How To Protect Your Children

The standard guideline I use in estate planning is the “parade of imaginary horribles.”
To me, this means drafting strategies for everything possible to go wrong so that the estate plan covers all contingencies. In that context, let’s talk about children.

Anyone who is a parent knows that once you have a child, you spend the rest of your life figuring out how to protect him or her. Unfortunately, the majority of parents (yes, the majority) do no planning whatsoever to protect their children in the event of their deaths. What do I mean?

Guardianship. If both parents die in a common accident, who takes care of the children? Who raises them? Is it your wealthy but unstable sister and her husband whom you have never liked or your good friends whom you trust. Young couples with minor aged children are the ones that need to figure out whom they will appoint as guardians of the children and they also need to put structures in place to help the guardians and the children.

Wills and trusts are the vehicles used to designate the guardians for the children in the event both parents die. Unless you specify your wishes in a will or a trust, upon your death, the courts may step in to figure it out. That may mean you’re your unstable sister gets the children over your friends.

The designation of the parties to take care and custody of the children is just the first step. What about funding the needs of the children?

Let’s say both young parents have life insurance but no wills or trusts. As we discussed my last column, the insurance beneficiary designations pre-empt whatever is in the will or the trust. So, if each parent has designated the other as the primary beneficiary of the life insurance policy and each has designated the children as the secondary or contingent beneficiaries if the primary dies, the children could end up with a substantial amount of money from insurance policies when both parents die. But, the money doesn’t go to the children if they are minors. It goes to the guardians for the children.

Obviously, if the parents haven’t named those guardians, that is a problem.
Let’s say the parents have designated guardians in a will or a trust. Then what. If the parents have made no plans for the money, the guardians are free to decide what to do with it. Obviously when you trust someone enough to appoint them as guardians of your children, you will trust them to use the funds wisely. But, even though you trust the guardians, your specific intentions about how you think the money should be used will never be known unless you specify them in writing.

If you want the children to go to college, for example, your insurance proceeds could fund a college plan for the child. Let’s say you want the money held in trusts for the children so that the children and guardians get the money from interest and dividends, but the principal is held for the children until they are older. If you specify that you do not want the child to get all the principal of their trust when they turn 21, you can avoid a potential issue for the child. How many 21-year olds will use a lump sum of money for practical purposes? Instead, if you decide the children should get the principal of their trusts, one-half when they are 25 and one-half when they are 30, you are helping the child to be more prudent with the money.

In setting up trusts for the children, the parents will have to designate a trustee for the trusts. Parents should be aware that it is not wise to precipitate any disputes by designating a trustee who is different from the guardian. Why create a scenario where there could be a dispute between the guardian of the children and the person who controls the money for the children, the trustee? Making the guardian and trustee one and the same makes common sense.

As parents, you can also specify when the rules can be set aside and the principal used to help the children at any time. If the child has a catastrophic medical emergency or starts a business or gets married, you can decide to instruct the trustee to invade the principal of the trusts for the children to pay for such contingencies. These types of provisions must be stated in writing.

What about protecting older children? I was reminded recently that older children, over the age of 21, must have a power of attorney designating the parents or others as their medical and financial power of attorney in case they need it and that power of attorney can also designate the parents as guardians of the older child. If an older child, let’s say age 30 and unmarried, gets into a terrible car accident and requires institutionalization, the parents do not have the right to admit the child to an institution. They would have to go to court and be designated as the guardians of the older child. That process alone takes time and costs in legal fees. However, a power of attorney that also provides guardianship works to protect that older child and is easily implemented.

Finally, what about protecting children with disabilities? If your child is disabled, as a parent you must keep in mind that an inheritance from you may cause the child’s disability benefits to be cut off. The child receiving disability benefits may receive an inheritance if they have a special needs trust and receive the money through that trust. If you have a child with a disability, you need to consult an attorney to ensure maximum protection for that child.

So, to those young parents out there, I know it is hard to imagine, but, as imaginary as it is, horribles do happen. Protect your children even after your death by using the tools of trusts, wills and beneficiary designations. I will be discussing this and other estate planning matters on September 18 from 6:30 p.m. – 8:00 p.m. at Rod ‘N’ Reel in Chesapeake Beach in a free seminar titled “Everything you Always Wanted to Know About Estate Planning But Were Afraid to Ask.” Join us by calling and reserving a space. Or, reserve a space on my website at See you there!

Lyn & TeddyAbout the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them” (2013 ebook download available at Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.