Deciding who will care for your children after you’re gone is one of the more vexing decisions you’ll have to make during your estate planning. It’s often a tough decision because you will need to not only select a guardian to raise them, but also select a trustee to handle their financial care through the years. While you may be able to find a guardian who would also make a responsible trustee, it’s just as likely that you’ll need a different person to handle the financial stewardship of your children’s inheritance.
For example, if you have an IRA or an annuity that you wish to pass to your minor children, how can you ensure those funds will be used properly—especially if the person you trust most to raise your kids isn’t necessarily the best with finances? This question is multifaceted, so let’s unravel one aspect at a time.
The Question of Guardianship
Here’s the good news: The person who raises your minor children and the person who handles their inheritance don’t have to be the same person. In the event that your selected guardian isn’t as adept with finances as you’d like, or if you think the financial burden would be too much to ask in light of other available resources, you can appoint a trustee specifically for the purpose of managing your children’s inheritance for everything from braces to college costs. Thus, you’d entrust one person with your children’s assets and another with their care, while enabling each to interact with the other. This dual guardian/trustee model gives many parents peace of mind—knowing they don’t necessarily have to risk their children’s inheritance while ensuring that they are raised according to the family’s values.
You may also hear about something called guardianship of the estate. We don’t think of this as much of an estate planning option, since estate planning is about controlling what happens in the event of your incapacity or death. With guardianship of the estate, the court appoints a guardian of your children’s inheritance, while judges make the majority of the ultimate decisions. Guardianship of the estate only happens when you fail to plan for the management of your children’s inheritance, and if you have minor children, you should definitely look at the trustee model. Worse yet, any unspent funds go to your children at age 18, leading to many situations of squandered inheritance.
For many families the best strategy for financially providing for the children is to use a trust. In that case, a trustee fulfills the responsibility that would otherwise belong to the guardian of the estate. The trust assets can be released to the children or the caregiver incrementally according to age and needs. For example, the trustee could distribute money for the children’s needs until age 18 and then manage for the money until the child is a financially mature adult.
Your trustee may also exercise discretion in investing and distributing the funds for the children’s support, education, and other needs, coordinating with their physical guardian to ensure the children’s needs are met until they come of age. This can ensure that the assets are there when they’re needed for your family. Even relatively modest estates of $50,000 need to be cared for properly—it’s a shame when any amount of inherited money isn’t put to best use.
Passing an Annuity to Children
Annuities pay out regular income—which can make them convenient vehicles to cover ongoing expenses for minor children. If you have set up an annuity for yourself or a spouse, you can name the children as beneficiaries, or you can also name a trust for the benefit of your children. If you are still paying into the annuity at the time of death, your children may receive the balance, or you may give a trustee the option of rolling the balance into another annuity to be paid out to the children at a later maturity date. If you are already receiving annuity payments yourself, the children may simply continue receiving these payments for the remainder of the term. Depending on your annuity contract, payouts may also be made lump sum. Annuities are very flexible financial products with many different options. If you have an annuity now, or if you are considering purchasing one, bring it to our attention as we work on your estate plan so we can make sure it meshes with your will or trust seamlessly.
Transferring an IRA to Children
Individual Retirement Accounts (IRAs) are also excellent vehicles to pass along wealth for minor children’s welfare—because, unlike some annuities, they have the ability to grow over time and can provide a lifetime of financial benefit to your children.
When you name the next generation as beneficiaries on an IRA, you effectively extend the IRA’s life expectancy. While the required minimum distribution payments to the children will be smaller than they would have been for you (since, according to IRS rules, they have a longer life expectancy), the account balance can remain invested for growth over time. Your financial and tax advisor can evaluate your situation to help you decide which type of IRA (Roth or traditional) is the best option for your goals. And we can work with you to make sure that the IRA is fully protected against creditors, predators, and bad financial decision making with an IRA trust.
Whether you’re talking annuities, IRAs, or any other monies, you should make funds payable to a trust, rather than directly to your children, or else you’ll trigger the guardian of the estate scenario we discussed above. By making the trust the beneficiary of these accounts, you’ll ensure that you and your appointed trustees have control over the funds and disburse them according to your wishes.
Planning for the welfare of minor children after your death is neither simple nor pleasant to consider, but it’s absolutely necessary for peace of mind. Determining the right person(s) to be the guardian of your children and trustee of their inheritance requires careful thought, but you don’t have to sacrifice your children’s inheritance for their proper care. With the right financial plan, you can manage both facets successfully. As always, we’re here to provide assistance and explain your options. Call us for an appointment today.