In February of 2023, my husband and I had our first child, which prompted us to get our basic estate planning in order. In the process of working with an attorney (shoutout to Heath Oberloh with Woods, Fuller, Shultz, and Smith, P.C.) to draft our wills, a trust, POAs, and healthcare directives, I was surprised at how overwhelmed I felt. Although I have worked in the trust and estate administration industry for a few years now, I must admit that when it came to my own planning, I wanted to bury my head in the sand and forget about it. Having to choose who will handle your affairs after your death, the fear of missing something important, the tedious task of retitling assets – and who wants to think about dying? I was reminded that even imperfect planning is better than nothing. Here are some observations that came to mind while going through the estate planning process myself.
- It’s best to start with your desired end goals and work backwards.
As I tried to organize my thoughts, I wrote down my goals in categories of big picture goals, secondary goals, and specific goals. I only had two big picture goals: Make sure my spouse is cared for financially, and make sure my children are cared for physically, financially, emotionally, and spiritually. All the subsequent planning was guided by those two goals.
- Even the money is not about the money.
A lot of people think estate planning is only for the rich: “trust fund kids” or wealthy business owners trying to avoid taxes. In reality, there are many financial and non-financial reasons for everyone, not just the wealthy, to have a plan for after (and before) they die. For most people regardless of their level of wealth, even the money is not really about the money: it’s about taking care of the people we love.
- The challenge of imperfect information.
Estate planning is a game of imperfect information, and this is especially the case for young families. When you’re just starting out, you may not know how many children you will have, what your health will look like down the road, or what job you may have in ten years. You can never predict everything that will happen over the course of your life, and it would be nearly impossible to prepare for every possibility. One has to balance being as comprehensive as possible, while still being flexible enough such that even if no more planning was ever done, the result would be generally the desired outcome. This requires some creativity. Someone who is done having children could specifically list their children by name in their documents; meanwhile, young families may need to plan for children who aren’t even born. In our case, our attorney helped us think through options for ensuring that even our unborn children are taken care of.
- Practical application – guardianship.
One of the most important aspects of planning for us was naming a guardian for our young child and any other children we may have in the future. Other non-financial factors I wanted to plan for were administrative ease for the executor and trustee we named in our documents. When you pass, the last thing your grieving family will want to think about is what needs to be done with your assets. This is why I wanted to make the process as quick and easy as possible. It’s also why I chose to name a corporate trustee as an advisor to the executor and trustee. You don’t have to choose an all-or-nothing approach when it comes to a corporate trustee. I wanted to name family members as executor and trustee, but still have a corporate trustee on hold as a resource to provide guidance and support as needed.
- Practical application – residuary trusts.
Another reason estate planning is important is to prepare for worst case scenarios your children could find themselves in. For young families especially, building residuary trusts into the estate plan is a given. Much like most people do not want the court deciding who will take care of their children in the case of their untimely death, they also do not want the court to decide how their money should be used to care for their children. What if my child becomes addicted to drugs or alcohol, has special needs, or ends up with a greedy ex-spouse? We all wish we could keep these things from ever happening to our children, but ultimately, we can’t. What we can do is recognize that as much as we want to take care of our children after we pass, sometimes giving them access to large sums of cash is not in their best interest. In creating residuary trusts for our children and giving the trustee guidelines about how to distribute funds depending on the situation, the hope is that we can help provide for our children while protecting them from themselves and others if necessary.
How do you ensure that a residuary trust is created for a child who is not yet in existence? Beneficiaries can be defined in the document as a class (such as “our living children”) rather than naming each beneficiary individually. Our attorney suggested what is known as a “pot trust” which would be created after the death of the second spouse. This type of trust has multiple beneficiaries, and typically the trustee has discretion to use the funds for the beneficiaries as they see fit. This means that if one beneficiary has more needs than another, the trustee is not limited by equal (or otherwise allocated) shares left to each individual beneficiary. A provision could then be built in for the trust to split into separate residuary trusts at certain point, such as when the youngest beneficiary turns a certain age or graduates from college.
- Practical application – distributions.
A common way to make sure beneficiaries get access to their trust funds at the appropriate time is to provide laddered distributions. For example, the beneficiary receives a third of the trust balance at age 25, half of the remaining balance at age 30, and the remainder at age 35 (assuming no special needs, addiction issues, etc. that would make outright distributions unwise). Our attorney suggested this instead… shifting control of the trust over time. Properly structured, this allows the beneficiary to retain the benefit of creditor protection, while still having access to the funds if necessary. This could look like starting off with an independent trustee at age 25, then the beneficiary becomes co-trustee and can have decision-making power at age 30, then eventually becomes the sole trustee at age 30. An ascertainable standard for distributions (such as health, education, maintenance, and support) needs to be built into the trust for the creditor protection to still be in effect once the beneficiary becomes trustee.
- The big picture
These are just a few small considerations in the complicated board game that is estate planning. As young people gather more information throughout their lives, they can update their planning to be more specific and closer aligned with their goals. At the end of the day, the goal of estate planning is not to hoard wealth, create division, or cause confusion. It is simply an act of love.