You should have an estate plan in place as soon as there are loved ones depending on you, but most people ignore this important responsibility. If something happens and no protections are in place, you will be leaving your loved ones in a very difficult position.
There are steps that you can take to protect your family while your children are still minors. Yes, it is unlikely that you will pass away when you are still relatively young, but you never know what the future holds. When you do the right thing, you can go forward with peace of mind.
An estate plan for a parent with minor children should include a simple will with a guardian designation. When you have nominated a guardian, the court will honor your choice if a guardianship is necessary unless there is some extenuating circumstance.
Revocable Living Trust or Testamentary Trust
The revocable living trust is a trust that will be established while you are still alive, and you would be the trustee, so you would maintain control of the assets. A married couple can potentially utilize a shared living trust, and they would be the co-trustees.
You would name a successor trustee to manage the trust after your passing when you are creating the trust declaration, and your children would be the beneficiaries. This can be any competent adult that is willing to assume the responsibility, and you can alternately name a professional fiduciary.
If both parents pass away while the children are still minors, an adult trustee would be in place to manage assets on their behalf. With regard to adequate funding, the trust can be the beneficiary of a life insurance policy, and term life is quite affordable for younger people.
Another option is a testamentary trust. This is a trust that is contained within a will, and it would be created by the executor after your passing.
Parents and grandparents sometimes endeavor to proactively save assets for the benefit of a minor child. This can be done in a few different ways, and custodial accounts are one of the options.
The Uniform Gifts to Minors Act (UGMA) established the original guidelines for custodial accounts for minors. A UGMA account can hold securities, insurance policies, and cash only. There are no contribution limits, and multiple people can contribute into the account.
In Tennessee, the age of majority and termination for these accounts is 18, so the child can access the funds at that time, and the account must be closed. The resources can be used for any reason, so this is not strictly a college savings account.
The first $1150 that is distributed is tax-free, and the next $1150 will be taxed at the child’s rate. After that, the withdrawals are taxed at the rate that applies to the adult that established the account.
There is a hybrid custodial account option under the Uniform Transfers to Minors Act. Everything is the same with two exceptions. The age of majority is 21 in Tennessee, and these accounts can hold any type of property.
A section 529 college savings plan is another possibility, and this can be the right choice if you want the assets to be used for educational purposes. With the other types of accounts, the earnings are subject to taxation, but this is not the case with a 529 plan.
As long as the resources are used to pay for approved expenses, the distributions are tax-free. Another benefit is the fact that the assets in the account are considered to be the property of the funder rather than the student. This is beneficial for student aid eligibility purposes.
Assets that are held by a UGMA or UTMA account are looked upon as the property of the student if they apply for student aid.
We Are Here to Help!
Our doors are open if you are ready to work with a Memphis, TN estate planning lawyer to put a plan in place. You can send us a message to request a consultation appointment, and you can reach our office by phone at 901-763-2500 or 866-997-6325.