Estate Planning: What You Need to Know, Part 3

 Schlau|Rogers, Your Smarter Estate Plan, California estate planning business planning attorney

Clearing a Path For Your Children

Alright. In parts one and two of our series, Estate Planning: What You Need to Know, we covered what we should generally keep in mind when estate planning, along with some specifics on planning for incapacity. In this third blog post of our five-part series on the basics of estate planning, we’ll learn more about designing a clear path to success for your children with your estate plan --- who this planning involves, what it will accomplish, when and why we should be doing it in the first place, and how we can bring our plans to life.

Key Takeaways

  • You can entrust your children to a guardian by naming a specific person in your Will
  • A will-based estate plan will drive your intent and memorialize it effectively so your children are provided financial support
  • A trust-based estate plan will allow you to control the flow of assets to your children and protect them from various risks

As you know, finding a balance between control and protection is what we think is the key to estate planning. One way we can find this balance is to properly address incapacity planning with language (that is clear and unambiguous, consistent and unchanging) in our planning documents. This makes sure we're setting a standard for incapacity and allows for precise handling of medical and financial issues during specific times of need. We can execute this strategy with the Advance Healthcare Directive, HIPAA release, and Power of Attorney. Together, these documents can help avoid a mess during particularly difficult times for family members because we're making decisions ahead of time.

After we’re gone, however, the Advance Healthcare Directive, HIPAA release and Power of Attorney no longer serve to provide specific instructions regarding the handling and caring for our children. Why? Because the powers they grant to the named individuals terminate upon our death (or shortly thereafter). To address this issue, we’ll have to provide another set of instructions to ensure our children are taken care of in the way we intend in this post-mortem period. This is where will-based and trust-based planning strategies and techniques enter the conversation.

Rather than discussing the differences between will-based planning and trust-based planning, which you can find here, or how will-based planning is a great alternative to having no plan at all, this blog post will specifically address using planning techniques that ensure a clear path to success for our children after we’re gone. Doing so will provide a similar, and in some cases more detailed, set of specific instructions for continued care of our children and precise handling of their affairs.

NAMING GUARDIANS FOR YOUR CHILDREN

Perhaps one of the most common issues that is "of high concern" for our clients is the desire to get affairs in order and create a comprehensive plan to manage those affairs in case of death or disability. Equally common is the correlative desire to provide for and protect our children. While there are many ways you can continue to protect and provide for your children after you're gone, ensuring the right person will act as guardian is vital. Put another way, in order to effectuate your specific intent as it pertains to the handling and caring of your children, you have to plan ahead.

 
“... the difference between your minor children living with family members that you trust, and the Probate court deciding for you.”
— The Schlau|Rogers Team

We know that incapacity planning is the first step you should take in planning ahead. But after you're gone, you need to make sure guardians are named for you minor children to ensure they are taken care of. Who you choose to act as guardian is of course a very important decision you’ll make in the estate planning process. Here's how you do it: You can entrust your children to a guardian by naming a specific person in your Will.

The named guardian can act as guardian of the person, guardian of the estate, or both. A guardian of the person is the typical type of guardian that we think of when we hear the word: it is a person that would take custody of your child after you are gone. This is the person with whom they'll share a home. A guardian of the estate, on the other hand, would be someone who would manage the affairs of your child's estate after you have left assets to him or her upon your passing. One person can act as both guardian of the person and estate, or you can divide these roles up among different people that might be more equipped to handle one role over the other. Another option would be to divide the roles between a family member and a professional fiduciary. You can also name a set of individuals that will serve in succession if, for some reason, a guardian is unable to act.

Once you've named a guardian in you Will, a guardianship can begin upon your passing if you are survived by minor children. A guardianship, of the person or estate, is ultimately a court-ordered process, and so legally speaking it will take more than just your Will to ensure your children are put in the hands of the right people. However, if you have a Will and name a guardian, the court will honor your decisions and effectuate your intent. This would all happen in Probate, which is a necessary process for those that only have Wills and have minor children that require a guardianship.

Ultimately, your Will can be the difference between your minor children living with family members that you trust, and the Probate court deciding for you. If you don't provide the court specific instructions as to whom should act as guardian, the court will make its own informed decision. Whether the court is able to make the right decision is a crap shoot. A judge will likely have no way of knowing about particular familial situations that call for avoiding certain living situations or family members. Worse yet, challenging an appointment by the court will be time-consuming and expensive. This cost will be unnecessarily passed on to your beneficiaries. So, your best bet is to name a guardian ahead of time to ensure your children are in the right hands.

PROVIDING FOR YOUR CHILDREN AFTER YOU'RE GONE

Naming a guardian for your children is an important step in ensuring they are cared for after you're gone. But, to really lay a clear path that will allow them to succeed despite going at it in entirely different circumstances, you'll need to take the next step. This next step is providing a precise set of guidelines ahead of time to make sure guardians can act in concert with trustees with the best interest of the child in mind. But, how can you ensure a precise road map is left behind to address this concern?

Well, a will-based estate plan would drive your intent and memorialize it effectively. Your wishes would essentially be spelled out in your Will and ancillary documents. In naming your family and specifically distributing your property to certain people or entities (beneficiaries) outright, free of trust, you will make it clear that while your children may be cared for by a guardian, they are to receive specific assets upon your death. If your child is under the age of 18, a guardian of the estate would manage their financial affairs.

Keep in mind, however, that your Will can only act as your own individual Last Will and Testament regardless of whether you are married. This means if you are married, both you and your spouse will require individual Wills. In designing the Wills and naming guardians, it's important that the individual Wills do not conflict so as to avoid the need for a court-driven process down the road.

Now, in California, by and through your Will, everything that is not community property (separate property) can be left to your children or you can divide assets up among children and grandchildren, charities and schools; you can do almost whatever and give to whomever you’d like. By specifically distributing your property to named beneficiaries you will be ensuring your children are provided for from a monetary standpoint in some capacity. However, there are often complexities that require more nuanced planning such as minor children, or special needs beneficiaries.

 Schlau|Rogers, Your Smarter Estate Plan, California estate business planning attorney

USING SUB-TRUSTS TO BALANCE CONTROL AND PROTECTION

To address the complexities of life that require more detailed estate planning, we can create sub trusts. Again, some instances call for will-based planning and others call for trust-based planning. If you'd like a complete discussion of both and how they compare, your can learn more here. For now, what is important to understand is that trust-based plans can allow you to name specific beneficiaries for whom you will provide just as a will-based plans do. Where trust-based plans largely differ is in the control you can have regarding the flow of assets to your your children.

With trust-based planning, you would be able to to design a revocable living trust that would act as your main trust with a sub-trust for minor children that would be created and become irrevocable upon your death. The details of the administration of this trust can vary widely. However, controlling the flow of assets to ensure you are able to protect and provide for your children after you're gone is fairly simple.

For instance, you can design the trust so that funds are held in trust by the trustee until the minor child reaches the age of 18 or 25, or whatever age you believe is appropriate. This allows you to inhibit the flow of assets until a certain date to protect against various risks associated with passing assets along to a beneficiary.

You could also set up a sub-trust that calls for specific distribution of funds at various intervals. For example, the sub-trust for your minor child could be designed in a way that would distribute 1/5 of the funds at age 25, 1/4 of the funds at age 30, 1/3 at age 35, 1/2 at age 40, and 1/1 at age 45. This could be scaled either way, younger or older, and can be adjusted to fewer or more distribution periods. Essentially, you can control exactly how the funds are distributed to your child and when.

In order to simultaneously ensure the beneficiary will be protected from risks and always have access to funds for the basics, you could add another layer of planning and relinquish some control. The most common way to do this is including an "ascertainable standards" provision that allows funds to flow to the minor child for health, education, maintenance, and support prior to a set distribution date. Funds could be distributed at any time the trustee determines it is necessary to provide for the health, education, maintenance, and support of the beneficiary. This "ascertainable standards" exception can be incorporated into either of the sub-trusts mentioned above.

Another situation that would call for trust-based planning is a special needs beneficiary. If a beneficiary requires special care, you can specifically design a sub-trust to again be created and become irrevocable upon your death for the benefit of that special needs beneficiary. The trick is to design it so the beneficiary can also receive supplemental benefits as it is common for beneficiaries with special needs to be eligible for governmental assistance. If not properly planned, assets inherited through the administration of an estate can disqualify a beneficiary from receiving those government benefits. 

Sadly enough, some people resort to disinheriting a special needs beneficiaries and hoping another beneficiary will handle the burden of caring for the disinherited individual (which leads to many potential problems that are outside the scope of this article). Instead of employing this strategy (or lack thereof), it is best to design a special needs sub-trust (SNT) with appropriate and precise planning.

This could mean creating a discretionary trust that is designed specifically to preserve governmental benefits like Supplemental Security Income and Medicaid. The discretionary SNT could be either first-party or third-party, which changes whether the government can reclaim the funds in the trust that are left over at the time of the beneficiary's death. Third-party SNT are most common and prohibit the government from dipping into the left over funds.

Essentially, the SNT is designed to allow for discretionary distributions of funds to special needs beneficiaries in situations that governmental benefits would not already be provided. The "ascertainable standards" method is not useful in this scenario because this language would cause the funds to be included in the beneficiary's available resources. This in turn will affect the beneficiary's eligibility to receive the governmental assistance to which they may be entitled. Ultimately, the trust should allow discretionary distributions not related to food or shelter. You can find more about what would be allowed on the Social Security Administration website here.

KEEPING YOUR CHILDREN HAPPY AND SAFE

Finally, and perhaps most importantly, planning ahead by clearing a path for your children after you're gone will allow you to ensure they are kept happy and safe. While no one wants to think about your children having to be uprooted and placed in another's home, it's important to understand planning for it can make all the difference. If you'd like, we can make sure your affairs are in order so you can provide for and protect your children after you're gone. Schedule your strategy session today and ensure you find a balance between control and protection with a comprehensive estate plan. Yet another way to plan smarter.

Matthew Schlau is a co-founding principal of Schlau|Rogers and an estate and business planning lawyer practicing in Orange, San Diego, Los Angeles and Riverside counties. He is a husband, father, blogger, crossfitter, and really good at helping people achieve their goals.

At Schlau|Rogers, we do more than just estate and business planning, probate and trust administration. Our objective is to provide individually-tailored plans that allow you the opportunity to reach your goals, all while minimizing headaches and risk, and maximizing peace of mind.

On our blog, you'll find useful information about estate and business planning, probate and trust administration, as well as some tidbits on personal finance, taxes, and anything else we think will help minimize headaches, worry and risk, all while maximizing peace of mind.

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