What You Should Know About Estate Planning
for Minor Children
by Tom Bouman
by Tom Bouman
Parents of minor children should nominate guardians in a properly signed will. In the event of death, when there is no surviving parent, the local probate court would be responsible for appointing a guardian for any surviving minor children. The person nominated in the will is the likely choice of the court, provided that the nominated person is willing and able to serve after a background check.
2. How should money be left for a minor child?
There are three primary methods for the handling of money left to a minor child.
·
Court-appointed Conservatorship. In a conservatorship,
the probate court appoints an adult as conservator to manage the child’s
property until the child turns age 18. The conservator is required to file
annual accountings with the court.
·
Custodianship under Arizona Transfers to Minors Act. In a
custodianship, an adult is authorized by law to manage a child’s property until
the child turns age 18 or 21 depending on how the custodianship was authorized.
·
Trust. In a trust, an adult is appointed as
trustee to manage a child’s property in accordance with the provisions specified
in the trust document.
The best
option by far is to leave the property in trust for benefit of the child.
A trust provides maximum flexibility and privacy. To illustrate, note how
the other two available options – custodianship and conservatorship accounts –
require outright distribution of the asset at age 18 or 21. A trust can
be drafted to retain assets in trust until any age or for the beneficiary’s
lifetime. A trust can also be established for multiple beneficiaries, a
feature not available with custodianship or conservatorship accounts. A
trust for a minor child is managed by an adult or trust company (the
“trustee”), who does not have to file any reports with the probate court.3. How do the assets get into the trust?
After the death of the parents, an asset may only be contributed into trust if the governing document permits it. The governing document may be a will, living trust, or beneficiary designation. In some cases the governing document might explicitly choose the trust option. For example, the deceased parent’s will might say, “My personal representative shall retain the share for Child in trust until Child attains age 30.” The absence of such language does not necessarily prevent the use of a trust. A separate administrative provision could give the personal representative discretion to put the funds in trust instead of giving them outright to Child.
The simplest option is for the parents to establish a living trust during their lifetimes. In the event of their deaths, the trust could just continue for benefit of the children. Assets outside the trust would be paid directly to the successor trustee and never be subject to court involvement.
4. How does a common trust work?
When there are multiple children, a popular option is to funnel all assets into a “common trust” for the children’s mutual benefit instead of splitting the assets into separate equal shares. The theory is that while at least one of the children is under a specified age, the trustee should allocate funds in the same manner as the parents would if they were alive. Thus, the trustee of a common trust would be permitted to sprinkle distributions among the children, not necessarily in equal amounts.
The common trust should terminate when the youngest child reaches a specified age (age 23, for example) or possibly when all children have graduated from college. When the common trust terminates, then the remaining assets, if any, would be divided equally among the surviving children.
5. May the guardian also serve as trustee?
Parents of minor children should think carefully about whether they want the guardian to also be responsible for managing the assets of the minor children the guardian is raising. In many cases, if the guardian is entirely trustworthy and responsible, this is the simplest and best option. However, in some situations it might be better for another person or company to manage the assets. This will require cooperation between the trustee and the guardian, but it also provides a check-and-balance system for discretionary expenditures.
6. Who should be the beneficiary of life insurance?
When there are minor children it does not make sense to name them as beneficiaries of life insurance, or any other assets for that matter. If the parents have a living trust, the trust should be named as the beneficiary so that life insurance proceeds can be paid to the successor trustee, not directly to the children. If the parents do not have a living trust, it may be best to name the probate estate as beneficiary so that the life insurance proceeds can pour into a common trust described in the parents’ wills.
About
the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.
Thomas J. Bouman
Attorney - Author - Speaker
www.TomBoumanLaw.com
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