If you have minor children, you need to make sure that your estate plan addresses their specific needs. One of these is making sure that if something happens to you, their inheritance won’t get caught up in a Guardianship of the Estate.
What is a “Guardianship of the Estate”?
Minors are not able to handle her own property and financial affairs because she is under a “legal disability.” People under age 18 cannot own and manage their own property. A Guardianship of the Estate is necessary so that a person can be appointed to handle the minor's property and financial affairs. Once the minor turns 18, however, that legal disability is removed, so the Guardianship is no longer needed. All of the assets that are in the Guardianship estate will be given to the minor at that time – with no strings attached.
Not a “Guardianship of the Person
Sometimes people confuse a “Guardianship of the Person” with a “Guardianship of the Estate.” A Guardian of the Person is a person appointed by the Probate Court to have control and custody of a person not capable of caring for themselves. In the case of a minor, the Guardian of the Person would have custody of the child, and would be responsible for making sure that the child's needs are being met (such as healthcare, education, living needs, etc.)
Problem with Guardianship of the Estate:
Termination of the Guardianship
For many parents, the biggest pitfall of a Guardianship of the Estate is its termination. As stated previously, when a child turns 18 the “legal disability” is removed, and there is no longer a need to have someone else manage the assets. The Guardianship is therefore terminated, and the Guardian distributes all of the property remaining in the Guardianship estate to the child. At this point, they can manage their own assets and spend as they want, without any guidance or supervision.
Many parents are understandably concerned that an 18 year old would not make wise financial decisions on their own, and would spend their money foolishly on things like expensive cars and parties instead of on their education and their welfare.
When parents of minor children truly understand the pitfalls of the Guardianship of the Estate, they look for ways to avoid having property placed into a Guardianship for their children.
Avoiding the Guardianship of the Estate
As we stated above, the Guardianship is only needed if assets are to be transferred to someone who is under a legal disability. Instead of having the children named as the beneficiaries of a Will (and of life insurance, retirement accounts, etc.), the parents should create a trust that will hold and manage the estate for their children until they are older and more mature.
With a trust, the children would be the beneficiaries, and would therefore have those assets available for their care, their education, and living needs. Instead of being held by the Guardian (subject to Court control), they would be held by the Trustee of the Trust. Instead of being distributed directly to the child at age 18, they would be held in trust and used for the child until the child is older and better able to make wise financial decisions.
“But I Really Don't Have an ‘Estate'”
We hear this response from some parents of minors. They feel that they don't have a lot saved up yet, have little equity in their home, and are just getting started with their retirement plans. They feel that an “estate” is something that wealthy people have, and they certainly wouldn't include themselves in that category yet.
While some parents of younger children don't have a lot on their current balance sheets, they do have something to protect their families if they should pass away prematurely – life insurance. Parents often purchase life insurance on the life of one or both parents in case the unexpected happens. If both parents pass away, that life insurance could provide the majority of an inheritance for the minor children.
Go through the exercise on the page Why Create a Trust for your Minor Children?. This will help you get a better understanding of what your estate includes and why it is so important to plan for your children correctly.
If you’d like more information on estate planning when you have minor children, please watch our Webinar Estate Planning for Young Families.