Protecting Your Family
The most important reason for you to plan, regardless of where you are in the cycle of life, is to protect your family. The issues that face you at different points of your life change. For instance, as you mature, there are usually more family members who depend on you. The modern family is more complicated than it was in the old days when Mom stayed home and raised the children, Dad went to work and, after the children left home, Mom and Dad started planning for retirement. This picture has changed dramatically.
When you think about your spouse, you should consider whether there is anyone who might create difficulties for her or take advantage of her when you pass on. For example, when you are newly married, if something happens to you, it is not uncommon for your relatives to be resentful about what your new bride or groom owns and where the property came from. These disagreements can be about small items that relatives feel belong to them, or about major financial issues. You need to protect your spouse by at least having a will that defines the property that belongs to your spouse and those items that belong to your relatives.
Oftentimes, people create a plan that leaves all of their property to their spouses, believing that the surviving spouse will take care of the children. Though this may sound reasonable, it may not be the best plan. Your children may put pressure on your spouse and cause tension among family members. The spouse may not act as you thought she would, or your spouse may not be capable of handling finances or family disputes.
If you have been married for a long period of time, it could be your own children who disagree with your spouse's plans. When this happens, it is usually because your spouse has a soft spot in his heart for one or more of your children. If you have more than one child, you know that your children have different needs. You and your spouse may sometimes argue about what your children should or should not have. These emotional pulls will continue, and often heighten, after you are gone.
You may want to put a plan in place that will help your spouse say no to your relatives and your own children. The more complex your property holdings, the more important it is for you to plan ahead for these contingencies.
If this is a second marriage for you, there are bombshells you might not have expected. There may be children from your former marriage or children from your spouse's former marriage who can complicate matters. Conflicting interests may emerge after you are gone. Perhaps you avoid putting a plan in place because it is difficult for you to address these competing needs. But just imagine how difficult it will be for your spouse to make important decisions after you are gone if you have left no guidance.
If you are concerned about who would manage your property and money for your children if something happened to you, you should consider creating a revocable trust. A revocable trust allows you to name a trustee who will manage your property according to the instructions in your trust. See Chapters 11 through 14 for details about trusts.
It is best if you and your spouse can develop a plan together, but if you do put a plan in place without discussing it during your lifetime, at least everyone will learn what you wanted after you are gone. When you are involved in a second marriage, it is imperative that you complete a plan to protect everyone involved — your spouse and your other family members and loved ones.
If both you and your spouse pass on and do not leave a plan, your property will be distributable to your children, but not necessarily distributed in the way that you would wish. This could also create tension among siblings.
When you think about what would happen to your property if both you and your spouse were gone (or, if you are not now married but have children), you should think about when your children should receive your property after your death. You should consider the age of your children, their maturity, and whether inheriting all or a share of your property would promote responsibility in them.
If your children are minors and you do not have a specific plan in place, the person who becomes the legal guardian of your children will have control of their money and property. You should think about whether that guardian will make the best financial choices on behalf of your children. If your children are in their twenties or thirties, you should consider whether they will pursue their education if they receive an inheritance (if that is important to you) and whether they will make the best choices. You are going to learn that there are ways you can help preserve your assets for your children's use and prevent them from wasting those assets, but it takes some thought and planning.
Leaving funds to a grandchild could cause your estate to owe generation-skipping tax. The calculation of this tax is complex and generally affects gifts to a person two generations younger than you. It is another tax you need to be aware of if you are making gifts to your grandchildren in excess of your annual exclusion. (See Chapter 17 for more about the annual exclusion.)
When you evaluate your property and the needs of your children and your grandchildren, you may want to create a plan that leaves some money or property for the benefit of your grandchildren. Sometimes when you leave a small inheritance for a grandchild, it can have a dramatic impact on her or his future. For instance, you can encourage your grandchild to attend college by setting up a fund that can be spent only for educational purposes. Many states have started prepaid college funds. Some of these state funds require that the child attend a college located in the state where the fund was created. Other states allow the fund to be used in some manner, typically at a discount, in another state. Most funds even allow you to name someone who can use the benefit if the child does not use the funds to attend college. If such funds interest you, check on the availability of a college fund in your state and the limitations that fund may have.
If you want to provide maximum flexibility, you can establish a trust for your grandchildren from which funds are disbursed only for educational purposes. For instance, if one grandchild does not attend college, the funds can then be spent on another grandchild who does want to attend.
It can be very difficult for your family and loved ones to keep your hard-earned assets if you do not have a plan. You can substantially reduce the costs and save taxes if you are organized and understand what happens to your assets after you are gone.