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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