If you were to review my client files over the last decade, you might be surprised to learn that estate plans for people younger than forty are scant. Yet, from an estate planning perspective, these generations carry the greatest exposure. While death or disability at any age creates complications, these complications are amplified for younger families, especially where there are children. The starting point is a Last Will and Testament (“Will”) or Revocable Trust established during your lifetime. If these documents are not properly drafted, however, or not combined with other estate planning documents, complications will still exist.
Using Trusts for Children
Where there are children, even adult children, the management of assets becomes paramount. Without proper planning, the courts will oversee the management of a minor child’s assets. In the case of young adult children, the assets may be subjected to the whims of children who may be incapable of handling assets, especially after a traumatic loss of one’s parents. Using a trust created under the terms of your Will or Revocable Trust, managed by one or more trustees, for the benefit of your child solves many problems. These trusts can be crafted in several ways. For instance, a common technique is to prepare a trust that provides for discretionary payments of income and principal until a certain age. Upon reaching that age, the trust terminates, and the assets pass to the adult child.
Another type of trust that is being used with increasing popularity is something called a “beneficiary controlled trust”. These trusts are often used to prevent the child from losing assets in a divorce proceeding. This trust does not terminate. Rather, when the child reaches a certain age, he becomes a trustee of his own trust. As trustee, the child has some control over the management and use of the trust property.
If you are using trusts, be sure to work with an attorney to customize your beneficiary designation forms for your beneficiary designated assets since they do not pass under the terms of a Will or Revocable Trust unless you direct them to do so. If you don’t customize a beneficiary designation form to specify that that your beneficiary designated assets should pass to the trust being created under your Will or Revocable Trust, the account will be distributed directly to your children, defeating your estate plan.
Nomination of Guardians
In New York, a child under the age of eighteen is considered a minor. To avoid family members fighting over the custody of your minor children or to avoid the Court having to appoint an unrelated person to care for your children, you should nominate a guardian in your Last Will and Testament. A guardianship is two-fold. There is a guardian of the person and guardian of the property. The guardian of the person does not need to be the guardian of the property and in fact, you often see these roles divided in young families.
Advance Directives consists of powers of attorneys, statutory gifts riders, health care proxies and in some cases, forms providing for the disposition of your remains and release of protective medical information. I often lecture that anyone can become disabled at any time. If you become disabled without advance directives, the problems that are created may be worse than the problems created by death. For instance, your family may end up in protracted guardianship proceeding to be able to handle your personal and financial needs.
The optimal time to purchase life insurance is during your younger years. It should be part of every well-thought-out estate plan for younger families. If there is a premature death, life insurance provides the cash flow to the surviving family members to move on. Too often, life insurance is not even considered, or if it is, insufficient amounts of insurance are purchased. The most important form of life insurance for a young family is term insurance. It is cheap, which allows you to purchase a significant amount to provide for your family if there is an untimely death.
While the proceeds from life insurance are tax-free to the beneficiary, one should not overlook the fact that the value of the policy is includable in a decedent’s gross taxable estate. If you own significant life insurance, you could easily end up with a taxable estate for New York purposes. If you have a taxable estate due to life insurance, your attorney will likely discuss a life insurance trust to remove the taxable value of the life insurance from your estate.