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Estate planning with respect to children is not child’s play; for many, it is one of the most important elements of their estate plan.
As a parent of minor-aged children, capturing the full breadth of financial needs and providing appropriate resources can be a challenging exercise. A parent’s estate plan should consider all of the following income or cash flow needs that may arise in respect of a minor child:
• The daily requirements of life such as food, housing, clothing, sports, travel, and all of the activities that fill a child’s growing-up years.
• Sufficient funds to complete a reasonable education including tuition for private school, if desired, and post-secondary education. Added into the mix are books and supplies, room and board while away, tutors and supplemental sessions, and resources to replace the role a parent might otherwise play in the child’s education cycle.
Beyond the childhood years, parents with sufficient estate resources may consider:
• Providing financial resources for the child’s first home or a contribution toward reasonable down payment that might allow the child’s earnings to support the resulting mortgage.
• A financial contribution toward wedding festivities or other memorable contributions to a child’s personal milestones.
• Miscellaneous gifts that might have been otherwise provided, such as a post-graduation trip aboard, first car, etc.
Once the full breadth of financial needs has been captured, an analysis of the various structures that could be utilized to hold the appropriate funds will help to shape the estate
plan. The first option that most couples often consider is leaving sufficient funds for the surviving parent to meet the ongoing financial needs of the children. In these situations, however, it is easy to miss the cost of the smaller, less obvious items which can leave a single parent without sufficient resources that might otherwise have been available if a death of the co-parent had not occurred.
If the surviving spouse is going to assume financial responsibility for the children, the testator typically leaves his or her financial assets and life insurance policies to the surviving spouse with the expectation the spouse will provide for the child. This makes sense when the surviving spouse is also the parent of the children so has a similar interest in the children as that of the testator. However, there could be situations where this may be inappropriate and other structures should be considered for some or all of the funds planned for the child.
The surviving spouse may be a spend thrift or may not be the child’s parent. For example, a second marriage can often involve children from the spouses’ prior marriage (or relationship) and non-traditional family responsibilities can create unusual financial needs.
Sometimes the child may be older and mature enough to accept and manage an outright gift or support payment from the parent’s estate. There are times, however, when some parents might hesitate to leave outright gifts because their frame of reference is based on today’s world where they can adjust or redirect support if they observe the child making what they feel are inappropriate or bad decisions. Each situation is unique and, as a child ages, a parent’s confidence in their financial savvy will evolve.
Another structure that should be considered is a testamentary trust arising upon the parent’s passing, which is funded with resources from the deceased’s estate or from a life insurance policy. The testator is the settler of the trust and chooses appropriate trustees. The design of the trust creates comfort for the parent because the trust provisions can offer directions to the trustees. For example, the provisions can set out how the funds are to be invested, how and when income and capital is to be distributed, directions as to what happens if a child does not survive to a distribution date and details about the eventual winding-up of the trust, if desired.
A parent is not limited to one approach but can use various structures for different portions of the estate. Customization is easily achieved to ensure the parent’s objectives are reflected in the overall estate plan. The planner’s role is to ensure that objectives are actionable using appropriate structures.