Estate Planning Actions You Should Consider Taking When Your Children are Under 18 Years Old As Well As When They Turn 18 Years Old
No one wants to address it, but you need to prepare for the unthinkable, particularly when your children are under the age of 18 years old. For peace of mind, some of the estate planning issues that you want to address when your children are minors as well as some issues that you should address after they become “adults” (18 years old).
NAMING A GUARDIAN OF MINOR CHILDREN
The most important piece of an estate plan for individuals/families with minor children is planning who will take care of the children if something happens to the parents while the children are minors. A guardian, who must be appointed in a valid Will which must go through the probate process, is entrusted with all the power and responsibility of a parent and makes important decisions about the child’s upbringing, schooling, religious training and medical treatment. As such, it is wise to nominate someone, whether a friend or family member, who knows your children and who will accept this role if called upon to do so. There are also several questions to consider. Does the nominated Guardian have a home large enough to accommodate your children? Does the Guardian live in a location that would permit your child to remain in the same school and to maintain the same friends and lifestyle? You also need to consider the financial impact that will be borne by the Guardian when he/she takes on responsibility for raising your children. How will you provide funds to defray the costs associated with raising your children? Finally, it is also wise to name a successor Guardian as well in case something makes the initial Guardian unavailable.
If you don’t name a Guardian in your estate plan and you and your co-parent both die while the children are under age 18, the appointment of a Guardian falls to the courts.[1] While the court system is required to always consider the best interest of the child, the Guardian chosen by the court may or may not be your first preference. For example, the court may look first to immediate family members such as grandparents, aunts or uncles, without regard to whether your children had a regular relationship with such individuals prior to your death.
FINANCIAL ASPECTS FOR MINOR CHILDREN – NAMING A TRUSTEE
It is also necessary to plan for the management and administration of any assets that you intend to leave to or for the benefit of your child. In most estate plans, whether through a Will or a trust, assets are placed in a trust for the child’s benefit upon your death. Accordingly, it is necessary for you to determine who will serve as Trustee. The Trustee—who may not be the same individual as the Guardian—will be responsible for managing and distributing the assets on behalf of your children. The Trustee is usually appointed via a Will or a revocable living trust. If you appoint different individuals in the roles of Guardian and Trustee, it is important to consider whether they can work well together and can coordinate their efforts to ensure a smooth future for your child. As with the designation of a Guardian, designation of a successor Trustee is very important to protect against potential change in circumstances.
A Trustee typically is given the authority to disburse the inherited assets to make necessary payments for your child’s heath, education, maintenance and support. As part of the estate plan, you may also determine when your children will ultimately receive outright the bulk of your assets, with a popular option that they receive distributions once they reach certain ages (25, 30, 35, 40). People certainly have differing views on this and what is right for their child, but a common theme is that most do not think their child is ready for such funds when they are only 18 years old, which is what will occur if you just name them as a direct beneficiary without any restrictions (see below for additional discussion of this topic). While outside the scope of this article, it is also possible to address more specific concerns about use of your assets for the child after your death. It is not uncommon for trust provisions to address use of funds for a child’s education, for major life events or for emergencies. Significantly, trust provisions can also be drafted to protect assets from a child’s future creditors or from loss in a potential divorce.
It is important to note that the duties and authority of a Guardian terminate when the child turns 18. The duties and authority of a Trustee, however, will continue throughout the duration of the trust provisions.
BE CAREFUL OF BENEFICIARY DESIGNATIONS FOR VARIOUS ASSETS
There are several forms of asset ownership that will supersede the terms of even the most well-drafted and validly executed Will or trust. Bank and brokerage accounts that contain “payable on death”/”transfer on death” provisions will be distributed to the beneficiary named on file with the financial institution, regardless of who is named as a beneficiary in the account holder’s Will or trust. Similarly, life insurance policies and many retirement accounts will be paid to the named beneficiaries on file with the carrier or plan administrator. It is essential that beneficiary designations be carefully reviewed and coordinated as part of the estate planning process, to avoid unwelcome surprises.
In most U.S. jurisdictions, including New Jersey, an individual is considered an “adult” for purposes of inheritance when he/she reaches age 18. Accordingly, if the unthinkable happens, assets left to a minor child outright (i.e., not in trust) would be transferred and then held in a court-supervised Guardianship account until the child reaches age 18. Unlike a trust (including trusts provisions in a Will), which can dictate that the assets be held in trust beyond age 18 (and even for the life of the beneficiary), this type of Guardianship account terminates upon the child’s attainment of age 18, regardless of the child’s readiness to receive the assets.
Consequently, be very careful of naming your minor child as a direct beneficiary in connection with these types of assets or even as a contingent beneficiary, which some of these assets allow, which could cause the same issue if both parents die simultaneously.
WHAT NEEDS TO BE DONE WHEN YOUR CHILD TURNS 18 YEARS OLD
When your child turns 18 years, he or she is considered a legal adult and under the law, is seen as being fully capable of making his or her own medical, financial and legal decisions.
From a medical care perspective, a parent can no longer direct medical care or make fiduciary decisions on the child’s behalf should they become incapacitated. Even worse, health care providers are not legally permitted to disclose a patient’s medical record or even discuss the patient’s health status or treatment recommendations with anyone—even the parent of a young adult who is still on their parent’s health insurance plan.
Consequently, after a child turns 18 years, he or she should sign two different medical documents: (i) a Health Insurance Portability and Accountability Act (HIPAA) Release form, which grants parents access to the child’s medical documents and permission to speak with their health care providers about their medical condition; and (ii) an Advance Health Care Directive, which allows the child to appoint an authorized agent (presumably one of the parents) to make medical decisions on the child’s behalf should they become incapacitated due to serious injury or illness.[2]
From a financial perspective, the child should be encouraged to sign a Durable General Power of Attorney form, which appoints an agent, generally one or both parents, to handle the child’s financial affairs. Through a properly drafted and executed Power of Attorney, a parent can gain access to items in the child’s name, such as bank accounts, pay their student loan bills, make car payments and so on.
If the above health and financial documentation are not put in place, and if a child becomes incapacitated after they turn 18 years, it becomes necessary for the parents (or another individual) to seek formal adult Guardianship of the child via a lengthy and costly judicial process. Clearly, this is a situation to be avoided, and the execution of the documents described above are a simple way to do so.
