Estate Planning Tips for Single Parents

Most people think that estate planning is just for senior citizens. I guess the reason for that is because when we are younger we feel we are immortal, and that a premature death can't happen to us. The odds against premature passing are pretty high, and this has been reflected in the decrease in life insurance rates, especially term life policies. That kind of thinking, however, can be disastrous if minor children are involved. Whether you are a single or divorced parent the consequences of not planning can make life difficult not only for your children, but also for your surviving relatives.

By having a thorough estate plan in place, you can ensure that your children will be taken care of and financially secure even if you are no longer there to handle it yourself.

Consider:

1. If you become incapacitated or pass away, who will take care of your children, and how will they afford it?

2. If you are divorced and there is a support order, what happens if the obligor (person responsible for financial support) becomes disabled or deceased?

3. If you have a child support order in place, and were careful enough to make sure the obligor was insured, who is the owner of the policy and how will the policy be kept in force if the obligor chooses to let the policy lapse?

Tools for estate planning:

Powers of Attorney for parent and grandparents if appropriate.

Wills and/or Living Trusts

Life insurance policy on support obligor with someone other than the obligor owning the policy.

Scenario:

Jane, aged 30, has two children, age 5 and 3, is divorced and lives in the marital home. Robert, the father of the children, is under a child support order based upon the incomes and means of both parents. Jane would like for her own parents to take care of the children should something happen to her.

Your responsibilities as a single parent make your estate planning needs distinctly different from those of a married couple. With no surviving spouse to provide for, your planning should concentrate on protecting your child's (or children's) welfare and on minimizing potential estate taxes. Those objectives require strategic solutions that are custom fitted to your circumstances.

A Guardian Plus a Trust

If your child is still a minor, your primary need is to arrange for a guardian. If you do not name a guardian and you die while your child is a minor, a court may choose a guardian who is unacceptable to you. That possibility is easily prevented by specifying in your will who is to have custody of your child. In addition, you can use your will to establish a trust that assures protection for your minor child's financial interests. With a trust, you are able to control the age and conditions for distributing the trust assets to your child, and before that, to ensure that the trustee will provide professional asset management. You may also use the trust to take care of any special needs you want to specify, such as your child's educational expenses.

Managing Life Insurance Proceeds

If you own life insurance to replace all or part of your income, you can have the insurance proceeds paid to the trustee, to be managed and administered with the rest of the trust assets. Using the trust to hold the insurance proceeds will let you designate how and when your child will receive the insurance money. You can remove life insurance proceeds from your taxable estate by setting up an irrevocable life insurance trust during your lifetime and transferring full ownership of your policy to the trust. To qualify for the tax benefit, you will need to live at least three years after you make the transfer. (This requirement does not apply if the trust buys the policy on your life.) The trustee would use annual contributions you make to the trust to pay the insurance premiums.

Disability Planning

Your estate plan should also provide for the possibility of your permanent or temporary disability. You need a reliable party to make financial and health care decisions if you become unable to make them for yourself. Your attorney can discuss the options available in your state. One strategy is to give a relative, friend, or other trusted person a durable power of attorney to conduct financial transactions on your behalf and, possibly, to make decisions concerning your health care. This can avoid court supervision if you become unable to manage your affairs for any reason. Or, you may want to consider setting up a living trust (or a standby trust) that allows a trustee to handle your financial affairs if you cannot.

Reducing Your Taxable Estate

Your options for reducing the size of your taxable estate do not include the marital deduction, but giving a series of gifts to your children remains an easy and practical strategy, especially if you transfer assets that are likely to appreciate in value. You can make tax-free annual gifts of up to $10,000 per recipient this year (adjustable for inflation in the future), either outright or in trust. Over time, annual giving can have a substantial effect on the size of your estate. For example, if you have three children and give each of them $10,000 for 15 years, you will reduce your estate by $450,000. Other planning strategies may be appropriate in your individual circumstances.

Protecting your children's future

As a parent, you're always thinking about what's best for your children. But have you thought about what might happen if you're no longer around? It's not a pleasant subject but it is important. Planning for your children's future is even more important if you're not around to help. If you are a single parent this task becomes even more difficult. Single parents have a number of special estate planning concerns. At death, for example, there is no surviving spouse to take care of financial and personal family affairs. To help protect family and property, a single parent needs to establish an efficient estate plan during his or her life.

Designating guardians

If you haven't already, make sure to have a will drafted by an attorney, in which you name one or more individuals to be the legal guardian of any minor child Ð typically until the age of 18. A guardian will have to make decisions regarding the care and upbringing of the child. The person(s) named should be consulted b before the will is drafted to be sure they are willing to accept the responsibility. Since the designated guardian may become unable to serve, it is also a good idea to name one or two successor guardians. You may name a different person to be responsible for overseeing your children's financial affairs. A single parent may be divorced and have legal custody of a minor child. At death, custody may automatically shift to the surviving parent regardless of what a will says. It is important to know that although divorce terminates a marriage, it may or may not affect a surviving parent's custodial rights. You should consult your Attorney regarding your particular circumstances.

Establishing a trust

While a child may be an adult in years, he or she may not yet be mature enough to handle, invest or manage property. You can establish a trust to protect the property you intend to pass on to children, no matter what their age. Trusts can protect assets for anyone you desire and may continue even until the death of the child and beyond. One of the most important decisions is who should be the trustee. The trustee (individual or professional) will manage the assets and make distributions based on instructions you provide in the trust document.

A divorced parent who dies and is survived by minor children may not want the former spouse to have control over money left to the children. A trust can be created to control the funds left to children, even if the former spouse becomes the children's guardian.

Paying estate taxes

Under current tax law, the amount subject to estate tax decreases until 2010 when the tax is repealed. However, unless Congress extends current law, the estate tax is due to be reinstated in 2011. Because of this uncertainty, individuals with assets over $1 million should consult an Attorney, Tax Advisor and Financial Advisor to consider effective estate planning strategies.

Gifts or bequests to a surviving spouse are generally exempt from federal estate taxes under the unlimited marital deduction. In addition, the income tax due on IRA and qualified plans distributions payable to a surviving spouse can be deferred by rolling them over to a surviving spouse's IRA.

Without a surviving spouse, the marital deduction is unavailable and both estate and income tax can be triggered. A single parent should consult an estate planning professional to discuss ways of reducing these taxes.

Alimony payments

Some single parents are dependent on former spouses for support. If the spouse providing the support dies, payments may end. The spouse receiving the support may consider purchasing life insurance on the life of the supporting spouse with his or her consent. Many divorce agreements stipulate the use of life insurance in this manner.

Income protection

Parents should consider a financial protection plan that includes Life and Disability Income insurance and determine how much capital or income is necessary to help protect children or other beneficiaries. For example, money may be needed to help maintain a home for children, pay for college or other expenses in the event of the 'bread winner's' death or disability. This financial protection may need to be coordinated with a will or trust.

Living documents

All parents should have an updated power of attorney, health care proxy and living will. Often, married couples will rely on each other to make decisions for them. This would be problematic if a tragedy were to occur to both parents simultaneously. Married couples and single parents may want to consider having a close friend or family member listed on these documents to make decisions for them if necessary.

Although it is a difficult subject to face, you have options when it comes to protecting your children and your estate. The steps you take now can help ensure that your wishes are carried out the way that you desire.

Information appearing in this article intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.