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Planning for the Support of Minor Children – Part III

When we last met Jenna and Mark Livingston, they were hunkered down in St. Thomas, U.S Virgin Islands, waiting for Hurricane Astrid to pass.  As they huddled in the town assembly hall, Jenna, an attorney, and Mark, a pediatrician, bemoaned their failure to adequately plan for the care of their children in the event of their death. Both age 30, the couple had three children, aged five months, two, and four. They expected to live long and productive lives.

While the couple clung to one another, terrified, Jenna said, “Right now, I am kicking myself for not planning for the financial support of our children, should something happen to us. I am not sure any of our relatives can afford to raise three children together, especially ones as young as ours. I also wanted our kids to go to private schools, then good colleges, like we did. We should have paid more attention, upped our life insurance or something, to make sure they were provided for. I just know they are going to be split up and raised in different homes. And even then, there is no guarantee they’ll be able to afford college. Oh, this is just so awful.” She began to cry.

While it may be unusual for both parents to die at the same time, it is not unheard of. Many times, couples view the possibility that one will survive as a safety net. It isn’t. Accidents occur all the time, and since couples tend to travel together, they are at greater risk for simultaneous death.

The parents of minor children have very specific estate planning needs:

  • Guardianship
  • Support, and,
  • Financial management

Each category requires careful consideration.  This is the third in a series of blogs that address each issue separately.

Jenna and Mark had some good estate planning options:

The California Uniform Transfers to Minors Act.  Generally, an account  is established in the name of a custodian, who holds the assets placed in the account on behalf of a designated minor until he or she reaches age 18. The property held in the account may be a gift made by a parent or other adult, income earned by the child, or assets inherited from others. The custodian, who may be a parent, relative, or a professional fiduciary, is responsible for managing and investing the assets held in the account.  Before a child reaches 18, the property accumulated in the account may be used for his or her benefit. After they turn 18, the contents of the account must be turned over to the (former) child. In California, the creator of the account may delay—in writing– the payout of funds in the account up to age 25.

College Savings Accounts. A 529 college savings plan permits funds to be saved for post-secondary education in a tax-advantaged way. Earnings are exempt from federal taxes, and some states also offer additional benefits, such as matching grants or state tax deductions. In addition, the funds placed in a college savings account cannot be used for any purpose other than a college education. The California CollegeShare Savings Plan offers no state tax advantages, but the account earnings are tax-deferred, meaning no tax is due until a payout is made. However, California residents may invest in any state 529 plan in the United States and still receive the federal tax benefit. They are not required to invest in the California state-sponsored plan, even if their children plan to attend colleges in California. A 529 plan can be started with minimal funds.

An irrevocable trust. Assets placed in an irrevocable trust stay in the trust. The assets cannot be removed, even during a grantor’s lifetime.  Income generated by those assets and principal can be distributed to trust beneficiaries by the trustee as specified in the trust contract. For example, a trust contract may specify that income accumulated be used for the support of minors, school expenses, to make down-payments on a first home, or even to reward philanthropic efforts. The grantor is limited only by his or her imagination. The assets of the trust are protected from almost every outside party, including creditors, ex-spouses, purported heirs, the government, and ne’er do wells. There are a wide variety of trusts available that can be used to benefit and support children.

Under federal gift laws, an individual parent is permitted to give away up to $14,000 a year per person tax-free. For a married couple, the exclusion increases to $28,000.  The gift can take any form, be it cash, an interest in property, or a business.  In addition, for gifts of high value assets, the exclusion may be spread out over five years. This gift tax exclusion is a great way to build a pool of funds for use by children should the premature death of both parents occur.

A Revocable Living Trust. Generally, a parent or parents set up the trust, naming themselves as the trustee, and titling key assets, such as a residence, in the name of the trust. If simultaneous death occurs, that property becomes available for the support of a child or children, and is protected from creditors, irresponsible parties, and even, the courts.  Once the grantor dies, the successor trustee takes over, managing and administering the trust assets for the benefit of the named beneficiaries, in accordance with the grantor’s instructions. It is important to note that a Living Trust may be funded with life insurance. Upon the grantor’s death, the proceeds from the policy can be used to fund the trust.

 

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