Estate planning is a crucial step for parents who want to ensure their children are financially secure after they are gone. Without a proper plan, a child’s inheritance can be jeopardized by various factors, including taxes, that child’s creditors, and legal disputes. Read on and speak with a seasoned Rochester estate planning lawyer from our firm to learn how parents can protect their children’s inheritance through effective estate planning strategies.
How Can I Protect My Children’s Inheritance in My Estate Plan?
An estate plan consists of several key components designed to safeguard assets and provide clear instructions for their distribution. The first step in creating an estate plan is drafting a Will. A Will is a legal document that outlines how assets should be distributed upon the parent’s death. It allows parents to specify who will inherit what, how quickly the inheritance will be distributed, and can include provisions for guardianship if the children are minors at both parents’ deaths.
Under your Will, you can establish a trust for your child so that there is oversight by a Trustee on how a child’s inheritance is used. A Trust for a child offers more control over how and when a child’s inheritance is distributed. Typically, there is language in the trust that would allow the Trustee to use funds in the Trust for education, maintenance, and support of that child while the child is under a certain age. The trust would also specify at what age the trust would end and the child would receive their inheritance outright. Trusts can protect a child’s inheritance from a child’s creditors and reduce estate tax burdens.
In addition to a Will, establishing a revocable trust can be beneficial. For instance, parents can set up a revocable living trust, which allows them to manage their assets during their lifetimes and specify how their property should be distributed after death. Like a Will, your revocable trust can include a trust for your child.
Another critical component is the Power of Attorney. This legal document allows a designated person to make financial decisions on behalf of the parent if they become incapacitated but are otherwise still living. Having a durable Power of Attorney ensures that the parent’s financial affairs are managed according to their wishes, and that financial security may be maintained for minor children, because the agent under the Power of Attorney will have access to the parent’s assets to take care of the young children. Likewise, a Power of Attorney can be used to potentially protect the children’s inheritance from a parent’s long-term care costs.
How Can Parents Minimize Estate Taxes?
Estate taxes can significantly reduce the value of an inheritance left to children. Therefore, minimizing these taxes is essential for preserving a family’s wealth. One effective strategy is lifetime gifting. Parents can give away a certain amount of money each year ($18,000 per recipient in 2024) to their children without incurring gift taxes. Over time, this can reduce the size of the estate and, consequently, the estate tax liability. For two parents with four adult children, they can collectively transfer over $140,000 to those four kids each year, completely tax-free. This serves to further reduce the value of the parents’ estate for state and federal estate tax purposes at their death.
Another method to minimize estate taxes is through the use of trusts. Irrevocable Life Insurance Trusts (ILITs) are one popular tool. By purchasing a life insurance policy in an ILIT, after three years the death benefits of that life insurance are excluded from the parent’s taxable estate, reducing the estate tax burden, and passing on that money to the children tax-free.
Charitable donations can also help minimize estate taxes. By leaving a portion of one’s estate to one or more charitable organizations, parents can reduce the taxable value of their estate. This not only benefits the chosen charity but also preserves more of the estate for the children (rather than a portion going to the state and/or federal government for payment of taxes).
If you have further questions about how to best protect your child’s inheritance, please don’t hesitate to reach out to Lacy Katzen LLP today.
