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Estate Planning for Our
Children
by David Hoffman
Sometimes, when I give a talk on estate planning, I
scrutinize the faces of my audience. Most appear to be of an
age approaching retirement or past retirement or well past
retirement. I am fairly certain that none of them ever use a
babysitter. And that is unfortunate because, if any room in
your home is furnished with bunk beds, carpeted with toys,
decorated in crayon or reeking of diapers, then you have a
much greater need to attend such a presentation. For estate
plans that involve children are the most challenging of all.
Let’s begin with the age of distribution. When do you want
your kids to get your money? Although eighteen is the age of
majority, most parents find that notion laughable. So I tell
them that they should pick an age that seems appropriate.
Parents love this idea. In fact, when I asked one client
when she wanted her daughter to receive her inheritance, she
replied, “Is sixty too old?”
But whether you want your kids to get their money at
eighteen or sixty, who holds it for them until then? Almost
always, the person holding the purse strings is a trustee.
The trustee can be given broad discretion to distribute any
amount of trust money, at any time and for virtually any
purpose, right up until the child reaches the age you have
chosen. After that, whatever is left of the child’s share is
given to her outright. If you believe that your child will
never be mature enough to handle money, the trust can go on
until the day she dies. After that, the balance can be given
to just about anybody.
You can also establish one trust to distribute money among
several children. That kind of trust is known as a
Sprinkling Trust. In some states, parents can even establish
trusts that provide for generations of their progeny. That
is commonly known as a Dynasty Trust. The variations on who
gets how much, for what and when are endless.
Another thing to consider is called the Division Date. Do
you want your estate to be divided among your children on
the date of your death? That seems reasonable. But what if
one child is a decade older than another? If you die after
one child finishes college but before the younger one even
begins, should the younger child have to pay her own way?
Some parents choose not to divide the estate until the
youngest has reached a certain age.
And what if you have a disabled child? She may one day be
entitled to Federal and state benefits. Leaving her money
could disqualify her for those benefits. You may leave her
money in trust but only if it is a Special Needs Trust. Put
simply, a Special Needs Trust instructs the trustee to do
whatever the government does not. For example, the trustee
may pay for vacations, presents and entertainment since the
government does not provide those things.
In every case, you should use living trusts as opposed to
testamentary trusts. Living trusts are established by a
trust agreement and they are usually not subject to court
oversight. Testamentary trusts, on the other hand, are
created by will but the will must be probated. After probate
is completed, the trustee may still be required to make
annual accountings to the court. Such accountings usually
require the assistance of an attorney or a CPA or both. In
addition to the professional fees, the court takes its cut
in the guise of filing fees. So if a child is orphaned at
two and is not slated to receive her inheritance until she
is twenty five, the costs of probating your will and
administering the testamentary trust over twenty three years
will consume a healthy portion of her birthright. In the
vast majority of cases, it simply makes no sense to use
testamentary trusts.
Having provided for your child’s financial well being with
living trusts, you need a will to nominate a guardian. With
the prior approval of the court, your child goes to live
with the guardian you have selected. It is important to
remember, however, that the guardian’s function is very
different from that of the trustee. Trustees need to be good
with finances. Guardians need to be good with children. Even
if you know someone who excels in both areas, it is still
best to select different individuals to fill those two jobs.
Too often, guardians have spent trust money to benefit
themselves. Many times the benefit to the guardian has been
innocent or indirect (e.g. adding a pool to the guardian’s
home to aid in a child’s physical therapy). Nevertheless,
deliberate, innocent or indirect, it is called fiduciary
breach and it is a serious matter indeed. Presumably, you do
not want to imprison the person you have chosen to replace
you.
Even though planning for the needs of minors presents the
biggest challenge, the plain truth is that estate planning
is for all of our children. They are why we do it. Looking
out over my audience, I ask “How many of you have children?”
Everyone raises a hand. Then I ask, “How many of you love
your children?” Every hand reaches higher. “That’s good to
know” I say. “Because if you don’t love your kids, there’s
no reason for you to be here.”
David Hoffman is a Virginia attorney who limits his practice
to wills, trusts, probate and estate taxation. His offices
are located in the Northern Virginia suburb of Fairfax City
and he can be reached at 703-267-6100.
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