Estate planners are in the business of “what ifs.” We need to make sure that your Will covers all the possible circumstances that might arise in your life.
Generally speaking, if you are married and have children you have more “what if” scenarios to be concerned about than if you are single with no children.
Let me explain by use of an example. Let’s say Tarzan is married to Jane and they have two children. What if Tarzan dies leaving Jane and his children? This is the first “what if” scenario. Tarzan’s Will must specify who receives his assets and how. Will Jane receive everything or will the children receive something too? It’s up to Tarzan to decide.
What if Tarzan and Jane are killed in a tragic jungle accident together leaving only their children as survivors? That’s the second “what if” scenario. The third and generally the last “what if” scenario is extremely unlikely but we must still plan for the unlikely. What if the entire nuclear family perishes together? In other words, Tarzan, Jane and their two children happen across a den of lions who are not particularly impressed with Tarzan’s yodeling skills? You can see how this might arise in a real life example. We call this situation the “airplane crash” scenario where the nuclear family is on a plane together going on vacation and the plane goes down. Who will receive their assets in this scenario?
Each of these “what if” scenarios require more discussion. The first scenario is where someone predeceases their spouse. When planning for this scenario, most people choose to leave their spouse as the sole beneficiary of their will. However, if it is Tarzan who predeceases Jane, Tarzan must decide how to leave his assets to Jane. He may choose to leave her his assets outright and without any restriction. This is often called an “I Love You” Will.
However, Tarzan has another choice if he prefers. Tarzan may be concerned that Jane may remarry after his death. He may be concerned that if she remarries, his hard earned assets may end up going to Jane’s new spouse and may never go to his own children. This is a very legitimate concern. In order to prevent this scenario from occurring and to ensure that his children receive their inheritance one day Tarzan may choose to leave his assets to Jane in trust.
This type of trust is called a Qualified Terminable Interest Trust (QTIP) otherwise known as a marital trust. The terms of the trust written into the Will specify that the trustee (a trusted person selected by Tarzan to manage the assets in the trust) may give the principal assets to Jane when s/he deems it appropriate to do so but must give her the income of the trust no less often than on a quarterly basis. The trust also definitely provides that when Jane dies, whatever is left in the trust must go to Tarzan and Jane’s children. In this way, Tarzan’s assets are protected and may not be inherited by Jane’s new spouse. The marital trust is a very powerful protective tool and spouses may choose to leave to each other in this way to protect their children.
In the next “what if” scenario in which both Jane and Tarzan perish together, it is likely that their Wills provide that their assets be distributed to their children. Moreover, this bequest is usually a “per stirpes” bequest. Per stirpes is a Latin term which means that assets will follow the family blood line. In other words, if Jane and Tarzan die their assets will go to their children. If, however, one or more of their children had predeceased them but had children of their own, the assets will be distributed to Jane and Tarzan’s grandchildren instead.
Once again, however, Jane and Tarzan must decide how to leave these assets to their children. Again, they may choose to leave the assets to the children outright with no restrictions, or they may choose to leave the assets to them in trust. In this case the trust is known as a minority trust. Jane and Tarzan might feel that their young children are not mature enough to receive considerable assets when they attain the age of majority, usually 18 years old.
They may feel that the money should be managed by a trustee on behalf of the children until they attain a more mature age. As such, the trust would be “age terminating,” meaning that the trust will pay over the assets to the children at a particular age or even at different ages. For example, many of my clients choose to leave assets to their children at three ages; ages 25, 30 and 35. This means that if they die and their children are under the age of 25 at that time, the money will go into a minority trust. The trustee will manage the money and when the children turn 25 they will receive a third of the trust assets.
When they turn age 30 they will receive a total of half the trust assets and when they turn age 35 they will receive the balance of the trust assets. The trustee may also be given the authority to exercise the discretion to give the children the assets or some of the assets at other times or ages if the trustee deems it appropriate to do so. You are not restricted to utilizing these three ages. You may set any age limitations you wish but many of my clients like to utilize these ages because they feel that major life events occur around these ages, such as getting married, having children and buying a home; ages at which the money would likely be necessary for large expenditures.
The last “what if” scenario is when the entire nuclear family perishes together. If this occurs, nothing we discussed above will occur. Neither the spouse nor the children will inherit because they have all passed away. When drafting your Will to deal with this albeit remote possibility you will need to consider who will inherit your assets. My clients often select more distant family like siblings, nieces and nephews, or even parents. Many of them also choose to leave a legacy by bequeathing some of their assets to charity.
Once again, if nieces and nephews are to inherit, you may wish to utilize the same type of age terminating minority trusts we discussed above if they are still too young to responsibly handle assets.
We invite you to contact us to learn more about estate planning and the services we offer.