Becoming a parent is a significant life event that opens up new vistas of happiness and sleeplessness. The goal of this four-part article is to provide a general overview and resources to new parents on how to navigate the government, estate planning, and insurance related issues which commonly arise for new parents.
The article is for educational and informational purposes only and does not constitute legal advice. Anyone contemplating taking legal action is urged to obtain proper legal advice from an attorney licensed in your particular jurisdiction.
Now that you are a new parent, your estate planning needs have become more complex. It is common for new parents to meet with a financial planning professional to ensure that if they both pass away, they can financially provide for their child.
Before or after the birth of a child is a good time to create or re-evaluate your estate plan. Especially if you took out a life insurance policy to provide for your child after you pass away, you should consider consulting with an attorney to see if creating a trust is the right choice for your estate plan. Some of the advantages of creating a trust are outlined by my colleague Paul Kellogg in these three articles (1 , 2, and 3). The advantages of a trust increase once you have a child.
What happens if both parents pass away before their child turns eighteen and the parents have named the child as the life insurance policy’s beneficiary and left your estate to your child? The insurance company can only give the proceeds to a legal guardian established by the probate court. Establishing the guardianship takes time and legal fees, and even if your will appoints the guardians they will continue to be monitored by the court until your child turns eighteen, costing your estate in legal fees and expenses.
Without a trust, your child is entitled to all of the life insurance proceeds and the sum of your estate the day he or she turns eighteen. Most parents want to avoid the scenario of giving their child unsupervised access to hundreds of thousands or millions of dollars the day he or she turns eighteen.
A trust can be used to dictate how and when your financial assets will be distributed to your child. The trustee you appoint will be tasked with managing the trust’s assets in accordance with the terms of the trust. The trustee can be a different person than the child’s legal guardians, giving your assets an extra layer of oversight.
If you have created a trust and named the trust as the beneficiary to your life insurance policy, the written terms of the trust control the money. The terms dictate when your child can receive money from the trust (i.e. pay for college, then 33% at ages 20, 25, and 30) and dictate how the trustee should divvy up assets between multiple children.
A trust provides the best way for parents to ensure of if they pass, the life insurance money and other financial assets left to the child are not squandered. But it is not a good idea to draft or fund a trust without the guidance of an attorney.
The precise terms of a trust, and how those terms interact with Ohio law, are extremely important because they are the “rulebook” for distributing the assets of the trust. The issues compound in determining which assets to place in the trust and in deciding how the trust fits into each family’s unique estate planning needs. There can be significant legal and tax ramifications if your trust is not properly integrated into your estate plan. Consulting with an attorney is the best way to ensure your financial assets will be handled for your child in the correct manner.
Finally, if you have been blessed with a child who has special needs, then you should consider consulting with an attorney to help you navigate their unique legal and estate planning needs.
Kyle E. Hackett is an attorney in Cincinnati with the Phillips Law Firm, Inc. Kyle helps individuals and small businesses anticipate and solve a variety of legal needs, disputes, and lawsuits. He can be reached via e-mail at [email protected] or (513) 985-2500.