leave assets to minor children

How Do I Leave Assets to Minor Children?

What would happen to your young children should something happen to you? Have you named a guardian in your will? Have you created income streams or designated specific assets to see to their well-being into the future? If you want to leave assets to minor children, you need to plan for it now.

Common Mistakes Parents Make

One of the most common mistakes parents make is to assume that, by naming a guardian for their minor children in their will, the guardian will automatically be granted access to the estate assets to take care of the children. Unfortunately, that’s not what happens.

Unless you have your wishes clearly—and legally—outlined, the court will control how your estate is to leave assets to minor children. The guardian isn’t the one to control that inheritance. And this control is enforced until the child reaches the age of majority, either 18 or 21.

Upon achieving that magic age, your child will receive the entire inheritance. If you think back to how much sense you had at age 18, you might have some serious reservations about placing a lot of money at your child’s disposal.

Legal Requirements for Bequeathing to Minors

When the court is involved in distribution of assets to your children, they will have requirements. Every time your child’s guardian wants to use money from the fund, they’ll need to document it. Those expenses will then be audited and approved by the court.

In addition, each time money is requested from the estate, an attorney has to be appointed to represent the minor child in court. Naturally, the attorney’s fees will be deducted from the funds you’ve left behind. That can eat away at their inheritance quickly.

If relatives leave assets to minor children, the same rigamarole will occur. The court will step in to protect the child’s interests—even when the parents are still alive. This happens when a minor child is named as a direct heir, especially of high-dollar assets.

How to Properly Leave Assets to Minor Children

Children’s Trust

There has to be a better alternative, right? One option is to create a children’s trust as part of your estate plan. In the trust, you will designate a person who will manage how you leave assets to minor children. That takes power back from the court and keeps it with a trusted friend or family member.

Of course, in this scenario, you can still decide when or if your child will inherit, as well as the conditions under which they will do so. Keep in mind, however, that this provision won’t go into effect until you die. It will not occur if you are incapacitated.

Revocable Living Trust

Another option—and probably the best—is to create a revocable living trust.

A revocable living trust is extremely flexible and allows you to take each of your children’s needs and circumstances into account. You don’t parent all of your kids the same, so why would you leave assets to minor children in the same way? Here, you’ll appoint a trustee, who will manage the inheritance until your children reach the age you want them to have full access to the funds.

Plus, with a revocable living trust, all of the provisions hold when you are incapacitated as well.

When you choose a smart way to leave assets to minor children, they are protected from the courts, creditors, divorce, and even their own excess. And your revocable trust can be amended at any time. If you have second thoughts about a provision or change your mind about the trustee, making modifications is easy through a trust amendment document. In the unfortunate instance that your child predeceases you, you can also dissolve the entire document.

Poulos Law Firm Helps You Leave Assets to Minor Children

It can be disconcerting to think about dying and leaving your children. But it can be even worse for them to leave them ill prepared for their future should you pass away unexpectedly. Being prepared is the best gift you can leave to your minor children.

At Poulos Law Firm, we help you make plans that protect your children and family. Contact us to schedule a consultation and learn more about how to properly leave assets to minor children.

Build a Fortress for Your Beneficiaries

The question of how to leave your assets to your beneficiaries deserves considerable thought. For instance, outright distribution to a child with special needs can interfere with government benefits your child may be receiving. What about a child you know is not financially responsible … should you give them the assets outright, stagger the distribution method or set up a lifetime fortress or dynasty trust.

Let’s take a look at all three methods…

Outright Distribution
This method is pretty straightforward … upon your death and after payment of expenses and debts, your beneficiaries receive their full share of the assets immediately. The advantages are that the assets can be folded into their own estate plans. The disadvantages may include some rather serious tax consequences depending on the size of the estate, and of course, that irresponsible child may blow through your assets with the speed of light.

The biggest issue for most families is that the kids (or their partners or spouses) will blow the inheritance in no time.

Staggered Distribution
In this scenario, you provide your child with a percentage of their inheritance at certain ages, dates or when certain events happen. For instance, when your child turns 21, they receive 1/3 of the inheritance, another 1/3 when they marry, and the final 1/3 when they reach age 40. You can also build in distributions of principal and income for things like a home down payments, educational expenses or even a monthly stipend for living expenses.

You may have seen the movie with James Garner’s move The Ultimate Gift. In this film, a deceased billionaire leaves his spoiled adult grandson a series of tasks to perform to receive his inheritance. You can structure an “incentive-based trust” along the same lines as the movie. For instance, your child will receive ½ the inheritance when he or she graduates from college and the other half when he or she retains a full-time job for at least two years.

This structure allows you to prevent a beneficiary from having too much control of inherited assets until he or she is more capable of managing them. In addition, this is a good way to protect your child and your assets if he or she is having creditor issues or is going through a divorce.

While very popular, it is not always appropriate especially when you have young children. How much do you know about who your kids will be in the future when they are very young? You don’t, so how can you make a decision about the “right age” to give a distribution?

Lifetime Fortress or Dynasty Trust
A third method of leaving assets to your beneficiaries is through a lifetime fortress or dynasty trust. In this scenario, your assets remain in trust for the beneficiary’s entire lifetime. For instance, your child could receive distributions from your trustee for health, education and living expenses. Or for more protection, you require that all activity in the trust be done in the name of the trust so that the funds never leave it. This does mean more administrative expenses, but it does provide solid asset protection. Such a plan is not for every family, but every family should at least consider it.

Special Needs Trusts
If you have a special needs beneficiary or do not plan for the possibility that special needs might arise in the future, you put public benefits for that beneficiary at substantial risk with an outright distribution. With provisions for a special or supplemental needs trust you have a particularly useful tool. You can support their needs and yet not interfere with government benefits he or she may be receiving.

Whatever method you choose you should start by discussing all options with an experienced estate planning attorney. Each method has pros and cons that should be carefully weighed to meet your goals for your family, and also meet the needs of your beneficiaries.

Naming a Stand-Alone Retirement Legacy Trust as Beneficiary

Naming the right beneficiary for your tax-deferred retirement accounts may be one of the most important decisions you make with regards to your estate plan. You want to continue the growth of those accounts for as long as possible, while still protecting the financial future of your beneficiary(s). Naming a younger beneficiary, like a grandchild, can stretch the wealth-compounding potential of the accounts, but naming a beneficiary outright does have its risks.

The disadvantages of naming a beneficiary outright:
• Distributing fund to a minor means the distributions will be paid to a guardian and you must have faith in the guardian’s good intentions. In addition, when the child turns 18, the money is theirs to do with as they wish — depending on the child, this could be good or turn into a disaster.
• Your beneficiary may abuse the privilege and take larger distributions or even cash out the account, thus destroying your intentions for long-term growth of the account.
• If your beneficiary becomes incapacitated, the court may step in and interfere with your plan for fund growth.
• If your beneficiary has special needs, any additional income may cause him or her to lose their eligibility for valuable government benefits.
• A spouse is under no obligation to follow your wishes and can name a new beneficiary.

The solution to counter these problems is to name a Stand-Alone Retirement Trust as your beneficiary. It provides you with more control on what happens to the assets. A carefully crafted trust can meet all the IRS requirements for a qualified beneficiary. After you die, distributions are paid by the plan into the trust for the benefit of your heir or heirs. It can pass funds directly on to your heirs (a conduit trust) or the trust can accumulate and grow these funds (an accumulation trust). A trustee can then pay out the assets over time according to your instructions. A perfect example is allowing the trust to only pay for certain eventualities — college tuition, a home down payment, unexpected medical bills or any other event you might want to designate to trigger the advance of funds to your beneficiaries.

The advantages of a Stand-Alone Retirement Trust
• Since there is no named beneficiary other than the Trust itself, there is no risk of court interference should your beneficiary become incapacitated.
• The trustee makes the decisions on fund distribution on your behalf should something happen to your beneficiary.
• There is no risk of your heirs cashing out too soon and taking a huge tax hit. Your ongoing control assures the continuing power of long-term, asset-protected, tax-deferred growth of your requirement account.
• The trust protects your funds from becoming subject to creditor claims.
• The trust allows you to maintain a long-term relationship with your trusted financial advisor by appointing him or her as trustee and protecting your beneficiary from making the wrong choice of financial advisor.
• You maintain control of retirement plan proceeds even if your beneficiary unexpectedly dies before the accounts are paid out.

A Stand-Alone Retirement Plan Legacy Trust is a powerful estate planning technique that allows you to watch over your family and continue the growth of funds even after you are gone. To evaluate this strategy as part of your estate plan, you should consult with a qualified estate planning attorney who has experience in this type of planning.

Get Those Beneficiary’s Correct..or else.

Do you want to create absolute chaos or extensive problems and expenses for your heirs? Sure, you do. Not!

When we ask clients and their advisors whether client’s beneficiary designations are current, we either get a “sure” answer or an “I think so?” response. Not good.

What’s a simple way you can ensure that your inheritance passes to your designees in accordance with your wishes? Make sure your beneficiary designations are up to date! Most people fill out a form when they open an account and never think about it again. Except. Things change: people get married, divorced, have children, want to disinherit someone. All kinds of things can happen.

“But I have a will!”

Not all of your property is distributed by your Will or Trust. Many assets are passed on through a beneficiary designation, for example retirement accounts (IRA, DEP or 401(k), etc.), life insurance policies, annuities, employee benefit plans and stock options to name a few. These types of accounts will ask you to name a beneficiary when you open them. In other words, it is your responsibility to select the person(s) you want to inherit those assets. Your will or trust for that matter has no relevance here. Accounts with beneficiaries are not probate assets so your will does not control where they end up.

Clearly, you should periodically review your beneficiary designations to make sure they reflect your wishes. Additionally, when you designate a beneficiary, make sure the name is accurate. The insurance company will not release funds to “The John and Jane Doe Revocable Trust” if the name on the beneficiary form is “The Doe Family Trust”.

Even when our clients have beneficiary designations in place they are often outdated or fail to take into account what the beneficiary’s position is. Are they children? Does the person have special needs? What happens if there is more than one beneficiary and one dies – where does the benefit go?

What if your spouse dies and they have named someone else as beneficiary of their IRA or insurance policy? In some states such a designation, without the consent of the other spouse, is void as a fraud upon the spouse’s rights. But in Arizona a spouse has the right to dispose of his or her half of the community property as they see fit. In the case of an insurance policy or retirement account that designates a beneficiary other than the spouse, Arizona law presumes that the excluded spouse consented to the designation but the spouse is still entitled to their one-half share of the community property whether it comes from the insurance policy or other assets. If those other assets are less than the spouse’s share, the spouse may have a claim against the policy.

What if you named your spouse as a beneficiary, but then you later divorce? Well in that case, the Arizona Legislature has got your back! In 1996 they passed a statute that automatically revokes any disposition of property made by a divorced person to their former spouse or to a relative of the former spouse. In Estate of Lamarella, the ex-wife argued that her deceased ex didn’t change the beneficiary designation after their divorce because he wanted her to receive the proceeds of his life insurance policy. The Court of Appeals said “too bad” because the statue applies, and if he wanted his ex to remain on the policy, he should have redesignated her as beneficiary. Any time you have a life changing event, such as a death, a birth or a divorce, you may want to change your beneficiary designations.

Ah, but what if the retirement account plan (ERISA) beneficiary designation is not changed after the divorce? Arizona law suggests that the account be treated the same way as the life insurance policy. But ERISA is a federal law that should preempt state law. As least for now Arizona’s “revocation upon divorce” law applies. The divorced spouse is treated as if that spouse died first. This is not the rule in every state however.

Beneficiary designations are an important part of estate planning. Why leave this piece unattended? It is much better to review your status on a regular basis on your own or with your financial professional. We review these items as part of every estate plan we do.