You are married. You have a couple of young, healthy children. You are still young yourself. Life is good. Why would you have to worry about estate planning? Isn’t that for when you die, or for people older than you? Nope!
Estate planning is more than death planning. Estate planning is keeping control of your property and other assets while you are alive and well, providing for you and your loved ones in the event you became mentally disabled, and after you are gone, giving what you have, to whom you want, when you want, the way you want.
You may think that once you are married, your spouse has some sort of legal authority to make decisions for you if you are unable. If you think this, you would be mistaken. Marriage grants your spouse no such authority.
Your spouse can only make such decisions for you if he or she has been granted such authority by you, or by probate court. You can grant such authority to your spouse through financial and health care powers of attorney. These documents would allow your spouse, to make financial, medical and mental healthcare decisions for you if you are unable.
Without a financial power of attorney, your spouse would have to be appointed as your conservator by the probate court, before he or she could make your financial decisions when you are unable. Similarly, without a healthcare power of attorney, your spouse would have to be appointed your guardian by the probate court, before he or she could make medical or mental healthcare decisions for you.
In the event that both you and your spouse became incapacitated or died, who would take care of the kids? Where would they live? Who would make medical and other decisions for them?
If you have done no planning, someone would have to petition the probate court for guardianship of your children. When there are no family members or other loved ones who want to be guardian and your children are orphaned, Children’s Protective Services may step in and take custody of them. Your children would then become wards of the state and part of the foster care system. Your children may be split up and/or put up for adoption. Is this what you would want for your children?
To avoid both probate court guardianship proceedings and Children’s Protective Services, you and your spouse could sign a properly drafted parental appointment of a guardian for your children. In this document you designate the person(s) to whom you want to have guardianship over your children in the event of your incapacity or death.
In that circumstance, all your appointee would need to do is present the guardian appointment document to the probate court, along with an acceptance of guardianship and the court would then issue letters of guardianship. No muss, no fuss. The person you want is then the guardian of your babies.
Upon your death, if you have done no planning, any assets in your sole name would be split between your surviving spouse and your kids. If your spouse gets in a car wreck causing injury or death and gets a large personal injury judgment against him or her, both his or her assets and your assets are at risk to satisfy the judgment. If your surviving spouse marries Thor, her Swedish personal trainer, or Bambi, his aerobics instructor, your assets may be subject to claims by Thor or Bambi.
Since your kids are minors, their share of your estate would be held in a court appointed conservatorship until they reach age 18, when they become adults and gain all the wisdom and insight of adulthood, and the court distributes all their conservatorship assets to them. They then go to university, the University of Corvette.
Buzz Suuppi, my associate attorney, recently updated his estate plan, and he addressed these concerns. Buzz and his wife Sarah, have two kids, Lily, 4 and Sophie, 2, and a son on the way. Buzz and Sarah have separate trusts, each with about half of their assets. If something happened to either of them, the other’s trust would last for the lifetime of the survivor, who gets income or principal whenever needed for health, education and maintenance.
The assets in this type of trust avoid probate upon Buzz or Sarah’s incapacity or death. The survivor’s inheritance is protected from claims against him or her from lawsuits, bankruptcies and other creditors. The survivor’s inheritance is also protected from divorce or death claims from the new spouse, Thor or Bambi.
Furthermore, Buzz put remarriage protection in his trust. After his death, distributions to Sarah stop when she marries Thor, unless Thor signs a pre-nuptial agreement waiving any claims to Sarah’s assets. This does two things. It protects their entire marital estate for their children Lily and Sophie, and it takes the pressure off of Sarah when requesting a pre-nup from Thor. She can blame it on Buzz. Well Sarah said fair is fair, so she put Bambi protection in her trust.
To protect the kids, Buzz and Sarah, have set up lifetime trusts for them. Until the youngest is age 25, or if earlier, has earned a bachelors’ degree, their entire marital estate stays in one bucket, to be used for any of the kid’s needs. Once the youngest reaches age 25 or gets a college degree, if earlier, the assets in the common trust are then split into equal lifetime trust shares for each child.
Their named successor trustee would manage and distribute the assets in the kids’ separate lifetime trusts until they reach age 30. When each child reaches age 30, they become the successor trustee of their own separate lifetime trust. With separate lifetime trusts, the children would have access to the trust assets for any of their needs
These children’s lifetime trusts have two primary protections. Firstly, the separate trust assets are generally protected from claims against the children from lawsuits, bankruptcies and other creditors. Secondly, so long as the children keep these assets in the separate lifetime trusts and never co-mingle trust assets with marital assets, the trust assets will be protected from their divorcing spouses. With the use of lifetime trusts, there is creditor and divorce, or predator, protections.
In addition to having the proper documents in place, you should also investigate whether disability, long-term care or life insurances make sense for you. With proper planning, you can protect yourself and your loved ones, both during your lifetime and after you are gone.
By: Matthew M. Wallace, CPA, JD
Published edited May 26, 2013 in The Times Herald newspaper, Port Huron, Michigan as: Young families need to do estate planning, too