Creating an estate plan that is aligned with your family’s goals and objectives can protect your family’s finances and safeguard your family’s future should an unexpected event derail your plans. For parents with a young family, even though death is hopefully a long way off, planning for this eventuality is important for a variety of reasons. Investing the time to put an estate plan in place can help protect your family.
No matter where you are in life's journey, having an up to date estate plan can help ensure your family is protected in the event of your death.
Last Will and Testament
A last will and testament (will) is the foundation of an estate plan. A will provides for the disposition of your assets, names your executor and appoints the guardians of your minor children. In some cases, the will may also name a trustee to manage your property after your death. Your trustee, who may be your spouse, a trusted family member or an institutional trustee, once appointed after your death, will manage your assets for the benefit of your family in accordance with the terms set forth in your plan. As time passes, your family and your family’s needs will change, and your will should be updated to reflect those changes. Updates will also be necessary to take into consideration items such as changes to the law, career growth and increased personal wealth. You will want to consider the following things when preparing your will:
Name Guardians for Minor Children
Who would raise your children if you passed away? As a parent, it is terrible to imagine and, perhaps, difficult to determine who that person would be. This decision could affect your children’s upbringing and education and could impact them for the rest of their lives. In our experience, the greatest challenge to completing a will for young parents is agreeing to the selection of guardians for their minor children. Naming guardians, however, is one of the most important reasons for parents of a young family to have wills. Because every family is different, the best choice for one family may not be appropriate for another. Guardians could be grandparents, siblings or close personal friends, and while there is no perfect choice for such a difficult decision, you will generally want to find someone whose values align with yours. Although a court must always approve your choice for guardian, should you fail to appoint a guardian in your will, a court will not know your intentions.
By failing to nominate a guardian in your will, you are leaving that decision to a legal process over which you have no control.
This is a highly personal decision and one that parents may not agree upon without thoughtful deliberation and discussion. Once you have made your selection, you should discuss this with the individuals you have selected to be sure that each is willing to serve as a guardian. Selecting guardians now, however imperfect or debated it may be, is always better than leaving it up to chance.
Name an Executor for your Estate
An executor (sometimes called a personal representative) should be designated in your will to allow for someone you believe to be trustworthy and responsible to administer your estate. Perhaps the best choice will be your surviving spouse or a trusted family member. Banks can also serve as executor. Many testators (a person who makes a will) choose both an individual and a bank to serve. This allows the individual who knows the family to work with a professional who has experience navigating the sometimes-complex estate administration system. Your executor plays an important role following your death, including gathering and valuing assets, filing any appropriate tax returns, distributing your assets as directed in your will and following the legal requirements for administering the estate. The executor does not need to be an expert in taxes or law, but they should obtain legal, tax and financial advice when administering an estate to avoid making mistakes. The executor’s job may only last for one or two years, but it is a very important role.
Establish Testamentary Trusts for Children
A will designed to protect assets for your children should provide for, at minimum, testamentary trusts. A testamentary trust is a trust created pursuant to the terms of your will and comes into existence only following your death. You will need to designate a trustee to manage assets that will pass to the trust. The trustee must make distributions in accordance with the provisions of the trust and must act in the best interests of the trust’s beneficiaries. In choosing the trustee, you will want to choose a person or an institution with knowledge and experience remembering that, unlike the role of your executor, the trustee could be acting in this role for years or decades.
A trust may serve many purposes as your children mature. For instance, while your children are young, a trust can determine that a competent adult will manage the property for the children and use it to provide for them.
After your children become adults, leaving property in trust can allow for continued professional management and protect that property from a child’s improvidence and creditors (even a divorcing spouse). If the trust continues beyond your child’s lifetime, it may even pass to a future beneficiary free of estate tax when your child dies.
Durable Powers of Attorney
Imagine what would happen if you were in an accident or experienced a health event following which you were unable to manage your financial affairs or those of your family. If you do not have a durable power of attorney in place, then your family may need to seek a court-appointed guardian to manage your assets for your benefit and for that of your family. Going to court takes time and resources. A much better strategy could be to execute a durable power of attorney that names agents and successor agents. If you ever are incapacitated or simply unavailable, even for a brief period of time, your agent can manage your financial affairs while you are unable to do so. When you have dependent children (and we all know that life with young children can be expensive), were you to be incapacitated a durable power of attorney can be useful to allow your family’s bills to be paid with your available resources during a challenging time. As with any position of trust, the person you choose will depend upon your family’s circumstances. Your agent could be your spouse or partner, a trusted family member or friend or even your attorney or accountant. You may consider designating at least one successor agent for situations where someone needs to be reached in an emergency that requires immediate action to access or safeguard your assets.
Healthcare Powers of Attorney and Living Wills
A healthcare power of attorney (and similar documents with different names) is used to designate healthcare agents who can make healthcare decisions on your behalf if you are unable to communicate those decisions to your healthcare providers. Privacy laws prevent your healthcare providers from sharing your medical information unless you authorize it to be shared. Even if you are able to make your own healthcare decisions, your healthcare agent is authorized to receive information from (and provide information to) your healthcare providers.
A living will provides your family and healthcare providers with your instructions regarding end-of-life decisions. Additionally, a living will names an agent to communicate those instructions to your healthcare providers.
Should your family disagree about your instructions, your living will agent can go to court to enforce the instructions contained in your living will.
Both of these documents can be critical components of any estate plan, especially for parents of young children. If something were to happen to both of you, designating an adult to make these decisions can ensure you get necessary treatment and that your children are not burdened with very difficult decisions regarding your care or communicating end-of-life decisions.
For many of the same reasons, when your young children grow up and go off to college or are away from home, you should encourage them to prepare a health care power of attorney and living will so that someone can make decisions on their behalf and communicate with their healthcare providers. Due to privacy laws, once your child attains majority, your child’s medical providers will not communicate with you (even though you are a parent) without this authority.
Stand-by Guardian Designation
Many states allow parents to designate someone to step in as guardian of their minor children if for some reason both parents are unable to fulfill their duties as parent. If you are a single parent, this could be very important were you to become temporarily incapacitated and unable to care for your children.
Having a stand-by guardian would allow that person to immediately step in and care for your children without having a court appoint a guardian. The factors considered above when appointing a testamentary guardian should be considered here as well.
Term Life Insurance
Odds are you have an entire lifetime ahead of you to invest in your career and to grow your resources for the legacy you intend to leave to your descendants. But what would your family do were you not to live a long life? If you were to die prematurely, term life insurance can help fill the gap between your current financial resources and the current and future needs of your family. Obtaining thoughtful advice regarding term life insurance is a critical component of the estate planning process for young families.
Term insurance can allow your family to have the resources to deal with the premature death of one or both parents.
In many instances, life insurance could be useful to pay your mortgage and allow your children to have a safe and familiar place to be raised by your surviving spouse or the guardians designated in your will. Additionally, insurance proceeds can support your children’s expenses while they are growing up and allow for any child who desires a college education to obtain one. For families just starting out who may have limited resources, term insurance can be affordable. Because term insurance provides only a death benefit for a set term, it is less expensive than permanent policies of insurance. Further, many policies of term insurance can be converted into permanent insurance at a later date. This can be an important feature if your health declines and you need to maintain life insurance. It is important to properly coordinate the beneficiary designation (naming the beneficiaries of your policy) with your estate plan. If you create trusts for children, be sure the beneficiary designation directs the death benefit to be paid into those trusts. It may also make sense to have a separate trust own the life insurance policy.
Don’t Wait, Plan Now
It is certainly true that the years spent raising children, progressing in your career and attending to the routine activities of daily life are some of the busiest that you will ever experience. Nevertheless, being busy should not be an excuse for failing to plan. Americans live active lives and accidents do happen.
Having a power of attorney, healthcare power of attorney and living will makes someone available to manage your affairs, including your medical treatment, while you are incapacitated and, if the worst happens, convey your instructions regarding how to handle medical care at the end of life.
Should you die, your will determines that your assets reach the right people in a form that is managed and protected. Your will can also allow for a guardian to be appointed for your children, avoiding a potentially lengthy and difficult proceeding in court. Lastly, planning with life insurance can help your family have the financial resources to maintain its standard of living, even if you are not there.
Your PNC team, along with your personal tax, legal and financial advisors, can help you accomplish your family’s goals and objectives as part of your overall wealth planning strategy.
For more information, please contact your PNC Private Bank advisor.