You're finally an empty nester. After sending the youngest of your kids off to college, you are a mixed bag of emotions. On one hand, you're happy to see your kids fly the coup and spread their wings. On the other, you're wondering where time went -- blink and they're gone!
During this major milestone in your life as a parent, there is a lot to consider. How will you fill your time? How often will your kids come home? One thing you might not be thinking of is your estate plan. Is it time for an update?
When your child was born, you had an estate plan to nominate guardians for your kids if anything happened to you and your spouse. That's not relevant anymore. Now, there are new factors to consider: What will happen if your kids inherit substantial sums of money while they are in college or before they've started their careers?
- Will they waste the money you've spent so many years diligently saving?
- Will they stop going to college?
- Will people take advantage of them?
These are common concerns. They're also valid. Here are a few strategies to keep your family secure, no matter what happens.
A Trust for Your Children
There are two ways to create a trust. You can create an inter vivos trust while you are living, or you can implement a testamentary trust that takes effect when you pass, through the terms of your will.
Trusts are beneficial for a few reasons.
1. A trust can distribute your income over time.
Instead of your child getting a large sum of money immediately after your passing, you can opt to have it distributed over time. For example, you can give your child 25% of their share of the trust assets when they're 25 years old. You could then opt to give another 25% when they're 30. The remaining 50% could be given when they're 35, or 40, or 50. You can choose whichever ages or percentages you like.
With this option, you reduce the risk of your child leaving college, spending all the money extravagantly, or getting taken advantage of by others.
2. Your child will still be financially supported
As a parent, your job is to ensure your child has the money they need for health, education, and other types of reasonable support. If something were to happen to you, you'd want to ensure they still have this same type of protection.
A trust can provide for distributions to beneficiaries for reasonable expenses even if you choose to keep the money in trust, as mentioned above, rather than distribute the funds or property outright. And, at the same time, a trust can also preclude distributions for unreasonable expenses.
3. Protect Your Assets From Creditors
When a person passes away, creditors often come knocking. Distributions made to your children outright are subject to claims of their creditors. It's a burden you'd never want your family to face. However, funds held within the trust are protected from their creditors, in most states.
Up until last year, funds that were a part of an inherited IRA were thought to be untouchable by creditors. IRAs are governed by a very creditor-unfriendly federal law called the Employee Retirement Income Security Act (ERISA). In June 2014, the United States Supreme Court held otherwise in a case that turned out to be a substantial victory for creditors in a case called Clark v. Rameker.
Your Children's Estate Plan
In addition to thinking about your estate plan, you should also consider your child's estate plan.
When your children still lived at home, you were able to make financial and healthcare decisions on their behalf. Then, they turned 18 and flew the nest. Now, you might not have as much say over these important decisions.
It's a scary thought.
- What happens if they are injured in an accident?
- Who is authorized to make financial and healthcare decisions?
The answer: People empowered to do so through powers of attorney.Fo kids in college, there are two types of powers of attorney that might be useful.
- Durable General Power of Attorney: This empowers the person nominated in a durable general power of attorney to "step into the shoes" of a person who is legally incapacitated, in order to make financial decisions on their behalf.
- Healthcare Power of Attorney: This empowers the person appointed pursuant to the healthcare power of attorney to direct medical treatment of a person who is legally incapacitated. In some states a healthcare power of attorney is called an advance healthcare directive and may contain information about the medical treatments and procedures that should be provided if they are unable to make those decisions themselves. A person who is appointed pursuant to a healthcare power of attorney or advance directive, person is duty bound to honor the treatment desires set forth in the document. In other states a healthcare power of attorney can be coupled with a living will to articulate the end-of-life healthcare treatment desires.
Is It Time for Your Family to Update Your Estate Plan?
These are situations you never want to encounter. However, if life takes a sudden turn, you'll be glad you had your and your children's estate plans in place.
Instill good habits of planning in your kids. By helping your children make these important legal documents, you'll build a healthy habit of planning so they're better prepared come what may.
Steve Cook is an estate planning lawyer at Cook & Cook in Phoenix, where he advises families about business and estate planning.