It takes special care to create an estate plan that efficiently distributes your assets and meets your goals for every person and cause important to you. But no part of the process means more to most people than that which involves their children. After all, for most of us, our children are our most important legacy, and how your estate documents treat them will have an impact long after you’re gone.
To help organize this process, it is useful to think of children in three categories: minors, young adults, and fully grown adults with spouses and children of their own.
Children from infancy through high school have a different set of needs than children of other ages. One is simply to be able to rely on an income for daily needs in case you’re no longer there for them. Since the parents of young children usually don’t have large savings or net worth, the challenge is to provide an instant estate, for which life insurance is the best answer.
There are several rules of thumb for how much life insurance to buy — from four to 10 times your annual income. The right amount should be the result of a thorough needs analysis of your entire family, which can be accomplished by asking your spouse and yourself a series of probing questions, including:
After you determine how much life insurance to buy, you need to think about who will raise your children if you and your spouse both die before the children are adults. This calls for naming a guardian in both of your wills. If you don’t have a will, a state court will appoint a guardian for you, and it may not be someone you or your spouse would have wanted for this role. In addition, parents might also wish to designate a person to manage the children’s assets, known as a custodian or trustee. This can be the same person as the guardian, but designating an unrelated third party, like an attorney, banker, or trust company officer, who can be charged with thinking only of your children’s welfare, appeals to some people.
Among the other major decisions you have to make is whether and how to split your assets among your surviving spouse and your children, and if you leave some assets directly to your children, how to determine the split among them.
Often, it can make sense to leave all or most of your assets to your spouse and to divide assets you bequeath to your children evenly. But this might overlook such considerations as children with special medical needs or special abilities.
Once children reach the age of majority — 18 in most states — a new set of considerations enters the picture. By this age, your children no longer require a guardian and are legally capable of spending their money in any way they want — and therein lies a potential problem. What if you leave $250,000 for college, and instead, your children decide to waste the money and skip college?
One way to control how the inheritance is spent is to establish a trust with a schedule for distributions. One option is to delay a full distribution until they reach a certain age, like 25 or 30. another choice is to give them a series of partial distributions over many years. Another increasingly popular strategy is the incentive trust. This vehicle makes payouts contingent on your child’s achievement of specific accomplishments — like maintaining a certain grade point average; graduating from college, graduate, or professional school; marrying; or buying a home.
Many of the same kinds of considerations that apply to minors and young adults can also influence your decisions regarding your adult
children. Do they, their spouses, or their children have special medical
needs? Have your adult children fallen on hard times or are they irresponsible with money? How many children do they have and how
much help will they need to finance their education?
Another consideration has as much to with your own objectives for minimizing estate taxes. If your estate is much larger than you and
your spouse’s combined estate tax exemptions (currently $11.58 million
for each spouse in 2020), you might want to shrink it with an aggressive campaign of gifts to your children and grandchildren. On the other hand, any funds you leave to your children might encumber them with estates equally as large as yours or larger, with the same tax challenges. In this case, you might want to transfer some of your assets to a generation-skipping trust, which bypasses your children and names your grandchildren as the beneficiaries.
Don’t go it alone when mulling over these decisions. Most importantly,
you need to reach a meeting of the minds with your spouse and even your children, especially if they are adults. One thing you don’t want to do is to create bad feelings after you’re gone, either toward you or among your survivors.
“It is not the strongest species that survive, nor the most intelligent, but the most responsive to change.” – Charles Darwin
“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly,
one by one.” – Charles MacKay
“Nothing sedates rationality like large doses of effortless
money.”– Warren Buffett
With markets bouncing around all-time highs recently, pending
elections and political unrest creating additional emotion and drama, one can only speculate where the indexes may be going. Yet when the market is high, so is risk. Will you accept more risk and ‘ride the tiger’, or consider a more rational approach toward fixed income or even guaranteed income accounts*?
*All guarantees and protections are subject to the claims-paying ability of the issuing company.