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Why Estate Planning With A Living Trust Is Critical For Minor Children

   Talk about a costly minefield for young adults- failing to utilize a Living Trust in California. It happens quite frequently because young adults with minor children, whether couples or singles, do not think about death or incapacity. Right? Right! Their minds are on their jobs, acquaintances, social lives, and of course, their minor children. So what happens when things go wrong and the unthinkable happens to a 30 or 40 something year old? Let's take a look at a prime example.

  Hypothet: Jack and Jill, in their late thirties have three minor children- Jim, Jane, and Jake. Jack and Jill have recently bought a home valued at $500,000, with a $400,000 mortgage. Jack has a 401K retirement plan at work valued at $250,000, and Jill has an IRA valued at $50,000. Additionally, they have some bank accounts of about $30,000, and a term life insurance policy on Jack of $750,000. The 401K, IRA, and life insurance designate the spouse as the primary beneficiary and the children as the contingent beneficiaries in equal shares. If nothing happens in their lives, no problem. But, we never know what's around the bend. Just check your national and local news daily and you will see, even young people die or lose capacity through accidents or unexpected illness. Jack and Jill have no estate planning in place although they have minor children, a home, retirement plans, and life insurance.

  Okay, Jack and Jill leave home one night to celebrate their 10th wedding anniversary. Unfortunately and catastrophically, they never return home. A negligent driver kills them on the freeway. The three minor children have no parents and no one has been appointed as their legal guardians. They are now beneficiaries by law of the parents home, 401K, IRA, life insurance, and bank accounts but because of their minority, they cannot access the funds.

What is about to begin is the second phase of this nightmare- Court proceedings.

Because Jack and Jill failed to arrange and sign a Nomination of Guardianship, the Court must hear evidence on who should be the appointed guardians of the persons of the minor children. Both siblings of Jack and Jill apply for guardianship which results in a contest. Although there are attempts to keep the children together, a settlement is reached and the children are split between the siblings of Jack and Jill. From this point forward, the kids will see each other fairly regularly but will grow-up separately. Is this what Jack and Jill would have really wanted? Probably not. Had they made a Nomination of Guardianship a part of their estate plan, they could have specifically designated who they wished to raise their children together which the Court would normally honor without any contest.

Now, what about the assets owned by Jack and Jill? Jack had an old will in which he left everything to his mother prior to marrying Jill. This mess will need to be sorted out in a probate proceeding, because the kids are heirs to Jill's estate. Sadly, Jack and Jill neglected to arrange a Living Trust as part of an estate plan to avoid probate and include their present desires for the distribution of their estate for their children.

As a result of probate, the children inherit the home but what is the become of it? We can't deed the home to minors. Also, what about the 401K, IRA, and life insurance proceeds? Checks cannot be written to minors. So, the Court must now provide for the third proceeding- a Guardianship of the Estate for the minor children. So now we have three legal proceedings in progress- the probate, a Guardianship of the Person of the minor children and a Guardianship of the Estate of the minor children. Because of the faults or inconsistencies of Jack and Jill's siblings, the Court appoints a Private Fiduciary to oversee the minor children's funds.

What usually accompanies or is incidental to Court proceedings? You got it- attorney fees and Court costs, which is coming out of the minor children's inheritance. And these fees can continue for years.

Now for the absolute bombshell. The kids have either been split apart as they grow up or possibly placed with family members Jack and Jill would have never approved; their funds have been reduced over the years from attorney fees, costs of Court, etc. That is bad enough. But now as each child turns age 18, they receive their share of inheritance, outright. That's right, the Guardianship has concluded as they reach majority at the ripe old age of 18 and a check is handed to do as they wish. For purposes of the hypothet, let's assume the net estate when the first child reaches age 18 is $750,000. His share is $250,000. What do you think is going to happen to those funds in the hands of an 18-year-old these days? Cars, vacations, must we mention drugs... Let the good times roll, baby!

Jack and Jill, out to celebrate their 10th wedding anniversary, created a monster occurrence. Oh, they were great parents, loved their children, worked hard and wanted the best for their family. But, they let ole man Procrastination prevent them from doing what they knew, deep down, they needed to do to protect their children and their financial security- create an estate plan.

They should have arranged a Living Trust so that all of their assets- the home, 401K, IRA, life insurance, bank accounts, etc. could have been managed by their hand-picked successor trustee. The Living Trust should have been designated as the contingent beneficiary of the retirement plans (IRA and 401K) and the life insurance with special wording in the Living Trust. This would eliminate the need for the probate and Guardianship of the Estate. This family member or friend could have prudently invested these funds for the children without depletion from attorney fees, Court costs, and other Court expenses. The funds could have been utilized for each child's education through college or post-graduate schools. They could have also been used for the children's maintenance, support, and health until they obtained gainful employment after schooling and distributed prudently at age 25,30,35, etc. The family member trustee would oversee the funds to make sure they were prudently invested and not wasted.

Additionally, and as part of the estate plan, Jack and Jill could have pre-arranged who was to raise their children together and included them in their Nomination of Guardianship as part of their Estate Plan.

By arranging and signing the Living Trust AKA Family Trust in their Estate Plan, they could have put all of these issues to bed, just as they put their minor children to bed each night knowing if the worst were to happen, the kids grow-up with security.

Isn't that what you live for and want for your children? Then do it! Establish an Estate Plan and Family Trust for your family. You are never too young to do it when you have the risk of your children's lives at stake. 

 

Jack E. Stephens, J.D., LL.M.

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