As Wealth Advisors, we provide advice on all aspects of your financial situation, and work with a network of carefully selected professionals in taxes, estate planning and insurance to devise appropriate solutions that will help you achieve your goals. This article is a collaboration between Merriman Advisor Geoff Curran and Evan Monez, attorney at Montgomery Purdue Blankinship & Austin PLLC, who is one such member of our professional network team.
Though we try to stave off the inevitable as long as we can, it’s a fact of life that eventually, everyone dies. When this occurs, the deceased person’s family, while still grieving their loss, must deal with the transfer of the decedent’s assets. If you don’t have estate planning documents in place when your time comes, the laws of the state you live in determine how your estate is distributed. This is especially complex if you have children under age 18, children from previous marriages, property in different states or an estate large enough to be subject to federal or state estate taxes.
With some advance planning, you can ensure your assets pass as you intend, with as little trouble as possible for your loved ones. This article discusses Washington State law, and the rules discussed here may differ in other states. Please consult a licensed attorney in your state to understand how your state laws apply to the concepts in this article.
A will (sometimes called a “last will and testament”) and a revocable living trust are types of estate planning documents that determine how your assets are distributed. Very generally, a revocable living trust is a will substitute where you transfer your property to the trust during your lifetime, and the terms of the trust agreement govern both the lifetime use and death distribution of your property. The differences between wills and revocable trusts are outside the scope of this article, but many of the same concepts apply. A will can also nominate the guardian of a minor child, if neither parent is alive. A will communicates your wishes in a legally enforceable way and avoids leaving such decisions to someone else or to the laws of the state.
Like many things in life, many people do not take the time to have estate planning documents properly drafted, or assume that they won’t need estate planning until they are elderly. To illustrate the benefits of early planning, we will focus on a case study involving a young family, what could happen if they pass away without estate planning, and ways that estate planning can avoid some of the problems that otherwise may arise. We will also briefly discuss a few other types of family situations for which estate planning is particularly important.
Case Study – Young Couple with Minor Children
What Happens to the Couple’s Child?
A guardianship proceeding ensues to determine the child’s guardian. A “guardian ad litem” is appointed to represent the interests of the child in the guardianship proceeding, and that person makes a recommendation to the court regarding who should be the guardian. The court ultimately decides who will be guardian of the child. Since the couple did not have wills nominating a guardian, any of their relatives could petition for guardianship of the child. The court would have no obligation to honor a verbal agreement between the deceased couple and the brother. If any other family members objected, or thought they should be named as guardian instead, the court proceeding could become extremely expensive, potentially costing thousands of dollars, as well as the time required and emotional toll. The guardian ad litem’s fees are generally paid out of the child’s inherited assets. If the guardian ad litem, a stranger to the family, chooses someone other than the brother to be guardian and the court confirms that choice, that person would become guardian, regardless of the verbal agreement with the brother, and at a steep cost to the child.
However, under Washington State law, the court must approve the guardian nominated under a will or a durable power of attorney (a document that determines who makes decisions for you if you’re incapacitated), as long as the guardian is qualified. Generally, to be qualified, the guardian must be a “suitable” person of sound mind over the age of 18. While a guardian ad litem is still appointed to determine the best interests of the child and report to the court on whether they believe the guardian is qualified, the court can only reject the nomination and appoint a different guardian if they find the guardian nominated in the will is unqualified. Additionally, the process is significantly less costly than a guardianship proceeding where there is no will nominating a guardian.
How Do I Choose a Guardian for My Minor Child?
Sometimes people hesitate to draft their estate planning documents because they feel that choosing a guardian is a difficult, high-pressure decision. However, this may be the result of misconceptions about how guardianship works. For example, you may think your sister is the best person to raise your children if you’re unable to, but it’s important to you that your children remain near the rest of your family and their friends, and you know there’s a chance your sister might move cross country to be near her spouse’s family.
Fortunately, your child’s guardian isn’t necessarily the person whom your child will live with; the guardian is the person who gets to make the decisions about your child’s life. If circumstances change and your sister is the best person to make the decisions, but not the best person for your children to live with, she can decide as guardian that your child should live with a more appropriate relative. You don’t have to determine now who is the best person to have custody of your child. You just need to decide who you want to make that decision.
Another concern that sometimes arises is when the person you want to make decisions about your child’s health and welfare is not the most financially responsible person to manage the child’s assets, or vice versa. For example, your brother’s values regarding childcare and healthcare might align with yours, but he might be terrible with money. Or, your parents’ values differ from yours, but they’re very responsible financially. Fortunately, there are two types of guardianship: guardianship of the estate, and guardianship of the person. The guardian of the estate makes decisions regarding the finances and assets of the child. The guardian of the person makes decisions regarding the child’s healthcare and wellbeing, and determines where and with whom the child lives. While many people nominate the same person as both guardian of the estate and of the person, you can name different people for each role if that’s what you’re more comfortable with.
Note that a will only names a guardian for your children if both parents are deceased. If the child has one surviving parent, but that parent is incapacitated and cannot act as the natural guardian (or, in the unlikely event of two surviving but incapacitated parents), a durable power of attorney can name a guardian for such a situation. Durable powers of attorney have many benefits beyond the ability to name guardians for your children (for example, being able to name your own guardian or even to avoid guardianship if you yourself are incapacitated), and are a crucial part of any estate plan.
What Happens to the Couple’s Assets?
The assets of the couple from our case study are administered by the guardian for the benefit of the child until the child turns 18, at which point the child has full control over all the assets. Many people, perhaps remembering themselves or their friends and family at 18, prefer not to give their children unfettered access to significant assets at that age. If the couple had made a will, they could have directed the assets to a trust for the child’s benefit, to be used for the child’s health, maintenance, education and support, until the child reached the age of their choosing, or even for the duration of the child’s life.
Why Leave Assets to My Children in Trust?
There are significant advantages to leaving property to a child in trust. Most notably, leaving assets in trust ensures that even though the child may enjoy the assets and the income they produce during their lifetime, the trust assets are protected from the claims of the child’s potential creditors (including a spouse who divorces them), which is a significant protection not available when assets are owned outright, free of trust. Additionally, if estate tax planning is a concern, assets remaining in estate and generation-skipping tax exempt trusts can pass down to future generations tax-free.
Furthermore, trusts are highly customizable, allowing you to convey your values to your children after you have passed. For example, if you want the trustee to be able to distribute funds to your child to buy a home or start a business, even if such expenditures would use up all of the trust assets, you could do so. Alternatively, if you want to make sure that your children are motivated to make their own way in the world and not rely on the trust assets, you can add provisions to that effect. The trust terms could direct the trustee to make a large trust distribution upon a child’s graduation from college or attainment of gainful employment, or could give the trustee the discretion to withhold distributions if a child is not providing for themselves and does not have a good reason (such as disability or providing care for another family member).
While most people would prefer their children not have control over significant assets at 18, the idea of a trustee controlling all the assets long after the children have grown into adults may not be attractive. Trust provisions can be drafted that allow the trust beneficiaries to become their own trustees when they reach a certain age. For example, you may appoint your sister as trustee of your children’s trusts while your children are young, but give your children the right to be co-trustees of their own trust share when they reach age 30, and sole trustee at age 35, giving them the opportunity as adults to learn how to manage significant assets before having sole control. Trust powers can be broad enough that the beneficiary/trustee has almost as much control as if they owned the assets outright, but with the tax and creditor protection benefits of a trust.
Other Scenarios in Which Estate Planning is Crucial
In families where both spouses have children from previous marriages, estate planning can be particularly important. The division of property between the surviving spouse and the children of the deceased spouse can be complex and contentious if no estate planning is in place. Problems also arise when planning that is in place does not address the blended family situation. For example, a couple may draft wills leaving everything outright to the surviving spouse at the first death, and then splitting the assets between both sets of children at the second death. However, after the first death all of the property belongs solely to the surviving spouse, who can change their will at any time. Unfortunately, even when spouses have the best intentions entering into such arrangements, relationships between a surviving spouse and the children of the deceased spouse can degrade, and the children can end up receiving nothing from the surviving spouse if the spouse so chooses. However, an estate planning attorney could help such a family draft documents that address the particulars of their situation, to ensure both spouses’ children are provided for, regardless of the order of death.
People without Children
Estate planning can be particularly difficult for people without children, as there may not be obvious beneficiaries for their estates. Without estate planning, assets will generally pass to the closest living relatives of a decedent. If a person without children wants to ensure that their estate goes to the family, friends, or relatives of their choice, or wants to make sure particular relatives do not receive any of their assets, drafting a will or revocable trust agreement is essential.
Couples in long-term committed relationships who are not married generally do not have the same property rights as married couples. If one partner in such a relationship dies without a will, the surviving partner may not necessarily inherit any of the deceased partner’s assets.
Uncertainty and disputes may arise between the surviving partner and the decedent’s family members regarding property division. The law in this area is unsettled and constantly developing. An estate planning attorney can help couples in committed relationships avoid such uncertainty with a property status agreement clarifying ownership of the couple’s assets and wills to ensure the property is distributed consistent with their wishes at death.
As you can see, having basic estate planning documents in place can provide peace of mind for you and your loved ones, eliminating uncertainty as to what will happen to your minor children and assets at your passing and removing potential sources of dispute between your loved ones over your estate.
No client or prospective client should assume this article serves as a receipt of, or a substitute for, personalized advice from Merriman, or from a legal or insurance professional. The client or prospective client is responsible for determining whether any strategy discussed is appropriate or suitable for them based on their legal, financial, or tax situation. The client or prospective client should consult with an attorney, insurance, financial or tax professional regarding their specific legal, financial, or tax situation.
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Geoff has always enjoyed talking with people about finance, learning about their investments, financial strategy, and business sense. His interest only deepened with time, and what began as a hobby has now become a life-long passion, with an unparalleled passion for continuing education that makes him an expert in many subjects from traditional taxes and investments to business succession planning and executive compensation negotiations.
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