Starting a family comes with a new set of joys, challenges and responsibilities from single or even married life. These changes also come with a certain level of anxiety and concern, some of which can be alleviated by proper planning. It is not uncommon for a young family to begin a financial plan and a college-funding plan when a child is born and at that time, it is also important to prepare an estate plan. Drafting an estate plan at this time provides significant benefits over waiting until later in life.
The primary benefit of preparing an estate plan at a young age is removing the uncertainty of what will happen if you and your spouse die. While it is unpleasant to discuss, having an estate plan in place can answer five important questions, namely:
1) Who will care for my children if my spouse and I die? One of the main factors that lead young families to prepare an estate plan is the appointment of a guardian if both parents die. Without such a provision, the child may be subject to multiple relatives fighting over the child’s care. A guardian appointment can curb these problems and assure that the person who will care for your child is someone you trust and believe to be capable of accepting this responsibility.
2) How will my children be provided for financially? An estate plan provides how your assets will pass, to whom they will pass and in what form they will pass. For assets passing to a minor, there is often a concern that the assets will be insufficient and that the child may gain access to the assets before they are capable of managing the assets responsibly.
Instead of an outright bequest, assets passing to a child can be held in a trust known as descendants’ trust, which is established under the parents’ wills. A trustee of the parents choosing manages and uses the trust’s assets to pay for the child’s care. Once the child reaches a selected age, the assets pass to him or her outright.
3) How can I protect my assets from excess taxation? Most young couples lack sufficient assets to exceed the current federal estate tax exemption ($5.12 million in 2012). But, in the tri-state area, the state estate tax exemptions in New York, New Jersey and Connecticut are among the lowest in the country ($1 million in NY, $675,000 in NJ and $2 million in CT). For a young couple with a home and one or more large life insurance policies, it is very easy to exceed these exemptions and therefore be in a position to owe state estate tax. Fortunately, a properly drafted estate plan can minimize or eliminate most of these taxes.
4) How will my special needs child be cared for? Children with special needs often rely on government assistance to pay for the care and treatment. Qualifying for government assistance requires the person receiving the benefits to own minimal assets of their own. By preparing a trust known as a supplemental needs or special needs trust, parents can augment their child’s care and pass assets to a special needs child without risking the loss of their child’s benefits.
5) What if my spouse or I become disabled, incapacitated or unavailable? Two components of every estate plan are a durable power of attorney and a health care proxy and living will. A power of attorney allows a named agent (initially, the person’s spouse) to perform certain transactions as if they were the person granting the powers. A health care proxy and living will allow the spouse or other trusted individual to make medical decisions for an incapacitated person. Both instruments ensure that financial and medical decisions can be made during periods of incapacity, disability or unavailability.
A secondary benefit to preparing an estate plan at an early age is the creation of a relationship with a trusted advisor who can help guide you through the financial and personal changes that life brings. Having an estate planning attorney available to you can help you deal with issues before they come up rather than after a problem has occurred.
Preparing an estate plan at a young age can be difficult, especially when you have many other issues to deal with. But, once a plan is in place, it can alleviate numerous concerns and provide you with the security of knowing your most valuable assets will always be cared for.
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