As a parent, it can be difficult to sleep soundly knowing that your children are not financially stable, no matter what their age. That’s why you should start thinking about estate planning.
Estate planning is important because it prevents your assets from ending up with unintended beneficiaries, and it minimizes family conflict when you are gone.
Here are some useful tips to help you plan.
Communicate Openly with Your Children
It’s fairly common for children to underestimate or overestimate the total value of their parent’s estate. That’s why it’s important to talk with them about the actual value of your estate. It will give them peace of mind, and it will reduce family disputes once you’re gone. Be sure to discuss concerns, any potential hurdles that could prevent the proper distribution of your assets, and help them understand the reasons for planning your estate distribution in the way you have.
Level the Field
If you have several children, you are probably wondering if they should all get equal amounts. If you wish to keep things simple, it might be good to give each an equal amount. This does not just mean in terms of assets but also matters concerning responsibilities.
Alternatively, you may want to plan on an equitable inheritance rather than an equal distribution. Equitable inheritance means each child receives a fair amount given his unique circumstances. For example, suppose your youngest child has yet to attend college while the others have already graduated from programs where you footed the bill. In that case, you might allocate more money to the youngest, so they have the same educational opportunity. The same logic might apply if you have given one child money for a down payment on a house - instead of just dividing your assets, you could deduct the down payment from that child's inheritance.
One common mistake some parents make is leaving their eldest child as the primary beneficiary with the directive that they distribute the estate. Estate planning attorneys don't recommend this approach as it can cause conflict and hard feelings among family members.
It is a better idea for you to determine who gets what and put it in writing. Even include things like the heirloom from Aunt Mary and the family car.
Eliminate Uncertainties by Creating a Trust
Often, people choose to leave their children's inheritance to them directly, either immediately or at a specific age, such as 25 or 30. However, once your child receives their inheritance, legally, it is considered their property and will automatically become subject to creditors' claims and divorce settlements. That is why many estate planning attorneys recommend you create a trust instead.
A trust can be structured in various ways – with immediate distribution or even an extended distribution spanning your child’s lifetime. If drafted properly, this lifetime "dynasty trust" will create an asset protection barrier between the child and the child's creditors.
Trusts also keep your estate out of probate court, saving you (and your heirs) both time and money. In addition, trusts can minimize the amount paid in estate taxes.
Regardless of what you choose, you'll want to discuss your plans and intentions with a good estate planning attorney. Remember, you are ultimately responsible for the successful transfer of your estate to your beneficiaries.
Recent Insights from Black Walnut Wealth Management
- Have You Reevaluated Your Insurance Coverage Since COVID Began? If Not, Here Are 4 Areas to Review Right Now
- Personal Money Bias. What Can We Do About It?
- Protecting What’s Yours After You Pass
- Thinking About Moving Closer to Your Kids? Four Financial Implications to Consider
- A Federal Wealth Tax Was Introduced in the Senate. Here’s What Affluent Families Need to Know
- Applying for Life Insurance? Here’s What to Expect
- Identity Theft Insurance
- 2021: Looking Ahead With Hope
- What is a Mega Backdoor Roth IRA
- Scammers Are Getting Smarter. Here Are Five Ways to Spot Them.