Urgent Estate Planning Information For People With Young Children

Urgent Estate Planning Information For People With Young Children

Some recent events caused me to put these seven previous postings together to provide to a client. I am posting these here as today’s blog and while it is quite long it is a complete “kit” of how to provide for a family with young children should the main breadwinner have an untimely death. This should be given the highest priority. You are welcome to call me if you have any questions.

Jacob’s Father Died and His Mother Had to Move out of Her House

Last week I met two young mothers, one was 28 and the other 38. They both had two children. The 28 year old was married and she and her husband were in good health. The 38 year old was a widow. Her husband was in good health until he was diagnosed with a brain tumor and died seven months later. Her oldest son is named Jacob, age 9.

The 28 year old and her husband do not have a will and do not have life insurance. Neither did the 38 year old widow until her husband was diagnosed and they then had a will prepared, but he was not able to get life insurance. When he died his employer had a policy with $200,000 coverage that she received. After he died, she, Jacob and her younger daughter had to move out of their house into her parent’s house. She also received about $80,000 net from the sale of her home and $90,000 from her husband’s 401k account. She has a job and is able to continue working and with the Social Security payments for the two children and interest on her savings is able to manage. Her mother watches the children as she no longer can afford the sitter the children were sent to after school hours. She doesn’t have a clue how she will cover the children’s college education except from what might be left from the $370,000 she received. At least her husband had a will so the probate process was relatively easy and not costly. Since the husband was in his late 30s he was able to accumulate some home equity and 401k funds, and his boss covered him with some life insurance. If the wife also passed away untimely there would not have been adequate funds to provide for the guardian and the children as they grew up.

I told the 28 year old she and her husband need to get a will, if for no other reason than to name a guardian for their children if they both have an untimely death. I also told them they each should get a minimum of $1 million 30-year fixed premium term policy for about $120 a month total cost for both of them. Furthermore, they should provide in the will that the guardians should receive a fixed payment of $2,000 a month for the care of their two children and an interest free loan of up to $100,000 to build an addition on their home, if necessary for the care of their two children.

The 28 year old couple can make arrangements the best way they can in case the unspoken occurs. It is too late for Jacob’s mother.

More About Jacob’s Mother

Last week I wrote about Jacob’s mother who had to move out of her house when her husband died. I also wrote that she was left with $370,000 and that elicited some calls and e-mails questioning that she was not so bad off. Thus today’s follow up.

The woman’s 38 year old husband died – that is bad off regardless of amount of the money in her bank account. While she was able to marshal some funds, she did not have sufficient cash flow to continue living in her house. Had there been adequate life insurance she would have had the option of remaining or not. Without the insurance, she had no choice; and that is the purpose of life insurance.

I don’t know if she would have remained in her house, or purchased a less expensive house in the same area, but she had no choice. She knew she could not afford the monthly mortgage, real estate taxes and myriad payments required to maintain the house, so she moved as quickly as she was able. Also, by moving, her children had to go to different schools, leave friends and after school activities, and grow up without a father causing as big an upheaval in their lives as their mother’s.

Having an adequately funded plan with the suitable legal documents provides the survivor with an option to stay where they are or change. Without the right plans there is no choice, no decision or breathing room to get used to new circumstances. And God forbid if both parents would have been killed there would have been no will, no designation of guardians, no regular payments to the guardians and no fund for future financial comfort for the children. The 28 year old mentioned in the column had no arrangements, but hopefully by now her and her husband have sufficient life insurance and the proper documents.

The husband was 38, so pretty well established in his occupation with a job that provided life insurance as a benefit, able to accumulate some 401k funds, and also able to build some equity in their house after all selling and moving costs. They had no other savings but were managing comfortably on their two salaries. The wife is not destitute, but a widow with two children living with her parents, with concerns about future financial security and college funding for her children. This does not leave her in any type of enviable position. Anyone that thinks otherwise is just not in tune with how life works.

Individual Responsibility

Recently, I have read about some tragic events happening to noble people that have been killed while performing their public service jobs. Some occurred through accidents and some were murdered by dastardly people. In response to news reports that include information that they left a young family with high mortgages and have little or no savings, people rush to contribute to special funds established to pay off the mortgage and create college funds for the children.

This is very honorable and admirable especially since the tragic circumstances of their deaths can only evoke sympathy by all of us who are indebted to these public servants and who also believe in fair play and decency.

However, I have a problem with the family being left destitute. Doesn’t the main breadwinner of the family have a responsibility to make sure this doesn’t occur if there should be an untimely death? I also apply these thoughts to any head of a family that would be left in a position where their family could not maintain the life style decided on when they were active and well.

There is an easy, low-cost way to protect the family from an unforeseen and untimely death and that is with fixed premium guaranteed term life insurance for a period of 20 to 30 years. The purpose of the insurance is to provide funds should the unmentionable occur. Bare-bones term insurance can be very inexpensive – for example $1 million coverage for a 30 year old is not more than $40 per month for 20 year coverage and $70 for 30 years; for a 40 year old $60 per month for 20 years and $100 for a 30 year policy. All of these are less than the cost of a meal in a nice restaurant. And, the family is protected.

Once taken, you should pray to God that you will be “wasting” your money and the benefits will never be paid. This adoption of family protection is a responsibility that cannot and should not be delegated – it is an individual responsibility and certainly very affordable for any family leader.

10 Non-Tax Reasons for Estate Planning

People associate estate planning with saving estate taxes, but in reality, very few pay estate taxes. However, there are many good reasons to plan, and here are ten of them.

1. Execute a will. When you do not have a will, your affairs will be settled according to legislative and bureaucratic norms (usually never the full way the deceased would have chosen.) A will also allows the appointment of people to settle your affairs, and says whether they will be compensated or need to obtain surety bonds.
2. Planning can provide for charitable bequests, delayed distributions to beneficiaries, different classes of beneficiaries and asset protection for your heirs. This can be done through a will, trusts or by the way assets are owned and beneficiaries designated.
3. Probate is the process of settling an estate by proving the will, qualifying the executors, administering the estate, resolving all claims, accumulating and liquefying assets, filing all tax returns, paying taxes and making distributions to beneficiaries. In many cases, probate can be minimized by a careful titling of assets.
4. Choosing a guardian can be easily done in a will, and done with much difficultly, confusion and cost in a Surrogates Court when there is no will. Choosing a guardian is necessary in the event of an untimely death of both parents of a minor child or children.
5. Provisions can be made in a will or trust for an allowance or regular stipend to be paid to the guardian, and also to provide for funding for additions to the guardian’s home or to acquire a bigger home if needed for the appropriate care of your children. Without a will, needless costs will mount up each time the guardian needs additional amounts for the care of the children.
6. An estate plan can provide for estate liquidity such as making funds available to heirs soon after death, providing for the management and operation of businesses or real estate, providing funds to a guardian or indicating a need for life insurance. Many times low cost fixed premium 20 and 30 year term life policies can solve potential problems.
7. Planning enables the synchronization of non-probate assets such as IRA, 401k and 403b accounts, pension plans, annuities and jointly owned accounts or houses with assets individually owned. It is important to understand that many assets that people own are not distributed or covered by a will and care needs to be taken to consider the complete distribution of all of a deceased’s assets in accordance with what is desired.
8. A plan enables the preparation of healthcare proxies, living wills, powers of attorney and provisions for care when incapacitated or disabled. In many instances determining who “pulls your plug” could be much more important to you than who gets your money.
9. This is an appropriate time to prepare a letter providing the pertinent information you would want your family to have regarding your affairs, your background, ethical, moral and/or religious values and any other sage advice you want to leave behind.
10. Planning forces the organization of information and your affairs. And, a final word is to leave a list somewhere with all your passwords so your family won’t go crazy trying to decipher your email accounts, your computer and cell phone.

Nothing beats being prepared. As seen from the above, planning is essential – even when there is no taxable estate.

Choosing a Guardian for Minor Children

One of the most important aspects of a will involving children is the need to appoint a guardian who will take care of the children in the event of the death of both parents. Following are some comments to help in the process of considering such a choice:

1. The first step is for each parent to prepare a list of possible guardians with each candidate rated by their degree of responsibility, accessibility, geographic location, lifestyle, moral tenets, parenting views and personal compatibility with the children. Other factors to consider are the candidate’s ages, whether they have children, and the ages of their children.
2. The parents should compare their lists to see if there are any guardians they both selected. Additionally, they should discuss every person on both lists. What occurs sometimes is that the discussion centers in on one person rather than all of the candidates on the lists. .
3. Meetings and discussions with the potential candidates are essential before the final selection can be made. Parents should learn about the potential candidates’ willingness to become the children’s guardian, their projected short and long-range plans, and viewpoints on issues that are crucial to the parents.
4. Guardians should be selected after satisfying all concerns and after serious discussions between the children’s parents. It would be wise to choose an alternate guardian or guardians should the primary guardian become unable to fulfill the assigned duties of caring for the children.
5. Meetings with the selected guardians should be held on a periodic basis and should include the children. These sessions will provide a forum to elaborate on the current needs and plans for the children. The meetings will also permit the potential guardians to voice changes in their own lifestyle that might have a dramatic impact on the children. This may cause a change of the guardian based solely on indirect or unsaid impressions imparted and conveyed during these sessions. It would also give the potential guardians and the children opportunities to become familiar with each other.
6. An instructional letter or memorandum should be prepared for the guardians if it becomes necessary for them to assume their duties. This letter or memorandum should be an updated list of important, helpful details in providing for the children’s well-being. The details should include the children’s favorite foods, allergies, medical requirements, family medical history, personality traits and behavior responses. Personal opinions should also be stated on areas of personal discretion including spending allowances, dating, education, driving and drinking.
7. The will should specify which assets and the amount that should be placed in a trust with a trustee given the power to disburse them as required by the guardians for the care, maintenance, health, education and general well-being of the children. This trust will insure that essential assets needed to support the children can be used immediately without any court restrictions. This trust will expire at such time as pre-chosen by the parents in their will. An alternative to using the will would be a living trust.
8. The children’s financial security and standard of living will be determined by the guardians, trustees and most importantly, by the parents’ planning. The parents must provide direction as to the spending of funds to achieve their desired short-range and long-range goals. The guardians and trustees need to be provided with instructions of which goals have priority. For instance, are short-range goals such as a car or a vacation in Europe more important than long-range goals such as a college education or a nest egg for a future profession, business or house?
9. Day-to-day spending needs of the guardian can be provided for by establishing a monthly minimum allowance to pay the guardians. The parents should review the initial monthly amount periodically to see that it is still reasonable. Once the parents die, this amount will then be set. Afterwards, the trustee can be provided with the power to increase the monthly allowance to meet predetermined specified spending goals or to simply adjust for inflation.
10. The monthly allowance will give the guardians the freedom to budget and plan their new responsibility without having to account to the trustee. In the event additional funds are required by the guardian, requests can be made to the trustee. Further, at that time, a discussion with someone knowledgeable or financially independent might be in order.
11. The ability to maintain the monthly allowance is directly related to the liquid earning power of the remaining available assets. The parents should analyze the earnings and cash flow potential of the assets when drawing up their will in terms of after tax funds available for the guardian. An important consideration is that this earning power could sharply decline should the assets be substantially depleted to achieve a spending goal. Needless to say, much care should be used in projecting future cash flow as well as future budget requirements.
12. In addition to the monthly allowance, the will or trust could specify which items of care the trust should disburse without question by the trustee. This might include lessons, schooling, certain trips, religious instruction, and private tutoring.
13. If there are provisions for delayed distributions of the principal and interest to the children, the will or trust should state when distributions of income and principal is to be made as certain ages or stages are attained.
14. The parents also have to designate the point when the monthly payments to the guardian would cease. I suggest they stop one year after the youngest child graduates college or the child is honorably discharged from the service, moves out of the guardian’s house or turns 24, whichever occurs first.
15. I do not advise making the guardians the trustees. A trustee should have no interest in the funds other than to see that the parents’ wishes and desires for their children can be attained and will be followed.

Reprinted from Getting Your Affairs in Order by Edward Mendlowitz, CPA ©2012. Available for sale at www.Amazon.com and www.BN.com.

Payments to a Guardian

Upon the death of both parents, a guardian for minor children will be appointed. Funds can be left to the children as described in the next blog. An additional provision can be included to provide the funds to be used for the children’s care by their guardian. As in this and all legal matters, an attorney should be consulted to draw up the documents.

Following is an illustration of how this can be done:

• The designated legal guardian of the children will receive a net after tax income of $3,000 [or any chosen amount] per month until the youngest child reaches age 21 and is not attending a four year college program; or if they are attending a four year college program or in the armed services, then until one year after they graduate, or are discharged from the service, or the child reaches age 24, whichever occurs earlier. There will be no accountability of these funds.
• The trustee will have the right to make interest free loans or mortgages to the guardian, if in trustee’s opinion, the purpose of the loan is to assure or provide for the comfort (to be defined as loosely or liberally as possible) of the person in fulfilling their responsibilities as guardian of the children. The loans could have a maximum principal stated such as $400,000, and can have a maximum term such as ten or 20 years, or one year after the guardianship ends.
• The trustee will also have the right to withdraw principal or income at their discretion to apply for the benefit of the children or guardian if in the trustee’s opinion such funds would benefit the children or the guardian’s care of the children.

How to Leave Assets to a Minor

Under state laws, children cannot own financial assets until they reach majority – usually on their 18th birthday. Also, many times people do not want to leave assets outright to children or others until they attain a more mature age… when they feel the children could better handle the funds. To delay the transfer of funds to a child, a trust needs to be established. As in this and all legal matters, an attorney should be consulted to draw up the documents.

Following, is an illustration of how funds could be left in a trust to a child or any other young beneficiary that will inherit funds.

• A separate trust should be established for each child. In lieu of separate trusts, there could possibly be one trust that is “subdivided” into sub-trusts for each beneficiary.
• At age 21, the child will get distributions equivalent to the trust income. Upon reaching their 25th birthday, they will receive 1/3 of the total accumulated funds set aside for that child. The full income on the remaining funds will accumulate and be added to the undistributed principal. At age 30, half of the remaining funds will be distributed to that child. The income on the remaining funds will be added to principal with the full remaining amount distributed to the child at age 35.
• To the extent, individual income taxes will have to be paid by a child on any income accumulated but not paid or distributed, there will be a distribution to cover the taxes. The amount distributed will be at the highest effective tax bracket the child is in for the year the income is taxed.
• The trustee will have the right to invade principal for ascertainable standards of health, education, and general well-being of the beneficiary.
• The trustee will have discretionary powers to make distributions for anything that the trustee believes will be in the child’s best interest.

The above is an example of the available choices. It does not consider special needs of the child such as medical, custodial care or special schooling.

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