Planning your estate if you have minor children is very different than if you have grown children or no children. You need to make sure your children will be cared for while they’re still minors and that they have financial stability when they each adulthood. The three necessary elements for your estate are a will, a living trust, and life insurance.
Everyone needs a will. I’ve been over this before. It’s a simple two-part test: (1) Do you own stuff?, and (2) Are you going to die?. If you answered “Yes” to both questions, you need a will.
For parents of minors, the will’s function goes beyond disposing of your assets. A will also allows a parent to designate guardian(s) for their child. The guardians are the ones who will be responsible for raising the child in the event the child’s parents pass away.
Designating a guardian is an important detail that many people overlook because they think their loved ones will just figure it out. “Well, shouldn’t the kids just go to my [parents/sibling/friend]?” is a question I get all the time. The problem with not designating a guardian is that your loved ones might have disagreements about who you would’ve wanted to serve as the guardian. Then they’re going to get involved in custody dispute simply because you didn’t write down your wishes.
Of course, when determining legal guardianship after a parent passes away, the child’s other parent will be first in line to raise the child regardless of what your will says. And the courts still retain some authority to overrule your will (e.g., the guardian you proposed has developed Alzheimer’s disease and can’t care for themselves).
A Living Trust.
A living trust is an essential tool to protect your children’s future interests because it allows you to designate the ages or stages when your child can receive your assets. Imagine this scenario: Your child is 17 years old when you pass away unexpectedly. Your will designates your child as the sole recipient of your assets, which includes a house, a 401K, a car, and your bank accounts. The assets are managed by a fiduciary for a few months until your child 18, then your child receives all of your assets. Does your child have the tools and temper to handle those assets?
Do you remember when you turned 18? If you had received several hundred thousand dollars, what would you have done with it? For me, I would have stopped working, bought a new Mustang, and probably would’ve blown the rest of the money.
That’s why I recommend parents of minor children establish a living trust to control the distribution of assets to their children. The living trust can include provisions like restricting the use of the trust’s assets for college or necessary medical expenses until the child turns a certain age. Or you can designate that a child receives lump sum payments from the trust at certain ages (e.g., ¼ at age 18, ½ at age 25, and the remainder at 30).
The purpose of life insurance is to protect your loved ones’ financial interests in the event you pass away. If you pass away and leave several young children, life insurance is a critical tool to ensure there is money available to meet the children’s needs.
It’s important to ensure you name your living trust as the beneficiary of your life insurance policies. The trust will hold the proceeds from the policy and the distribution of the proceeds will occur according to the trust. If you simply name your children as the beneficiaries, then they will receive a lump sum payout when they turn 18.