’s the fear of addressing estate planning issues; subconsciously they may have the idea that “If I don’t think about it, then I won’t need it to deal with it for a long time.” When parents fail to plan, they are making a choice to have their choices made for them. The end result can be very different from what the parents would have really wanted, and may have a dramatically negative effect on their children’s lives. But the upside to keeping this resolution? Great peace of mind! In an effort to keep you focused on the New Year’s resolution of getting your estate planning affairs in order, following are five areas where proper planning can significantly help your children, should something happen to you: 1.
When you leave behind minor children without having designated a guardian, a person you trust to raise and care for your children, you place the choice of guardian in the hands of a complete stranger; a judge. After hearing testimony and considering legal priority, the judge appoints a guardian based upon what he/she feels is in the best interest of the children. However, what the judge determines to be the best interest of the children is not necessarily what you would have wanted. Keeping siblings together, a child’s religious practice, current schooling, friends, and family relations can all be put into jeopardy by what a judge determines is in the child’s best interest. Meanwhile, while the judge is trying to determine the best interest of the child, your family members, including in-laws, may already be deep in turmoil over the issue, resulting in a nasty and expensive battle to persuade the judge who is the best fit to care for the children. If a parent does nothing else in estate planning, deciding who would care for minor children if the parent cannot is probably one of the most important things parents can do for their children and their extended family.
There are a variety of educational planning mechanisms available for parents today. For example, there is the 529 plan, the Coverdell Education Savings Accounts, custodial accounts, and a variety of trusts. However, some of these tools may hold much greater benefit than others, for both the donor, whether parent or grandparent, and the child. Determining the appropriate plan to use will depend on the goals of the donor. Each planning technique serves a different purpose and has advantages and disadvantages. The donor’s desired control, desired amount of control to the child, desired income, gift and estate tax benefits, and concerns about the child’s ability to obtain financial aid are some of the factors that dictate which plan should be utilized. The Uniform Transfer to Minors Act accounts, or custodial accounts, are probably the most common vehicle used to save for a child’s education because they are relatively inexpensive, easy to establish, and often the only vehicle known to parents. However, once made, a transfer to a custodial account is irrevocable and becomes the child’s property. In Colorado, the child takes control of the account when he/she reaches the age of 21. Most parents, if given another option, would prefer not to turn over control of the child’s educational fund to the child at such an early age. Other options exist, but it is up to the parent to initiate those options. 3.
Maximizing What’s Left Behind
The current tax system can take an enormous bite out of an estate when someone dies. The estate tax rate, which is currently 45%, is applied to any individual or married couple with an estate over $3.5 million. While on its face, most people would speculate that they don’t have $3.5 million in assets and thus would not be subject to the tax. However, what most people fail to realize is that things like life insurance are included in the computation of the estate value. For example, an individual with a $500,000 life insurance policy increases the size of his or her taxable estate by $500,000 even though he or she will never see the proceeds. For a married couple who both have life insurance, the effect is much greater. Additionally, certain assets may also be subject to income tax upon the owner’s death when passed on to the beneficiary. The most notable are retirement benefits. While proper planning can help reduce the amount and timing of the imposition of income tax, the fact is not enough attention is given to these assets.
If given the choice, most parent’s, upon their death, would elect to maximize the amount of assets that they pass along to their children. The truth is parents have such a choice. 4.
Protecting Children from Themselves & Others
Often people don’t look at what they are leaving behind to their children as a potential target. However, in today’s society with high divorce rates, rampant litigation and new suitors to the surviving spouse, the assets left behind by a parent can fall into unintended hands. Sometimes people have the impression that they are leaving behind such a small amount that it is not worth protecting for their children. However, when parents stop and think about it, leaving a child even $100,000 is a big deal. It would certainly be a big deal to a child’s creditor or even soon-to-be ex-spouse. On the other hand, it may be that the child needs protection from himself or herself. When talking to parents about this issue, they often say that, given the choice they would not want a 21 year old who may be going through college or trying to get their life in order to receive a lump sum from the parent’s estate. Fears of dropping out of school, spending haphazardly, or financial mismanagement are all legitimate concerns for the parent. The good news is that parents have choices with regard to protecting assets left to the children. These choices range from the simple to the more complex depending on the assets and desires. But the bottom line is that it is important to understand you have a choice. 5. Blended or Divorced Families Estate planning for blended families—where one or both spouses have children from previous marriages—can be complex and worrisome. Potential conflicts among the current spouse, exspouse, any children from the previous and current marriages, and any stepchildren are often realities. One major point of apprehension is making sure the children from the previous marriage inherit property that belonged to their parent. With no plan in place, a step-parent or ex-spouse may take control of the assets and make distributions contrary to the parent’s wishes. Often times, parents do not want their ex-spouses controlling what was left behind to their child. Without planning, the ex-spouse is generally next in line to control money left to the minor child. As a parent in a blended or divorced family, the challenge is to divide the assets among the family according to the parent’s wishes and to put the desired person in place to control such assets while minimizing the animosity among the family. While these five areas of planning are the most prevalent with respect to children, there are certainly others. The most important thing to keep in mind is that with estate planning, you have choices and there are people who can help you understand and make those choices. Proper
planning is one of the greatest gifts you can give to yourself and your children, and one that will give you the satisfaction of knowing that youâ€™ve taken great care of yourself and your family while the choice was yours. Brandon Culter is Of Special Counsel for DCG, with a concentration in Estate Planning and Administration, and Business Planning. He can be reached at firstname.lastname@example.org. (If you havenâ€™t had your estate plan reviewed in over two years, we would like to invite you in for a review, at no charge, so that together we can be sure that the plan you put in place is the one that will accomplish your goals. Please call 303-450-1665, or email Brandon to set an appointment.)