Why Estate Planning is Important for Young Families with Children

Young people with children are usually in the beginning stages of their careers, and might not have an estate large enough to be affected by the estate tax upon their deaths. In 2020, an estate must be larger than $2.193 million to incur any Washington State inheritance tax, and larger than $11.58 million dollars to incur any federal estate tax. Nevertheless, there are many non-tax reasons for people with young children to develop an estate plan. An estate plan generally refers to a Will, a Power of Attorney, and a Directive to Physicians.

A Will is a critical document which designates how you would like to distribute your estate assets after your death. Married couples, in most cases, leave their estates to each other upon the first spouse’s death, expecting that the surviving spouse will use the inherited assets to care and provide for the children. When both parents have passed and leave minor children, the distribution of estate assets becomes more complex. The following issues should be considered by parents when making their Wills:

* Who will care for minor children in the event both parents die? Naming a guardian in the Will provides the best evidence of who the parents would like to make decisions for their children. When deciding on a guardian, parents should take into account the proximity of the guardian’s residence to the children’s current home, the lifestyle and religious beliefs of the guardians, and the financial situation of the guardian. Parents should name the same guardians in their Wills so as to avoid any confusion in the event both parents die simultaneously. Guardianship of minor children is a major responsibility, and parents should be sure to ask their preferred guardian if they would be willing to care for the children in the event of a tragedy.

* How will the estate assets be transferred to the child? If the parents have no estate plan in place, upon the death of both parents, the child would inherit their share of the parents' estate, and it would be held in a guardianship account. The child would have access to the monies by requesting distributions from the guardian, who would need court approval to spend principal from the guardianship estate. Additionally, once the child turned 18, all assets would be distributed directly to the child regardless of the child’s ability to manage the money. If parents engage in estate planning, they may create a Trust to hold assets passing to a minor child. The parents, via their Will, create a Trust and name a Trustee to manage, invest, and distribute the assets to the child according to the terms of the Trust. The Trust may allow distributions for the child’s health, education, maintenance, and support throughout their life. The trust terminates at some point, and does not automatically end upon the child’s obtaining the age of majority. For example, the Trust can end when the child turns 30. Alternatively, the Trustee may distribute principal in increments based on the age of the child. For instance, the child would be entitled to 1/3 of Trust principal at age 25, another 1/3 at age 30, and the rest at age 35. The Trustee need not be a corporate Trustee, and in the event of a smaller estate, it would make better financial sense to name an individual as Trustee (who may be the same person as the guardian). The individual Trustee could then hire an investment advisor to handle the investment of Trust assets.

Parents of a child with special needs should create a Special Needs Trust to hold assets for the child with special needs. This kind of Trust is typically funded with inheritance monies of the child with special needs, and does not have a payback to the state for medical assistance provided to the child and may not make any distributions that would disqualify the child from received any governmental benefits.

* Who will administer the estate in the event both parents die? The surviving spouse is typically named as Personal Representative, and a successor PR should also be named in the event the spouse is unavailable. A PR must be over the age of 18, and is responsible for gathering the assets of the estate, liquidating and selling any assets, and distributing the assets to the heirs under the Will. Each spouse may name their own successor PR to administer their estate.

To complete the estate plan, parents execute a Power of Attorney and a Directive to Physicians. A power of attorney allows an individual (the "principal") to appoint an agent to act on their behalf for medical and financial matters. The agent is typically the principal’s spouse, and a successor agent may also be named in the document. A Power of Attorney can take effect immediately, giving the agent the authority to act on the spouse’s behalf even if the spouse is able to speak for themselves, and it also applies in the event the principal is unable to speak for themselves. By contrast, a “springing” Power of Attorney only takes effect upon the principal’s incapacity.

A Directive to Physicians sets forth a person’s last wishes in regard to end-of-life situations. This document differs from a medical POA in that the Directive only governs a situation where the declarant is incompetent, and a doctor has certified that the declarant is in a state of permanent unconsciousness or has an end-stage medical condition.

Parents with young children should consider drafting an estate plan to ensure that their estates are administered according to their wishes, and that their children will be cared for financially and be placed with an appropriate guardian. If you have estate planning questions or if we can be of service to you, your family, friends, neighbors, or co-workers, give us a call at 253.858.5434. We represent clients throughout Washington and Idaho.