Estate Planning for Young Families

Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®
Deep down, we all expect to live forever. Or at least long enough to live a long and fulfilling life, with several generations already below us, from children to grandchildren, to possibly even great-grandchildren. Unfortunately, we all know that some of us won’t reach that stage of life, whether due to accident, illness, or incapacitation.
Yet most Americans conveniently ignore this possibility. It’s psychologically challenging to prepare for an early and unexpected death, yet it’s absolutely vital. Your family’s future is best summed up as follows: prepare for the worst, hope and strive for the best. To do otherwise could be a costly and stressful legacy for your family. The last thing you want to do is add an even more burdensome layer of despair to your already grieving family were the worst to happen.
This article endeavors to provide practical and actionable advice for crafting an estate plan specifically for young families. After reading it, I hope you’ll realize the importance of taking action sooner rather than later. You’ll feel a sense of relief and a burden off your shoulders, knowing that your family will be in safe hands, your children will be well taken care of until they come of age, and your spouse not be financially crippled.
This article will focus primarily on the accounts available to you and strategies to remove those funds while keeping as much as possible in your pocket.

Appointing a Guardian for Your Children

Children are the most cherished and significant individuals in a parent’s life. Your commitment to them continues beyond providing daily necessities or caring for them in the present. It also extends to ensuring their well-being and happiness even if you can no longer provide for them directly, be it due to untimely death or incapacitation. Therefore, deciding who will take care of your children under such circumstances is not merely an obligation; it’s a moral duty that is deeply personal and profoundly impactful.
Choosing the ideal guardian for your children is not a decision to be made lightly. It demands careful thought and consideration. This person will be the one to guide your children through life in your absence, taking on a role similar to yours. Therefore, you must ask yourself, “Who would that ideal person be?”
The person you consider as the potential guardian should ideally share your values, ethics, and approach to child-rearing. Do they instill the same moral compass in their children as you do? Would they raise your children in a manner consistent with your values? Are they healthy, responsible, and affectionate? Do they have children of their own? Would they even be willing to fill in your shoes? It’s a huge thing to ask of someone in life, and many are surprised when a close friend or relative refuses it.
If you get one thing out of this article, let it be this, so I recommend taking a moment to think about it. Can you imagine your children ending up in an orphanage or foster home, with complete strangers looking after them?

Securing Your Family's Financial Future

Your hard-earned money, property, and business assets may not go to your family as you desire. Creditors and Uncle Sam will both line up for their due, leaving your family a meager percentage of what they expected, potentially relegating them to a severely reduced lifestyle or, worst-case scenario, debt and destitution. Alternatively, the courts may decide for you who should get what during the probate process, and their decision may not align with your wishes.
However, an estate plan can help preserve your spouse’s and children’s lifestyle in various ways. Firstly, it safeguards assets from creditors and minimizes your tax obligation by establishing trusts and charitable giving strategies.
Secondly, an estate plan guarantees your desires are followed posthumously through legally binding documents, like wills and trusts, that expressly declare how your assets should be spent and to whom they should be distributed. For example, you can declare that a certain percentage of your estate should go to your spouse and children and even define how they can use those funds and at what age, for example, for university tuition at the age of 19.
Finally, an estate plan should consider the purchase of life insurance. There are two basic ways to evaluate the necessary death benefit to ensure your family is cared for – needs-based and human life value. A needs-based calculation considers the financial resources your family would require in your absence to maintain their lifestyle and pay for future expenses, such as retirement or college tuition. Once that number is determined, any existing assets and resources that can be used for those purposes are subtracted, with the difference being your death benefit.
Human life value looks at your complete economic worth based on income, age, and earning potential to determine the monetary loss of your future income upon your passing. That determination then becomes your approximate death benefit. Remember, these are just approximations that are used as starting points for deeper discussions of your insurance requirements.
If you’re a business owner, there’s a strong chance that your spouse will inherit your business if you pass. But are they capable of doing so? A life insurance policy can give them much-needed cash flow to keep the business running while they find a competent and suitable replacement. That individual can then operate the business and provide your spouse with passive income.
Insurance isn’t cheap, so it’s vital a professional carefully and accurately analyzes your needs. While we don’t sell life insurance here at WealthGen Advisors, we specialize in providing a non-biased analysis of life insurance needs. This independent viewpoint is essential since insurance companies may come to a biased conclusion.

Avoiding Probate

If you die without an estate plan (called dying intestate), your estate must go through a legal process called probate. Probate can be lengthy, costly, and stressful for your loved ones, needlessly placing further financial and emotional burdens on them in their fragile emotional state. Proper estate planning enables them to bypass the potentially years-long and exorbitantly expensive probate process, allowing a speedier transfer of assets to your beneficiaries.

Tax Minimization

As mentioned above, the IRS or your state may want a portion of your estate via taxes. Fortunately, your estate needs to be quite sizeable before the federal government steps in, though things may change. In 2023, for example, your estate must be worth more than $12.92 million or $25.84 million as a married couple. However, your state may have a different exclusion amount and tax rate.

Planning for Incapacity

Estate planning isn’t only about death; it’s also about planning for incapacity, which comes in several forms. You may end up in a coma, become physically disabled, confined to a hospital bed, or emotionally incapacitated. Were one of these examples to leave you unable to manage your financial or medical decisions, who would step in? Who could you trust to make the greatest of decisions for you?

How to get started?

You’ve made it this far, so you’re probably wondering what exact steps need to be taken to get an estate plan in place. The easiest step to start the process is to call a financial advisor specializing in estate planning. From there, they can analyze your overall situation, lay out the correct documentation you’ll need, and recommend an attorney for the finer legal details to coordinate with.
However, as a head start, here are some of the most important documents to create a comprehensive estate plan.

Last Will and Testament

The reading of the will is a common trope in movies, perhaps because it is perhaps the most fundamental estate planning document. It enables you to designate who will receive your property upon your death and appoint a guardian for your minor children. In it, you formally name the person or persons you’ve chosen to care for your children if both parents pass away.

Living Will

Also known as an Advance Healthcare Directive, a Living Will allows you to specify what actions should be taken for your health if you can no longer make decisions for yourself due to illness or incapacity.

Durable Power of Attorney (POA)

This document allows you to appoint someone to handle your finances and legal affairs if you become incapacitated and unable to manage them yourself. The person you select could be the same person you’ve chosen as the guardian or someone else. Putting estate planning aside, it’s a good idea to maintain a power of attorney for more general crises or circumstances – for example, you’re on vacation, and an emergency pops up requiring your POA to execute bank transactions under your name.

Revocable Living Trust

A revocable living trust holds your assets while you’re alive and then transfers them to your beneficiaries upon death without messy procedures in probate. As the name applies, you can alter or revoke it whenever you like. If you have minor children, you can specify that the assets in the trust be used for their benefit and then distributed when they reach a certain age.

Irrevocable Trust

Unlike a revocable living trust, once established, an irrevocable trust cannot be altered or revoked without the beneficiaries’ consent. However, they can provide significant tax benefits and asset protection, often used for large estates.

Charitable Giving Strategies

As part of a savvy and tax-efficient investment strategy, incorporating charitable gifts into your estate plan can reduce the size of your taxable estate, leaving more money for your family. Tools like Charitable Remainder Trusts (CRTs) and Donor-Advised Funds can support the causes you care about while optimizing your estate’s tax efficiency.

Charitable Giving Strategies

Some states allow parents to designate a standby guardian, who can step in and assume the role of guardian temporarily during a parent’s illness or incapacity.

Children's Trust or Testamentary Trust

Some states allow parents to designate a standby guardian, who can step in and assume the role of guardian temporarily during a parent’s illness or incapacity.

Charitable Giving Strategies

This type of trust comes into effect only upon your death. It allows you to set aside funds for your children’s upbringing and education. You can set guidelines for when and how the funds are distributed, and a trustee will manage the funds.

Letter of Intent

Although often not legally binding, a Letter of Intent written by you to the guardian and other caregivers provides instructions and information about your child’s upbringing, including education, healthcare, and personal values.

In Conclusion

As uncomfortable as it is, planning for the unexpected cannot be delayed or ignored. The implications are simply too severe, affecting the well-being of your spouse, children, other family members, and loved ones. Taking care of these issues today will be a burden off your shoulders, letting you sleep easier.
You probably only now realize how complex it all is – trusts, wills, documents, agreements; it’s too much to handle on your own. We recommend that you talk to several financial advisors and attorneys until you find one you are comfortable with, as well as talk with your family members and potential guardians and trustees to hear their thoughts and concerns and obtain agreement.
With guidance from a professional advisor and attorney coupled with a proactive approach, you can ensure your family’s financial stability and emotional well-being, even in your absence. As the saying goes, the best time to plant a tree was twenty years ago, and the second-best time is now – so start your estate planning today.
Disclosures

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

Author

  • Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®

    A Florida native, and full-time Sarasota resident, Ken founded WealthGen Advisors, LLC after spending more than fourteen years in the financial advisory industry. Ken holds multiple industry designations, as well as a master's degree in Financial Planning. Prior to founding WealthGen Advisors, Ken spent almost a decade in New York and then Texas as Vice President at The Capital Group, a $2T global investment manager serving institutional clients and pension funds.

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