Young families don’t tend to think about estate planning because they are of modest wealth and in good health. Despite that, young adults are not immune from the tragedy that may come in the form of an accident or unexpected illness.
In fact, unintentional injury is the leading cause of mortality among those ages 25 to 34. Therefore, parents with minor children need to address issues such as how to provide income to the children, how inherited assets may be managed for their benefit and who will care for the children if both parents are gone.
Naming a Guardian
If something happens to one parent, the remaining parent usually will continue raising the children. That leaves the question, however, of who will take care of the children if both parents are killed in something such as an auto accident. This presents a difficult decision for parents. But unless the parents name a guardian, the court will have to appoint someone without knowing the wishes of the parents, children or other family members. This process may be slow, expensive and unresponsive to a particular child’s unique needs.
The place for naming a guardian is in the parents’ wills. In naming a guardian, parents should consider the proximity of the guardian’s residence to the children’s current home, as well as the guardian’s lifestyle, religious beliefs and financial situation. Further, since it is such a major responsibility to take over raising a child, the preferred guardian should be asked whether they are willing to accept that role. In any case, guardianship provides for the children’s care until they reach age 18. Guardianship gives someone the power of a parent to make decisions about the child’s schooling, religious training and medical treatment.
This leaves the question of how the parents’ estate assets will be transferred to the children. The answer is that if the parents do not name a conservator in their wills, the court will appoint someone to oversee the children’s inheritance. That will cost money, and the children usually will receive their shares equally on reaching age 18.
Because the children may not be ready for such a responsibility at age 18, the parents may prefer to establish a minor’s trust in their wills. This trust would receive, manage, invest and distribute the assets to the minor according to the terms of the trust. Importantly, the trust may delay distribution of the assets to the child to a time or times chosen by the parents. Alternatively, in the case of a special needs child, the parents could establish a trust that would leave all distributions to the child to the trustee’s absolute discretion. This would keep the child eligible for certain government needs-based benefits such as Medicaid.
Children From Previous Marriages
Clients who have children from a previous marriage may want those children to inherit certain property. That might be accomplished by the parent keeping the property in question in their own name and leaving that property to the children from the prior marriage under their separate will or trust.
A review of the young parents’ life insurance needs is crucial to the planning process. That is because the income earned by one or both parents would have to be replaced if they died. A key point to remember, however, is that it is not just breadwinners who need life insurance. The stay-at-home parent provides services that the surviving parent would have to pay to replace.
This leaves the question of what kind of life insurance to purchase. The answer is that term insurance is sufficient for most families since it is more affordable for young parents and enables them to create an adequate safety net until the children are grown. On the other hand, if there is a special needs child who will be a dependent for life, permanent insurance is more suitable. This might include a second-to-die policy since the greatest risk to the children occurs when both parents are dead. In any case, when calculating the amount of insurance needed, the following four-step process may be followed:
1. Determine the number of years for which coverage is needed and multiply the parents’ income by that number.
2. Add the amount of nonrecurring financial obligations such as debts and college costs for the children.
3. Include the cost of replacing the services of the lost parent.
4. Subtract the cost of savings and existing life insurance coverage.
Next is the issue of designating the beneficiary of the coverage. Normally, each parent might simply designate the other parent as the beneficiary of their coverage. Alternatively, an option is to set up a life insurance trust with the spouse or another person named as the trustee with the responsibility to manage the trust for the children’s benefit according to the terms of the trust.
Durable Power of Attorney/Medical Advance Directives
To complete their planning, young parents should create durable powers of attorney and medical advance directives. Durable powers of attorney are documents by which a parent authorizes another person, such as their spouse, to manage their property interests if they are unable to do so because of injury or illness.
A medical advance directive is a document through which the parent may authorize another individual to make medical decisions for them if they are unable to do so for themselves. A further advance directive may take the form of a living will under which the parent specifies what kinds of medical services or treatments they want or do not want to be administered if they are terminally ill.
Young parents may not want to think about their own mortality. Yet tragedy happens, and unless parents take steps to deal with matters such as guardianship, conservatorship and their children’s income needs, the results may be most unfortunate.
In that regard, advisors can act as a catalyst to motivate parents to take action. Further, advisors may help inform parents about the advantages and disadvantages of various estate planning tools and techniques that can be applied to protect children, considering the family’s lifestyle, values and relationships.