Estate Planning for Young Professionals and Parents
If you are a young professional or parent, this article is for you. Most of you are so busy building a career or running to and from daycare that you don’t take the time to consider the important financial and estate planning decisions that you must make in order to protect your assets or secure your children’s future. This article will provide you with the essentials—a list of issues that you should think about now so that no one will have to worry later. We will consider the elements of an estate plan, creditor protection, and provide a primer on antenuptial agreements.
What is an Estate Plan?
“Why do I need an estate plan,” you might ask, “when I don’t have an estate yet?” The elements of a basic estate plan include a will, health care directive, financial power of attorney, and beneficiary designation language for your life insurance and retirement accounts. A will is required for those who want to exercise a power of appointment over inherited assets. A will is also necessary for young parents who wish to name a guardian for their children. Most parents want to impose some restrictions on when their children, especially young children, will receive money after the parents’ deaths. A will can include trusts for your children that come into existence if needed and allow you to name someone to act as trustee over those assets for the benefit of your children. A trustee has the long-term job of managing assets to provide for your children’s health, education, and support.
Many parents ask how much guidance they can give in their wills to the people they name as guardians or trustees for their children. Since most of the guidance parents want to provide is not legally-binding, or would be cumbersome and expensive to enforce, we recommend that parents express their wishes in letters to the guardians or trustees. This accomplishes both the desired communication of your wishes and allows the guardian or trustee to rely on his or her own discretion to depart from those wishes should unforeseen circumstances arise.
A health care directive allows you to name someone to make health care decisions on your behalf if you are unable to speak for yourself. A financial power of attorney allows you to name an individual to take care of financial matters for you during your lifetime. These documents are powerful and should only be given to those whom you trust. They are useful for young professionals who travel abroad frequently or in the event of incapacity. Each of these documents is a key to having a back-up plan in case of an emergency.
Once you have signed your wills, your attorney will give you beneficiary designation language for your retirement accounts and life insurance policies. This language will streamline your estate plan—for example, if your will creates trusts for your children until they reach age thirty, you need to tell your IRA plan administrator to pay your account to those trusts if your spouse doesn’t survive you. Using an estate planning attorney to prepare and coordinate all of these elements is crucial to preparing for the unexpected.
Many young professionals are concerned about protecting their assets from creditors, even if they don’t have significant financial issues right now. Some of the most common creditor protection devices relevant to younger clients are home ownership and certain types of trusts. A trust created by another individual (e.g. your parent or grandparent) for your benefit provides significant creditor protection. As long as the trust meets certain requirements, creditors can’t access the trust assets and can’t force the trustee to pay the debts of a trust beneficiary.
A beneficiary should work with the trustee of the trust and the beneficiary’s attorney to preserve the creditor protection as long as possible. For example, if the beneficiary wants to use the trust assets to start a business, the trustee might agree to lend money from the trust for that purpose, rather than make an outright distribution of trust property. In addition, that same beneficiary may want to consult an attorney for advice about how to structure the business. An estate planning attorney would likely recommend operating the business in a limited liability company or other entity that could provide protection from creditors.
Home ownership (as opposed to home rental) can be an effective way to build wealth and protect assets from creditors. Most states, including Minnesota, provide an exemption from creditors for a significant amount of equity in a homestead. This means that a creditor may not be able to force you to sell your home if you are facing financial difficulty or bankruptcy.
Antenuptial agreements or “prenups” often get a bad rap as contracts in anticipation of a divorce or as something only done in Hollywood. But they are also commonly used to predetermine the division of assets at death. An antenuptial agreement may be especially advisable when one or both spouses (1) are beneficiaries of trusts, (2) own assets received by an inheritance or gift, (3) will inherit from a parent or family member, (4) have significant personal net worth, or (5) own part of or work for a family business. Even if you have no significant wealth of your own, the possibility of future inheritance or ownership in a family business is a substantial reason to consider an antenuptial agreement.
Many people don’t realize that Minnesota already has an antenuptial agreement prepared for you—it’s found in our divorce and probate laws. Drafting an antenuptial agreement gives you the opportunity to opt out of the state’s default rules and implement your own wishes for division of assets in the event of divorce or death. In the context of a second marriage, antenuptial agreements are particularly helpful to avoid disagreements or to protect the assets you would like to pass to children of a first marriage.
Antenuptial agreements are governed by state law. Most states, including Minnesota, have certain required provisions. Antenuptial agreements must be signed before the marriage. No consideration is needed to form the contract other than the marriage itself. But, if the marriage does not take place, the antenuptial agreement is not effective.
We recommend that each party have separate counsel review and negotiate the antenuptial agreement. Since fairness and voluntariness are key to enforcing these agreements, use of separate attorneys will increase the likelihood that the agreement will be enforced. In addition, enforceability of the contract requires each party to make adequate financial disclosures of his or her income and assets. Business assets may be difficult to value and may require a full independent appraisal or an agreement that appraisals are not required.
Coordinating your estate plan with the antenuptial agreement is also vital. If you have an antenuptial agreement, you should work closely with your estate planning attorney to make sure your estate plan complies with the terms of your agreement. It is also wise to work with an estate planning attorney if you decide to leave more to your spouse than required by the agreement.
An Evolving Plan
Younger clients may often be unaware of the gifts or inheritances they will receive from parents or other family members. The additional assets they receive may significantly change their personal net worth and may create traps for the unwary, including increased estate tax consequences or unanticipated division of assets. Keeping your estate planning attorney informed of significant events in your life is key to ensuring that you have an appropriate estate plan.
It is especially important for you to notify your estate planning attorney if you own any closely held business assets or if you think you might receive business assets in the future. If the business is subject to a buy-sell agreement or any other restrictions on transfer, the provisions of that agreement must be considered in your estate plan. Further, the value of the business could change rapidly and that may impact your estate plan. Since this change in value is not tracked on the public stock exchange, discuss any changes in value with your estate planning attorney as they occur. Finally, the sale of a closely held business owned by you or your parent, or a public offering of a business, presents unique estate planning opportunities that can successfully transfer wealth to future generations. The sale or public offering should be discussed with your advisors before the transaction so that you can take advantage of these wealth transfer opportunities.