Remember when your children were young and slept so peacefully when you kissed their little faces goodnight? Even though they are grown up now, you might sleep as peacefully if you know there is a plan to take care of them after you're gone.
Estate planning may not be sexy but it sure is important. To leave your children an inheritance, you have to understand some technical issues as well as the finer points of discussing your estate with your loved ones.
Contrary to what many people -- including some estate planning attorneys -- think, estate planning is about more than legal documents. Frankly, there are many other issues that may be as important -- if not more important -- than the legal documents when it comes to the happiness of your children after your passing.
As a disclaimer, estate planning laws vary by state. Because of that, some of the information I'll outline here may not align with the laws in your state. You should seek the counsel and expertise of an attorney who is licensed in your home state in order to put this technical information to good use.
Understanding the Legal Strategies
There are three principle ways to leave an inheritance: Beneficiary Designations, Trusts, and Wills.
Beneficiary Designations refer to contexts where you can specify the recipient of a specific asset in the event of your death. It is common to designate a beneficiary of the following types of assets: life Insurance policies, IRAs, and company retirement plans. You can often designate individuals, organizations or even other estate planning devices as beneficiaries of these assets.
Trusts are estate planning devices that can allow you to avoid the hassle and publicity of a legal proceeding called probate. In addition, a trust can allow you to attach proverbial strings to the benefits you're leaving as an inheritance, among other things. You can specify that the trust assets be distributed outright to your beneficiaries at the time of your death or you can require that the trust assets will be held "in trust," subject to conditions.
At its most basic level, a trust is an arrangement whereby a person -- called a trustee -- holds legal title to assets for the benefit of others who are called beneficiaries. Trustees are charged with putting the interests of trust beneficiaries before their own and are held to the highest legal standards.
For example, a trust can specify that beneficiaries will receive some portion of their inheritances at a specific age. Likewise, a trust can require that the funds distributed be used for a particular purpose or that the trustee distribute the funds in a particular form - such as a house. A trust can also include "spendthrift" provisions to better ensure that your children won't waste their inheritances, or at least not all at once.
In order for a trust to be effective, legal title to assets must be transferred to the trustee of the trust before a person's death or the trust must be a designated beneficiary of a person's assets, as mentioned above. Otherwise, assets that aren't transferred to the trust become part of a person's probate estate and are subject to that person's will or the state's intestacy laws.
Wills are legal documents that specify the distribution of a person's probate assets, such as those assets that are titled solely in your name, aren't held in trust, or are subject to contractual restrictions. Assets with beneficiary designations are generally not subject to wills. Although a will can create a type of trust - called a testamentary trust - most wills specify that the assets of a person's probate estate are to be transferred outright to a person's heirs.
Talk Over Your Estate with Loved Ones
Communicate About Your Assets
Although you generally aren't legally required to give your money and other assets to your children, it may be a good idea to communicate to them what assets you will leave behind (as long as they're old enough to understand). You don't need to tell your children about everything that you own or even go into great detail, but discussing large assets they know about, like the house they grew up in, can be wise.
Ask Who Wants What / Let Them Choose
Because you have communicated about your assets, you can ask your kids which assets they want while you're alive in order to avoid, or at least lessen the discord and conflict after your passing.
Specify Distributions Yourself
If you don't want to ask your children about what they want, it may be a good idea to specify which child gets which of your most noteworthy or sentimental assets rather than leaving the division and distribution of your assets up to your executor.
Explain Yourself
If you decide to leave a disproportionately larger share of your estate to one child at the expense of the others, explain why. Perhaps it's because one child doesn't earn as much money in his or her profession, or perhaps it's because one child remained close to you while the other disappeared. Whatever the reasons, just explain so everyone knows your motivations.
Spread The Load
Although there are exceptions, it may be a good idea to nominate each of your children to take at least one particular role or responsibility in the administration of your estate after your passing. For example, one of your children as executor of your estate or as trustee of your trust, another as your attorney in fact under your health care power of attorney, and one of your children as your attorney in fact under your durable general power of attorneys. Although this may not be the case, your children may well draw conclusions about how much you trusted and or loved them because of their role in the administration of your estate.
Steve Cook is an estate planning lawyer at Cook & Cook in Phoenix.