A lot of people think that estate planning is something you only have to think about when you are old and gray. In fact, if you look at it objectively, it can be argued that estate planning is more important for younger adults than it is for their older counterparts.
How can this be the case? If someone that is 60 years of age or older has children, it is very likely that the children will be adults. They are in a position to support themselves, but the situation is entirely different when you are talking about dependent children.
A 2021 Caring.com survey found that 22.5 percent of people between the ages of 35 and 54 had estate plans, and the figure was 26.8 percent for adults in the 18 to 34 age group. These are the folks that have minor children still their homes, so these are disturbing statistics.
How do you provide for a child that is not old enough to handle money? A testamentary trust would be one potential solution.
This type of trust can be simply defined as a trust that is contained within a will, and it could be a particularly good approach if you are protecting your family with life insurance.
The way that it works is you name an executor in your will and you spell out the terms of the testamentary trust with your child as the beneficiary. If you pass away before any changes are made, the executor would have a fiduciary duty to establish the trust for the benefit the child.
You name a trustee to act as the administrator when you are drawing up the trust. The executor can be the trustee, but this is not required. When you take out your insurance policy, you would make the trustee the beneficiary of the policy.
If you pass away while the children are still minors, the trustee would fund the trust with the insurance policy proceeds and act as the administrator until the child reaches adulthood. At that point, the child would manage their own funds under terms that you set when you plan your estate. The major drawback is the will would first need to be probated by a court. This can be time consuming and also expensive.
A revocable living trust is another possibility. You would act as the trustee while you are living, and you would name a successor to assume the role after your passing. This trustee could manage assets on behalf of minor beneficiaries if necessary.
This type of trust is more effective than a simple will as an asset transfer vehicle in a number of ways, even if minor children are not involved. While you are living, you would maintain control of the assets, so nothing would change in that regard.
Probate is a time-consuming and expensive legal process that would be necessary if you use a will to transfer assets. On the other hand, if you utilize a living trust, the probate court would not be involved.
You can also include spendthrift protections when you have a living trust. It would become irrevocable after your death, and the principal would be protected from the beneficiaries’ creditors.
If you want to include spending safeguards, you can instruct the trustee to provide limited distributions over an extended period of time. This method is often better than a testamentary trust.
The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are a couple of legislative measures that allow for the creation of custodial accounts for children.
You contribute into the account while the beneficiary is a minor, and when they reach the age of majority, the child will become the owner of the account.
These accounts can be used if you want to develop savings for a child’s education, but once the child assumes ownership of the account, they can use the funds for any reason. A 529 account would be the solution if you want to set aside funds that must be used to pay education expenses.
The major difference between the two types of accounts is the nature of the assets that can be held. A UGMA account can hold financial products that you would find in a typical individual retirement account, such as stocks, bonds, mutual funds, and cash.
A UTMA account can hold all the above, but the possibilities are broader. You can convey real property, a motor vehicle, an art collection, and other valuables into a UTMA account.
Need Help Now?
If you are ready to work with an attorney from our firm to put a custom crafted estate plan in place, we are here to help. Planning for minor children does not have to be difficult. You can send us a message to request a consultation appointment at our office in Burbank, and we can be reached by phone at 818-937-2335.