Estate Planning for Your Children

If you have minor children, estate planning is a very important step when it comes to planning for your death. Failing to name guardians for your children in your will can lead to custody issues that are easy to avoid by simply taking the time to decide who you want to take care of your minor children in the event of your death. Determining who will raise your children if you die can be a difficult decision. For this reason alone many parents avoid the issue of custody decisions since they’re unable to find someone who they think will be the perfect guardian.

Avoiding the issue of guardianship is the number one reason why people fail to plan their estate or have a will. By procrastinating the decision about custody parents put their children at risk in the event of their death. Unless you name a guardian the courts will name someone they feel is right for the role of guardian. And this could be someone who you least wanted to have custody of your children. Court battles for custody can be long and drawn out, especially if there is more than one applicant who is seeking custody. This can place a huge financial and emotional strain on your children as well as deplete the assets from your estate. The worst case scenario is that no one applies to take custody of your children. The courts may decide to give custody to someone in your family who really doesn’t want the responsibility or your children may end up in foster care.

When planning your estate try to choose guardians for your children who you know will want to take them. Don’t feel that you have to choose a family member; friends you trust can also be ideal candidates. Consider separating guardianship of your children from the assets of your estate. By naming someone other than the guardian to be the trustee of your children’s money you ensure that there are some checks and balances in place when it comes to deciding how that money is spent.

Always have a backup named for the guardian in the event that your first choice is unable to accept the role. Keep in mind that if you name a couple as the guardian the issue of their breakup may become an issue and this can lead to a legal battle for custody. For this reason alone it’s a good idea to name individuals as guardians. If you’re divorced, consider your ex-spouse as the guardian. Most of the time, your ex will want to have custody anyway. Why make it more difficult by naming someone else as guardian and risking a lengthy court battle?

Nowadays, most Americans hold their wealth in retirement accounts. When it comes to
inheritance and estate planning, special considerations are necessary to ensure that these assets are protected and distributed according to the account holder’s wishes.

Retirement assets, such as IRAs, are typically passed via beneficiary designation. For example, for a married couple with children, it would be common to designate the spouse as primary beneficiary and children as secondary. However, in almost all occasions it is advantageous to name a trust—rather than a particular individual—as the designated beneficiary. Once the retirement account becomes inherited by a non-spouse beneficiary (i.e. children), it is important to understand that IRS regulations
treat this inherited retirement account differently. Specifically, once inherited, the beneficiary is obligated to begin taking required minimum distributions from such funds within a more immediate time horizon of either five years or over the beneficiary’s life expectancy. An IRA administrator will also offer the option of receiving the proceeds as a lump sum payment, which is very often discouraged, especially in the case of minor or financially irresponsible children. The preferred goal in planning for inheriting retirement assets is to maximize this window of time so that the tax-sheltered, long-term growth benefits of retirement accounts are maximized.

IRAs and other retirement instruments were designed precisely for a specific purpose: retirement. They were not intended as a savings mechanism for future generations. Tax laws work according to this assumption, and so foresight and planning are necessary when including such holdings in an estate to be passed on to beneficiaries. Trusts can serve as an appropriate conduit to protect and preserve these assets.

Some will consider a standard revocable living trust by default when structuring a retirement trust. This could cause unfavorable consequences, however, including a more fixed distribution schedule and the lack of creditor protection. Further, the IRS may a not consider the revocable living trust as a designated third party beneficiary, resulting in the assets becoming immediately, taxable income.

A Standalone Retirement Trust is a trust that is created for the sole purpose of serving as the beneficiary of the remainder of your IRA funds (and other qualified funds, e.g. 401(k)). Thus, the trust will be funded after you pass with whatever is left of your retirement assets. Then, the trustee of the Standalone Retirement Trust will oversee the distribution of the funds to your heir(s) in a manner you see fit.

A Standalone Retirement Trust will provide you with significantly greater control over the manner in which your remaining retirement funds are distributed to your loved ones, rather than just control who will receive the funds after you die—as is the case with leaving your IRA through a simple beneficiary designation.

Other potential benefits of Standalone Retirement Trusts include

Asset protection in the event of a divorce;
Creditor protection;
Generation-skipping tax benefits;
Special Needs/Supplemental Trust benefits;
Alerts the beneficiary of any tax consequences of an immediate payout;
Allows beneficiary’s to thinly stretch tax obligations over time;
Alleviates the need for a court appointed guardian for minor beneficiaries
Provides a beneficiary with asset protection in the event the beneficiary becomes disabled; and
Allows for successor beneficiaries.

For more information on Standalone Retirement Trusts contact our office today.