Your Children

Learn about the primary concerns when providing for minors, as well as the specialized estate planning options to help transition assets smoothly to children.

How you plan the transfer of your assets to your children will likely depend on whether they are adults or still minors. A child with special needs may need complete or supplementary financial support throughout their lives. Additionally, paying for education may be a concern as children transition into adulthood and beyond. If you haven't already placed assets in a 529 plan, Uniform Gifts to Minors Act (UGMA), or Uniform Transfers to Minors Act (UTMA) account, doing so during your lifetime may be a strategic way to reduce the value of your taxable estate while working toward education savings goals.

If you have a 529 plan, you generally maintain control of the account until the money is withdrawn. Therefore, part of your estate planning might be to update the successor designation, which stipulates who will take over management of the account if you pass away.

And, as always, ensure your beneficiaries are up to date on other assets that have provisions for naming them, including investment and bank accounts with transfer on death (TOD) designations.

For minor children

In addition to appointing a guardian, you'll want to make sure minor children are provided for financially in the event of the passing of the breadwinner or breadwinners of the family. Even if you have assets you would like to pass to children, consider life insurance to replace the parental income that would have supported them to the age of majority. You might also want to plan to cover the cost of college education through insurance, or to provide for your children into adulthood, as well.

Additionally, long term care insurance can help prevent your assets from being depleted by the cost of institutional care, home care, or other expenses if you become incapacitated.

Trusts can be especially beneficial for minor children, as they allow for more control of the assets, even after your death. By setting up a trust, you can communicate how you want the money you leave to your children to be managed, the circumstances under which it can be distributed, and when it should be withheld. You can also determine if your children will be able to control the money at a certain age as either co-trustees or as recipients of the full balance of the trust.

You may or may not want to appoint the guardian as trustee. If not, the trust can also include provisions dictating what access, if any, the guardian should have to the assets.


Trusts with distinct benefits for children

Credit shelter trust makes full use of each spouse’s federal estate tax exclusion amount to benefit children or other beneficiaries by bypassing the surviving spouse’s estate.

Qualified terminable interest property (QTIP) trust helps provide a source of income for a surviving spouse and then passes any remaining assets to the deceased’s children upon that spouse’s death.

Irrevocable life insurance trust (ILIT) purchases a life insurance policy to provide immediate benefits upon death that do not usually pass through probate.

Charitable trusts allow you to give to charities during your lifetime and allow the remainder to go to children when you pass away.

A trust can also be an effective tool for transferring assets to an adult child, while potentially reducing estate taxes and directing how you would like the assets to be handled after you have passed away. A single trust can cover all your children. A simple revocable trust or irrevocable trust may suit your needs, or you may want to consider one of the trusts with distinct benefits for children, listed at the right.

Retirement plans

Unlike a spouse, children will not have the option of rolling your retirement plan assets into their own IRAs. Any non-spouse beneficiaries will generally have to begin taking required minimum distributions (RMDs) soon after your death based on their age—and to pay the associated income taxes.

With non-spouse beneficiaries, your retirement plan assets will be included in the federally taxable value of your estate. This results in estate tax liability when you pass away (unlike leaving the assets to a spouse, which allows you to take advantage of the unlimited marital deduction).

IRAs have provisions for naming children as beneficiaries. At Fidelity, for example, you can:

  • Name children individually.
  • Name "All my children" as a beneficiary, which distributes the IRA assets in equal percentages to each of your living children (also known as "per capita").
  • Choose "Per stirpes," which means that if one of your children passes away before you do, their share will automatically go to their descendants.
  • Name children in any of these ways as "Contingent beneficiaries;" for example, you may want to name your spouse as the primary beneficiary, but if your spouse passes away before your IRA is transferred, then the assets would go to your children.

As always, if you want to name children as IRA beneficiaries, make sure your designations are up to date.

The rules for 401(k)s and other qualified retirement plans are similar to those for IRAs. If you are married and you want to designate beneficiaries—such as children—other than your spouse, you may need written consent from your spouse.

Otherwise, such plans follow roughly the same guidelines for what is taxable, but other features will vary from plan to plan. Contact the plan's administrator for specific rules governing your plan.

Children from previous marriages

If you have children from a previous marriage, you should weigh your desire to provide income and financial security for your spouse with your desire to provide an inheritance to your children and your wishes for the timing of that inheritance. A QTIP trust or bypass trust is usually a good option providing for a surviving spouse and having the remainder go to children. However, if your spouse is much younger, he or she may outlive one or more of your children and your children may need to wait many years after your death to receive the trust assets.

You may want to consider alternative strategies:

  • Split the amount of your estate by leaving part to your spouse and part to your children.
  • Use an irrevocable life insurance trust (ILIT) to provide an inheritance for your children while minimizing estate taxes.
  • Purchase an annuity for your spouse and leave the remaining assets to your children.

Children with special needs and other dependents

For any children or other dependents who may be unable to care for themselves as adults, you'll want to make special arrangements to ensure they have the care and oversight they need indefinitely. Life insurance may help ensure they have the necessary funds if they are unable to make a living for themselves.

For other aspects of their care, many options and combinations of options, up to full legal guardianship, are available to balance the individual's autonomy and best interests. An attorney with experience in this area can help you make the best choices for your situation.

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Estate planning strategies by asset
Consider what kinds of assets you'll leave to beneficiaries and the top estate planning concerns for each situation.