Do you know what would happen to your children if you were to become incapacitated? Don’t leave their lives in the hands of the courts.
Creating a Will
When Beth Higham was about 12 years old, her cousin came to live with her. This made an impression on Beth, now a mother of three, because her cousin had two siblings who each went to live with different relatives when their parents were killed in a plane crash.
“I remember feeling so sad because not only had my cousins lost their mom and dad, they lost each other, in a sense, because none of our relatives could take all three of them into their own family,” Higham says. “I think that memory is what prompted us to actually get with an attorney and make a legal will when our third child was born.”
Higham’s cousins’ parents hadn’t appointed a guardian for their children, so it was left up to surviving family members and the court to decide who would care for them. “When we only had two kids, we had a hand-written will naming a guardian for them,” she explains, “but when the third one came along we felt it was important to make it legal. We didn’t want to take a chance that they would be separated if anything happened to us.”
When you’re in your 20s, 30s or even 40s, it’s difficult to think about estate planning, because the need seems so far in the future. But the unfortunate reality is that accidents happen every day, and “it’s particularly important for parents with young children to have a will,” notes K. Gabriel Heiser of Brentwood, one of only 14 attorneys certified in estate planning in Tennessee.
“Wills aren’t just for the rich,” Heiser says. “Even if you don’t have much in the way of assets, you need to name a guardian for your minor children.”
A will also allows parents to make a trust for their children, which specifies when and how they will get any money left to them through the parents’ life insurance policies, investments, retirement plans, etc. And, having a will can help families save substantially on estate taxes – a whopping 41 percent – if all combined assets are $1,000,000. (Don’t scoff; Heiser points out that “You can get there quick with life insurance policies.”)
Naming a Guardian
Who would take care of your children if both you and your spouse died? Grandparents, a sibling or another family member? What if you don’t have any relatives capable of stepping in and taking over the care of your kids? Would you trust the court to appoint someone?
“Think about who would honor your values and desires in raising your children,” advises Robyn Lynne Ryan, an attorney with Cynthia J. Bohn & Associates, a Nashville firm specializing in wills, estates, conservatorships and guardianships. “Who would make sure your kids go to church, or go to college, or whatever is important to you?
“Juvenile court will grant custody, but they almost always appoint the guardian named in the will. If no one is named, they make every effort to keep children with their families,” Ryan explains. “Children become wards of the state – placed in foster care – only if there is no family member or friend who steps forward to take custody.”
Heiser also points out that you can name more than one person or couple as guardian. For instance, you could name your parents first, then your spouse’s parents, your brother and his wife after that and so on. Then if the first guardian isn’t able to fulfill that role for whatever reason, the next person or couple named would become the guardian, and so on down the list. You can also name a friend if you don’t have or want a relative to be guardian.
Setting Up a Trust
You will, of course, want to provide financially for your children if you die before they are grown. Life insurance is one vehicle for doing this, but unless you include a trust in your will stating otherwise, the entire amount will be given to your children when they reach age 18. “I haven’t met many parents who wanted their 18-year-old to have a lump sum of several hundred thousand dollars,” Heiser points out.
He says one advantage of a trust is that you can specify that each child gets a percentage of money at a certain age, another percentage a few years later, and the rest a few years after that. So if you want your kids to go to college, for example, you can specify that you want the trust used for that purpose, with one-third of the remaining amount given at age 25, one-half at age 30 and the remainder at age 35.
Part of creating a trust is naming a trustee to manage the finances. This may or may not be the same person you named as guardian. Beth Higham and her husband chose one couple to be guardians and another person to be trustee. “It’s just a good check-and-balance system,” she says.
“The trustee pays for all the needs of the child, and invests and manages the money on the child’s behalf,” explains attorney Ryan. “It’s best to name someone in your will who you have confidence in. It can be expensive – and emotional – if the court has to appoint someone.”
Another option is to have a corporate trustee. The advantage to having a bank or trust company as trustee is that these organizations are both experienced in managing money and impartial in its distribution. They do charge a fee for the service, so, according to Heiser, this option is usually best for those with estates in excess of $300,000.
“If you have a special needs child, you definitely need a trust,” explains Heiser. “If you give him the money outright, he may no longer be eligible for government supplement programs that he will really need over the course of his lifetime. It’s best to consult with an experienced estate planner for these situations.”
In addition to choosing a guardian and a trustee for your children, you also need to name an executor of your estate. Unlike a trustee, who serves for many years, the executor serves for only a short time, paying the expenses associated with your death. These include burial, final income taxes and certain outstanding debts.
As with a trustee, the executor can be a family member or friend, or a corporate institution such as a bank. Depending on the knowledge and experience of the trustee and executor, they may want to hire an attorney, a tax professional or a financial advisor to help them fulfill their duties.
Making Your Will a Legal Document
There are many decisions that must be made by a couple as they prepare a will. Attorney Heiser’s website, USAWills.com, takes you through the process, step by step, with lots of pop-up boxes providing additional information. After completing all the fill-in-the-blanks, you can review, make changes and purchase your will online if you choose. Then, to make it valid, it must be signed in front of a notary and two witnesses. Prices range from $49 – $199, with the spouse’s will added for half the price of the first will.
“Wills can also be updated at any time,” says attorney Robyn Ryan. “What works when you have one child will probably change when you have the second or third, if you get divorced or have a substantial change in your estate. It’s a good idea to revisit your will at least once a decade or when a significant change occurs.”
Ryan also advises that each parent have a separate will, because then it is easier to make changes. Most couples choose a “mirror” will, in which the couple’s joint desires are reflected in both documents. Both wills name the same guardian and trustee, for example, and the type of trust parents want for their children. A mirror will also allows each parent to name a beneficiary of any personal items they may have, such as a father’s childhood baseball card collection to his son or a mother’s heirloom jewelry to her daughter. Ryan charges about $150 per couple for a mirror will, if the couple’s assets are under a certain amount.
Felice Apolinsky, a single mom with two boys ages 8 and 11, has had a will since she was pregnant with her first child. “My dad is an estate attorney, and he made me do one,” she laughs. She and her husband both redid their wills when they divorced, mainly in the dispersion of assets, but made joint decisions about a guardian for their children if they both died.
“I don’t believe in leaving loose ends dangling in any part of my life,” Felice says. “You can get on with the business of living after your will is taken care of.”
Why Life Insurance Matters
Life insurance is actually a gift you give to your family, since you yourself will never reap the benefits of it. Like all insurance policies, you pay a premium and the insurance company pays a “death benefit” if you die during the policy period.
This precaution is important for several reasons. Life insurance can be used to pay funeral and other expenses associated with your death, which can reach up to $10,000. It can replace the income of a family wage earner or the economic value of work done at home, so the family can continue its current standard of living, i.e., pay the mortgage on the house in which you live. In addition to covering monthly living expenses, life insurance benefits can also be used to fund the children’s college education and provide money to help them get started on their own.
There are two types of life insurance: term and permanent. Term insurance is “straight-forward, plain vanilla protection,” according to Scott Newell, a financial advisor with Schwab Private Client Group in Brentwood. “Whole and universal life insurance, the two primary kinds of permanent life insurance, are just term policies with an investment component.”
With term insurance, you purchase death benefits for a specified period – usually five, 10 or 20 years. When the period is over, the deal is done and you walk away (or renew the policy). Insurance pays a specific lump sum to a designated beneficiary if you die during the term of your policy.
There is no time limit with whole and universal life insurance policies; they continue as long as you pay the premiums. Because the company invests some of the money you pay in premiums, these policies can also be used like a savings account. They accumulate a cash value over time, enabling you to withdraw some of the cash value or borrow against it.
“Financial advisors agree that it’s wiser to buy term life insurance and use the difference in premiums (compared to the much higher cost of whole or universal life insurance) to buy separate investments,” Newell explains. “The insurance industry disputes this by saying the money is tax-deferred, which is true, but it’s also true that it’s not typically a good investment. The rate of return is better when you make your own investments.”
Newell also explains that the exception to this is with an estate in the three- to five-million-dollar range, when you can buy insurance to pay estate taxes. This is obviously more complicated and requires the assistance of a professional estate planner.
Buying life insurance has an emotional aspect not associated with other types of insurance, so it’s easy to fall victim to sales pitches and buy more than you need, or end up with more expensive premiums than you want. For impartial information on life insurance, with a built-in calculator to help determine the right amount for your situation, go to bygpub.com, where you can also find other financial planning information.
Nancy W. Brown is a freelance writer residing with husband and two children in Nashville.
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