Estate planning is not a topic on the mind of many vibrant 20 or 30 somethings often still in the process of building an estate for which to plan. However, this can change quickly for young couples welcoming their first child into the world. As an attorney in my 30s, I often admit to clients that I neglected my own estate planning until the birth of my daughter. When you first bear the responsibility of becoming a caregiver of a truly dependent and initially helpless human being, it can quite significantly change your perspective.
Even in cases where young parents are not initially concerned with planning for their physical or mental incapacity through powers of attorney, they are, at a minimum, generally concerned with the care and financial well-being of their child in the event of the death of both parents.
First and foremost, young parents are concerned with the care and custody of their minor child in the event they should both pass away. Children under 18 require a guardian of the person in the event they have no natural guardians i.e. living parents. Custodial rights are not inherited by grandparents or other family members, they are ordered by the Courts. However, as provided in N.C.G.S. § 35A-1225, parents are presumed to know the best interest of their child. Any parent may, by last will and testament, recommend a guardian for any of his or her minor children for such time as the child remains under 18, unmarried and unemancipated. In absence of a surviving parent, such recommendation shall be a strong guide to the clerk in appointing a guardian though the clerk is not bound by the recommendation if the clerk finds a different appointment is in the minor child’s best interest. In summary, the nomination in the parents’ Will for a guardian of their minor child becomes presumed to be in the best interest of that child and will likely be honored by the Court.
Secondly, parents are concerned with the financial well-being of their minor children. A child under 18 years of age cannot inherit property without the appointment of what is called a guardian of the estate. Again, this is a process of Court appointment. However, there is a method by which parents can affirmatively control who will hold the purse strings for their minor children and avoid Court intervention altogether. Very simply, it can be done with the use of a testamentary or living trust.
A testamentary trust is a trust created in one’s Last Will and Testament. A testamentary trust can name a trustee to manage assets left to minor or young children until they turn ripe age. Typically, parents do not want their children to inherit assets even if they are 18 and, therefore, opt to set an older age for their assets to be held in trust such as 23, 25, 30 or even older. A testamentary trust allows for this and parents can include additional terms regarding how the trustee should manage the money and additional stipulations for the child to receive the money such as obtaining a bachelor’s degree.
Many parents opt for a testamentary trust since it is more cost effective than a living trust and the demise of both parents is not a common occurrence. That said, there are downsides to a testamentary trust as opposed to a living trust. First and foremost, a testamentary trust only “catches” assets which pass via probate and, therefore, the Will. As I have discussed in prior blogs, much of a person’s wealth passes outside of probate through mechanisms such as beneficiary designations. While, for children of ripe age, it is wise for parents to designate them as contingent beneficiaries on their non-probate assets, this should not be done for children under the age of which the parents believe appropriate for them to inherit directly. If minor or young children are named as beneficiaries, it circumvents the testamentary trust and either a guardian will need to be appointed if they are under 18, or the assets will go to the child directly if over the age of 18, neither of which are outcomes which meet most parents’ goals.
Now, if there are no contingent beneficiaries named after the parents which are typically each other’s primary beneficiaries, many financial institutions will distribute the assets to the “estate of” the account owner which will, therefore, be “caught” by the testamentary trust. However, financial institutions and life insurance companies have varying policies on how to distribute accounts when there is no living beneficiary provided, so there are risks to leaving contingent beneficiary designations undesignated. Some financial institutions may allow you to name the testamentary trust as the contingent beneficiary on your non-probate assets; however, this has pitfalls as well. A testamentary trust is not created until the Will is probated. Therefore, no one will be able to claim these assets until the Will is admitted for probate which can sometimes take time.
In contrast, if a living trust is created, even if simply as a pour-over mechanism for young parents, it already exists at the time of death so, if it has been properly named as the contingent beneficiary on the parents’ non-probate assets such as life insurance and retirement accounts, the successor trustee can immediately make a claim for the assets and begin providing financial support for minor or young children. For young parents with significant assets passing via retirement accounts and life insurance this is undoubtedly the best way to go for assuring immediate and guaranteed financial support for their minor or young children.
To speak with an estate planning attorney about planning for the care and financial support of minor or young children, give our office a call.