Estate Planning for Young Families

McNees Wallace & Nurick LLC
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Proper estate planning for young families is essential, despite often being overlooked by both clients and attorneys. Many young families view their estate as being “simple” because in their minds they “don’t have much,” and many attorneys do not focus on each client’s specific and unique set of circumstances. Compounding the problem is the fact that many young couples have difficulty thinking about what would happen to their family if something were to happen to one of them, and, to the extent they are concerned, many young couples are apprehensive of the unknown cost of retaining an attorney to prepare an estate plan. Despite these potential roadblocks, proper estate planning is essential for all young families, and a good estate planning attorney will address each of these concerns. Even an otherwise young, healthy adult can pass unexpectedly, and a good estate plan will provide for the surviving family and will leave them in a better place.

Understanding the Ways in which Assets are Disposed of at Death

It is important to understand that different types of assets pass at death in different ways. For purposes of estate planning, there are, in general, three categories of assets:  individually owned assets, jointly owned assets, and “non-probate” assets. Individually owned assets are assets held solely in the name of the decedent, such as an individually owned bank account, a tenant-in-common interest in real estate, or individually owned stock in a business. Jointly owned assets are assets held by one or more persons that are coupled with rights of survivorship, such as joint bank accounts and real estate held by husband and wife as tenants by the entirety. Non-probate assets are assets that contain a beneficiary designation, such as life insurance, annuities, 401(k)s and IRAs.

Jointly owned assets pass by operation of law to the surviving joint owner without probating the decedent’s Last Will and Testament. Non-probate assets pass pursuant to the beneficiary designation. Jointly owned assets and non-probate assets pass without regard to the terms of a Will. Stated another way, a Will cannot control the disposition of non-probate assets and jointly owned assets.

A Will controls only the disposition of a person’s individually owned assets. As a result, a good estate plan will coordinate the disposition of a client’s individually owned assets with the client’s non-probate and jointly owned assets. For this reason, it is imperative that an estate planning attorney have a solid understanding of the assets owned by the clients, the way in which the assets are titled, and any debt associated with the assets. This is typically accomplished through the preparation of a personal financial statement, which is usually prepared by the client or in connection with the client’s financial planner or accountant.

What Happens if I Die Without a Will?

There are many common misconceptions about what happens to a person’s assets if they pass away without a Will. Some incorrectly assume that all assets will automatically become the assets of the surviving spouse, while others believe that all property will go to the Commonwealth of Pennsylvania.

When a person dies without a Will, his or her individually owned assets will pass pursuant to the provisions of the Pennsylvania “intestacy” statute. If the decedent died with no children, but was survived by a spouse and one or more parents, the statute provides that the surviving spouse is entitled only to the first $30,000 plus one-half of the balance. The other one-half of the balance is to be distributed to the decedent’s parents. Where a decedent dies and is survived by children, all of whom are the children of the surviving spouse, the surviving spouse is entitled to the first $30,000 plus one-half of the balance. The other one-half of the balance is to be distributed to the decedent’s children. This result is often contrary to the desires of the decedent, as many young couples typically prefer to leave all of their assets to the surviving spouse before benefitting children or parents.

Last Will and Testament

The cornerstone of any estate plan is the Last Will and Testament, which controls the disposition of a client’s individually owned assets. Typically, Wills for young couples are reciprocal and will often be structured to leave all assets to the surviving spouse upon the death of the first spouse. Upon the death of the surviving spouse, all assets are typically left equally to the clients’ children. If the clients are charitably inclined, their desire to benefit charities can be incorporated into their estate plan as well.

When there are minor children, the Will should provide for someone to manage each child’s inheritance. This is often accomplished by including trust provisions in the Will that name a trustee to hold and administer each child’s inheritance in separate trusts for their benefit until they reach a certain age, such as 30 or 35. In general, the trustee will be authorized to make distributions to or for the benefit of the beneficiaries for their health, education, maintenance and support. These distributions are meant to ensure that the beneficiaries can maintain a minimum standard of living but do not foster or underwrite an unproductive or irresponsible lifestyle. In addition, the trustee may be authorized to make distributions to assist the beneficiary with the down-payment on a principal residence, the costs associated with a first wedding or the starting of a business. “Incentive” distributions may also be included in the trust to provide

for the matching of a beneficiary’s earned income, graduating from college, or rewarding a beneficiary who engages in missionary work. In addition, the payout of the trust is often structured to be spread out over a period of time. For example, the trusts could be drafted to provide for a distribution of one-third of the trust at age 25, one-half of the trust at age 30 and the full balance of the trust at age 35.

Although the trust will be designed to manage the children’s financial assets, the Will of a client with minor children (younger than 18 years of age) should recommend a guardian. The guardian is responsible for raising the children and has the legal authority to care for them. It is important that this information be communicated to the court when it is determining who will care for minor children.

The Will also names an Executor who will be responsible for administering the estate of the decedent. Typically, spouses appoint each other as the primary Executor, and an alternate Executor should be appointed. The Executor gathers the decedent’s assets, pays his or her outstanding debts, and distributes the estate pursuant to the terms of the decedent’s Will.

Durable General Power of Attorney and Health Care Power of Attorney

In addition to a Will, any complete estate plan will include a Durable General Power of Attorney and a Health Care Power of Attorney. The Durable General Power of Attorney appoints an agent to make financial decisions for the principal. The Health Care Power of Attorney appoints a health care agent to make health care decisions for the principal and generally includes a Living Will component. Typically, spouses appoint each other as their primary agent. It is important to name an alternate agent and an alternate health care agent in the event the primary is unable to serve.

Conclusion

The complexity of estate planning for young families often arises due to the nature of the clients’ beneficiaries rather than the nature of their assets. Because assets pass in a variety of ways, and because wealth is often accumulated in non-probate assets such as retirement accounts and life insurance policies, a good estate plan will coordinate the disposition of a client’s individually owned assets with the client’s non-probate and jointly owned assets. A good estate planning attorney will assist a young family with these and many other issues, such as ensuring adequate financial support for a surviving spouse, as well as the ability to ensure that adequate funds will be available to provide an education for the children. By establishing an estate plan, a young family will enjoy peace of mind in knowing that their family will be taken care of in the unlikely event of an untimely death.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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