Newly Posted Article - "Estate Planning for Parents of Young Children"
[September 24, 2007]
Kristin Wildman Shirahama

What if you died prematurely or suddenly became incapacitated? Though it’s difficult to think about, every parent ought to plan for these contingencies. Would your loved ones be protected? Who would be responsible for your children? A well thought out plan can protect your loved ones and spare them some confusion and anxiety after your death. This article will guide you through the estate planning process and include a discussion of the instruments—will, trust(s), durable power of attorney, health care proxy and medical directive— you will want to have in place if you became incapacitated or died.

You might start by taking a look at your asset picture. You will want to make a list of your assets, including their value, account numbers and where they are held. Indicate whether you own a particular asset individually or jointly with another person. Finally, you should take note of which assets, such as retirement assets, pass by beneficiary designation. Make sure you know who is named as beneficiary of these accounts.

When you have an idea of your net worth, you can take a look at your life insurance. Many young couples are underinsured. Most parents cannot afford to do without life insurance while they have dependent children. Many employers offer life insurance as a fringe benefit, so check to see what life insurance you already have. You may also be able to buy additional coverage through your employer. You can purchase term insurance cost efficiently to fill any remaining need.

To determine how much insurance is enough, you can ask a financial planner. You might also use an online calculator, which you can find by searching “life insurance calculator.” You will enter information on your budget, assets and liabilities as well as some other information about your family composition. Some financial planners advise that people have life insurance in amounts between 10-20 times their annual salary depending on their circumstances. Sometimes life insurance is purchased in order to pay anticipated estate taxes. A parent staying at home to raise children also needs life insurance. In the case of a stay-at-home parent, life insurance proceeds would be used to privately pay for all of the services that parent provides and possibly lost wages that would have gone toward college savings if that parent planned to return to work at some point.

A Will is often thought of as the cornerstone of an estate plan. However, in many estate plans a trust will control the ultimate disposition of assets. For example, if you have young children you will want to set up a trust for them because you will not want to leave young children money outright. You also may not want to leave money outright to young adults because they may not have the maturity to manage it properly. Finally, if you have a son or daughter with special needs you will want to set up a trust because leaving assets outright may negatively impact your child’s eligibility for government benefits. Instead, a trustee you select will manage the money for your beneficiaries. Depending on the circumstances, you might leave assets in trust for a beneficiary’s lifetime or hold it in trust until age 25. Sometimes parents prefer outright distributions in thirds starting at a given age such as 25, 30 and 35. The choice is an important one because you do not want money to misguide your children.

Married couples may also use revocable inter vivos trusts to reduce estate taxes. The federal estate tax personal exemption amount is now $2 million. The Massachusetts estate tax threshold is $1 million. Property left to your spouse will not be taxed because it qualifies for what’s called the “marital deduction.” Therefore, there will be no estate tax due on the first death if you leave everything to the survivor. However, on the surviving spouse’s death there will be a Massachusetts estate tax if the estate is $1 million or more (after allowable deductions ) as well as a Federal estate tax if the estate is over $2 million.

Revocable inter vivos trusts can be used with married couples to shelter the unified credit amount from subsequent tax in the surviving spouse’s estate. This is accomplished by the use of a formula clause in the trust that segregates some or all the deceased’s assets in a separate trust for the survivor's benefit without causing the surviving spouse to be treated as the owner of that trust share. The balance of the estate of the deceased spouse is left in a marital trust or given outright to the surviving spouse, either of which will qualify for the marital deduction. The tax savings come from the ability to exclude some assets of the first to die from the survivor's estate therefore keeping the survivor’s estate under the exemption amount.

If your estate plan will involve the use of trusts then your choice of who will serve as trustee is critical. You will want to name someone that will exercise good judgment. The trustee is responsible for investment and spending decisions. The terms of the trust will guide the trustee. For example, a trust for the benefit of young children might give the trustee full discretion to spend from trust income and principal for the benefit of your children. Though you may decide to use a friend or family member as trustee, you may also want to consider using a professional trustee.

Your estate plan should also include a will. You will nominate an executor who will marshal and value assets held by you individually, pay your bills, distribute your estate and fully account to your beneficiaries. There is court oversight, called probate, and your executor will hire a lawyer to assist in these responsibilities.

You will also nominate a guardian of your minor children in your will. You may also nominate a guardian for a child with a legal disability. While you might choose the same person to serve as trustee of your children’s trust and also their guardian sometimes it makes sense to use different people for these very different roles.

Your surviving spouse or next of kin will make funeral and burial arrangements for you. However, you may direct that someone else have the authority to dispose of your bodily remains if you prefer. You may want to discuss your preferences with your spouse, next of kin or agent or make a written statement of your wishes.

Finally, your estate plan should include instruments that will protect you in the event of incapacity. With a Durable Power of Attorney you can name an individual to handle your legal and financial affairs if you become incompetent and cannot handle these yourself. With a Health Care Proxy you can name an agent and alternate(s) who will communicate your choices regarding medical care in the event that you cannot communicate these yourself. The individuals you name in your Health Care Proxy are also responsible for making end-of-life decisions. A Medical Directive, sometimes called Living Will, outlines your preferences regarding the care you would want in the event of coma, brain disease or injury or terminal illness and provides guidance to your Health Care agent and loved ones.

With this background you can now start with your own plan. Do not rely on the general information provided here. Instead, contact an attorney now. Your attorney will customize your estate plan to your family’s situation and goals.

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