Beyond a Simple Will

Most people understand that it is important to have a will which spells out the way they would like their property to be distributed after they die.  Nevertheless, many people are uncomfortable (to say the least) contemplating their own mortality, so they put off taking care of even writing a basic will.  That’s quite understandable, but in most cases, it’s a mistake.

I think it is imperative that you confront your fears and put something in writing, especially if you have minor children.  Having a will and naming a guardian is nothing short of mandatory.  My experience is that many people, who definitely know better, have not taken care of this responsibility.  That’s quite sad.  Parents spend so much time and energy in ensuring the successful viability of their children’s (long term) future in terms of education and comfort, but fairly little in considering who will care for them (in the short term) if the worst thing that could ever happen happens.

Whether you should take a step beyond just a simple last will and testament and also use a trust is the subject of a June 3rd article in The Wall Street Journal, Deciding if Your Kid Is Trust-Worthy, by Stacey L. Bradford. She raises several pertinent considerations in estate planning.

The subject of trusts can be intimidating, but it is well worth your time to become acquainted with the issues. Fortunately, Bradford explains in plain English “why parents may want to consider estate-planning tools beyond a will.” Here are some relevant quotes.

Even middle-class folks can benefit from trusts when it comes to estate planning. That’s because children under the age of 18 can’t directly inherit more than a small amount of money. If you have more than that to leave to your minor child and make no provisions in your will, a court will appoint a property guardian to manage your child’s assets until he reaches 18 or 21, depending on the state.

That property guardian may be a complete stranger who won’t understand your values. Perhaps more important, the guardian could add one more layer of bureaucracy to an already complicated situation. When your child needs money, the guardian may have to make a formal request that then goes through the court system. It can be a real headache for your kids to get funds when they need it, and it’s not an arrangement that’s always in their best interests.

One way around the court system is to set up a custodial account for your kids through your will. In that case, you get to name the custodian, and he decides how the money is spent. Once your son or daughter is legally considered an adult, he or she inherits the money outright. The problem with this setup is that your kid might blow through the money and have nothing left over for college or grad school.

For many parents, setting up a trust is a better alternative that allows them more control over how their money is spent once they’re gone. If you have the means and want your child to go to private school, for example, include that in the trust document. A trust can also delay the age at which your kids get their hands on the money.

While setting up a trust is a bit more complicated than a custodial account — it requires a lawyer’s assistance, for one thing — it also provides more financial security for your children and is therefore worth considering. Ideally, you should set up a trust when you draft your will. But you can always add a trust later as your estate gets more complicated or your assets grow.

Here are a few questions to ask yourself to determine if a trust is right for your family:

Do you anticipate leaving your children more than a modest sum of money?

Do you want to have some say in how your children’s money is spent?

Would you prefer that your children not inherit the money when they turn 18 or 21?

Do you want the money to be used for a college education?

Bradford also discusses choosing a trustee and how your guardian and trustee will work together.

Even after reading just these excerpts that I posted here, you will know enough to ask the right questions of your attorney. Reading the article in its entirety or the book on which the article is based, The Wall Street Journal Financial Guidebook for New Parents, couldn’t hurt either. By the way, in my opinion this book will be valuable for parents who are not so new and even grandparents.

And, of course, it is absolutely imperative to work with a knowledgeable lawyer who specializes in estate planning issues. Trusts are highly complicated and simply not a do-it-yourself project.

What you spend upfront on the lawyer fees will be saved many times over, if the need ever arises.