In a recent post, I discussed the importance of establishing an estate plan for parents of children. The two areas of focus in that article involved designation of a guardian to care for children and the implications of dying intestate—that is, without a Will.
In Estate Planning for Young Families – Part Two, I will discuss two other areas of concern that many parents overlook when deciding whether they should pursue estate planning. These are the importance of establishing trusts and proper beneficiary designations on non-probate assets.
Trusts for the Benefit of Certain Beneficiaries
When the term “trust” is evoked, many people believe the use of trusts is for people with abundant wealth. However, there are important practical purposes behind establishing trusts.
Many parents understand that if they were to pass away, their children, whether twelve years old or twenty-two, have not yet reached an age of financial maturity such that they could be expected to manage their own finances. One benefit of a trust is that it allows parents to set aside a child’s inheritance so that it is protected for a period of time and utilized in a manner that benefits the child. In particular, a testamentary trust can include a “spendthrift provision” that prevents the principal of the trust from being collected upon by the beneficiary’s creditors. Rather, only the amounts paid out of the trust are subject to creditors.
Parents can also designate at what age or ages the child receives larger distributions from the trust. For example, parents can direct that the Trustee pay a percentage of the trust estate to the beneficiary upon reaching age twenty-five, and then, at age thirty, the child receives the remainder of the trust estate, free from trust. In between the time that the trust is funded and the final distribution, the Trustee can be instructed to make interim distributions to pay for the child’s health, education, maintenance, and support needs—just as the parent does on a daily basis.
If a Will is not prepared, a Trust is not assumed. Rather, as discussed in my previous article, the child would receive his or her inheritance outright, free from trust, at age eighteen. For many parents, the thought of their child receiving a lump sum of money at this age is worrisome given the sometimes impractical and shortsighted decision-making associated with their youth.
Beneficiary Designations for Non-Probate Assets
Estate Planning is an evolving practice that encounters the fields of real estate, creditor’s claims, banking, and many others. It may come as a surprise to some people that the disposition of their assets are not always controlled by the terms of their Will or Trust. “Non-probate” assets are assets that are outside of the probate process and, thus, are not controlled by the terms of a Will. When designated properly, they can include Bank Accounts, Real Estate, Vehicles, Retirement Accounts and Life Insurance.
This article will focus more specifically on financial accounts that are non-probate in nature, in particular, bank accounts, retirement accounts, and life insurance. What makes these types of assets “non-probate” is the contractual agreement between the financial institution and the owner of the account. When a person opens such an account, they are often given the opportunity to designate a beneficiary of that account when they pass away. This designation is contractual in nature because it the owner’s agreement that they giving the financial institution the ability to carry out their instructions and the financial institution’s agreement to do the same.
Of particular importance as it relates to the topic of this article are the specifics of who parents should designate as beneficiaries of such accounts and how they should be designated. As an illustration, Mark and May are married and have one child, Paul. If both Mark and May pass away, they want their entire estate to pass to Paul. But, Paul is only ten years old and they want Paul’s inheritance to be held by their trustee until he turns age thirty. Making these designations in their Wills is only half the process. Mark and May each own retirement accounts and life insurance on their lives. Currently, each account has the surviving spouse as the primary beneficiary and the name “Paul” listed as the alternate beneficiary. Herein lies the danger: if Paul is listed directly as the alternate beneficiary, and not the Trust or Trustee of the Trust, then Paul would receive his distribution from these accounts directly, free from trust, at age eighteen.
To counteract this issue, it is important that parents, and even grandparents, that designate minor beneficiaries as beneficiaries under non-probate accounts understand the risk of distributing the contents of these accounts to beneficiaries at age eighteen. Instead, in the scenario described above, Mark and May should designate the Trustee of the Trust created under their Wills as alternate beneficiary to hold, invest, and disburse the funds for Paul’s benefit. If Paul is over the age of thirty when Mark and May pass away, then he will then receive the funds directly, free from trust.
Establishing Trusts and designating beneficiaries are significant aspects of estate planning, especially for parents of young children. In the instance of a trust, parents should consider the size of their estate, the financial maturity of their children, and the age or ages at which they believe their children could manage their inheritance. In the instance of beneficiary designations, parents of children should review the designations on accounts previously made and assess how these designations align with their current estate plan or intended estate plan.
The attorneys at Middleton & Middleton understand the complex nature of trusts and have experience guiding individuals in establishing a comprehensive and integrated estate plan for both probate and non-probate assets, no matter the stage in life. Contact our office today to schedule an appointment to discuss your estate plan today.