Personal Finance Essentials
Estate Planning for Families
The Estate Planning Mistakes That Hurt the
People You Love Most
Choosing a Guardian for Your Children
The most common reason parents delay writing a will is not the thought of dying – it is the difficulty of deciding who will raise their children. Because the decision feels overwhelming, many parents do nothing. That leaves a judge in probate court to make the choice for them. Don’t let that happen.
When choosing a guardian, work through these questions with pen and paper, ideally as a couple, answering separately before comparing your answers:
If you are asked to serve as guardian, accept only if the parents have named you formally in their will or trust, provided a signed letter confirming their wishes, informed all family members of their decision and left each child with adequate financial resources.
Minor Children and Inheritance
The most common estate planning mistake parents make is naming children under 18 as direct beneficiaries of IRAs or life insurance policies. Even though the children are named, they will not receive the money directly. Instead, the money will go into the registry of the court, which will appoint a financial guardian for the children. That guardian may or may not be the same person raising your children. All distributions will require court approval.
When your children turn 18, they receive whatever remains – with no restrictions on how it is spent. A sports car is as likely a use as college tuition.
The solution is to establish a trust for your children in your will and name the trust as the beneficiary of your life insurance and retirement accounts. A trust lets you set the age at which your children receive assets, specify how the money may be used (for education, medical care or housing, for example) and name the person who will manage those assets on your children’s behalf.
Heirs Who Cannot Manage Money
Do you really want to leave a lump sum to a relative who struggles with addiction, spends recklessly or cannot hold a job? A trust allows you to distribute assets gradually, or only for specific purposes. You can delay distributions until heirs reach a certain age. You can distribute interest only, keeping the principal in trust. You can require that funds be used only for college, medical expenses or housing.
One approach worth considering: rather than cutting a problem family member out of your will entirely, give them an equal share – but place it in a Spendthrift Trust that distributes an allowance over time. Disinheriting one child often creates ongoing financial pressure on your other children, who feel compelled to support the one who was left out. Giving an equal share through a trust, while clearly communicating that siblings are not responsible for one another’s financial decisions, is usually the more effective approach.
The Danger of the “Simple Will” for Married Couples
The most common estate planning choice for married couples is the “simple will”: leave everything to your spouse, and to your children if your spouse predeceases you. It seems straightforward, but it often creates problems.
Consider what can happen: You die and leave everything to your spouse. Your spouse remarries someone who has children from a prior marriage. Your spouse later dies, leaving everything to their new spouse. The new spouse dies, leaving everything to their own children. Your children receive nothing. This is not a hypothetical – it is a pattern that plays out in real families every day.
A better approach is to leave your assets to a trust for the benefit of your spouse. Your spouse receives income and principal from the trust for the remainder of their lifetime, but since they don’t own the assets, they cannot redirect them to a new spouse. When your spouse dies, the remaining assets pass to your children as you intended.