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Families with minor children: the need to prepare for the unforeseen

Getting Our Priorities Straight

All of us are feeling the economic challenge of these times, and we are being called to re-think how we live and how we spend—to look at the “Big Picture” and ask:  WHAT REALLY MATTERS?  How do our actions, daily choices, line up with our most cherished values?  These are key questions we must answer in the recesses of our own hearts and minds, and in the intimacy of our circle of family and friends.  This is the quiet inquiry that gives our lives the backbone and direction it needs, and that leads to great peace of mind when we finally take the measures that will best protect what we love most.

Few, if any priorities trump our dedication to our children. In my career as an estate planning lawyer I am consistently awed by the immeasurable love demonstrated by the parents I serve…a love I share as a mother of a daughter that I adore and have given the best of myself to.

 I also see this love on the street, at the market, in restaurants and the mall…the securing of toddlers into their car seats, the wiping of a runny nose, the admonition to be “gentle”, to share toys… the insistence that a teenager call when he or she reaches her destination on a Friday night out with friends. 

We do these things not because we are anticipating some great disaster, but because we want to nurture and safeguard our precious and vulnerable children, and bring them into a secure future. It is this positive spirit of guidance and protection (and not the fear of disaster) that I wish you to keep in mind as you confront the difficult realities that are some people’s destiny—realities that save for an unexplainable touch of good fortune are not yours or mine at this moment.

The “Unthinkable” Happens to People Like You and Me

 My role as an estate planning attorney is not only to help people forge a multi-faceted legacy, but to help them lay out A PLAN OF PROTECTION for their loved ones during life, at death, and in the event that the unthinkable and unforeseen occurs.  The last of these…the unthinkable and unforeseen…is the one that evokes the highest level of denial and avoidance.  Ironically, the “unthinkable” is also what requires the most clear-eyed courage of us.

I lost one of my dearest friends when she was fifty-one. That she would die at that age was unimaginable to me. She left behind her eleven-year-old daughter and fifteen-year-old son. 

A thirty-one-year-old lawyer colleague of mine, a brand-new dad, lost his wife as she stood outside a lodge in Tahoe and  collapsed of an aneurysm only six months after I had sat laughing with them over dinner at a law firm party, and a few weeks after their baby girl’s birth.

One of my daughter’s high school friends had lost both parents by the time she graduated.  I hiked with her mom as she explained that her cancer was failing to yield to the best medical care money could buy.  In those last days I felt her utter incredulity at facing her life’s end.

My forty-five-year-old neighbor died two years ago, leaving behind a four-year old and a twelve-year-old.  I, also, have had my brush with death.  I am sure that you also have stories of family, neighbors, friends, who have suffered unforeseen tragedy, stories that are undoubtedly too close for comfort.

Luckily, the truth is that only a fraction of one percent of people loses both parents while a minor.  The odds are very much on the side of a happy outcome. But the inescapable and uncomfortable question to confront is:  What if it happened to me?  Or rather, why NOT me?  What special protection shields me from such a fate?  How much certainty can I bank on that it NEVER will happen to me? And finally, at what risk am I willing to do nothing?

As a mother I feel that I cannot afford any degree of risk when the potential consequences are so far-reaching and life-altering for my daughter…and now for my mother, who is totally dependent on me to manage her care in her old age.

Putting One’s Head in the Sand Is Not an Option Because No Plan Is a Plan

 There are very real practical and legal consequences to not preparing for the “unthinkable” that every parent should be aware of:

1. If your affairs are not in order, your loved ones may well confront confusion at a time when they should have the space to grieve and to be there for your children.  Imagine a family member or a friend right now trying to make sense of your affairs in a dire emergency.  Do you have the necessary legal documents to protect your spouse/partner and kids both financially and personally?  Does a trusted person know where everything is? Will he or she have to take many hours trying to figure out what should happen to your children and what assets you’ve left behind to care for them…dealing with receipts, piles of paper…figuring out what debts must be taken care of, who owes you money, whether you’ve put a plan in place for all this or not? Needless to say, no one wants to burden their loved ones with a chaotic circumstance, but in the absence of right planning, such chaos is a likely outcome.  If your house is in any degree of order, congratulations!  And if you still have a way to go (as we all do), you can start to make things better right now…one small step at a time.

2. A judge will decide who will be your children’s guardians without your input.  Judges always make the final determination on who will be the guardian of a minor.  However, ninety-nine percent of the time the judge will appoint the person a parent has nominated in a legal document unless there is evidence that such an appointment would be against the best interests of the child. If the parent has failed to put such a document in place, the judge will wait to see who steps forward to care for the child.  In the meantime, the court may place the child in foster care or under the care of Child Protective Services while it determines what is to be done, a process that at the very least leaches money from your children’s inheritance, and at the most, subjects them to additional disorientation and instability at a traumatic time in their lives.  None of this unpredictability has to happen with a little bit of forethought and planning to make your desires for your children known.

3. The wrong people may step forward in a court to care for your children, or alternatively, family members may argue about who should have your children.  A person may look great on paper, but he or she might well be the last person you would want to raise your kids.  In addition, when there are no legal documents to set arguments to rest, relatives may vie for guardianship in court proceedings that could well generate ill feelings among family members that will affect your children, as well as deplete your children’s assets.  All this could have been avoided by some careful consideration on your part of who is best suited to care for your beloved kids.  It is not an easy process to imagine someone in your place as a parent, but you’re the person who should make such a decision, not a court, or any other member of your family, no matter how beloved.

4. Authorities may be obligated to place your children in Child Protective Services in an emergency if you have not expressed your wishes in writing.  If you and your spouse/partner went out on the town one night, would the baby sitter know where your children should go if any emergency were to occur?  If you’ve done the work of choosing people to care for your children in such an emergency, do they have any authority on paper to take over until you recover, or until a court of law determines who the permanent guardian is to be? In the absence of any directive from you, an officer fearful of liability may well call Child Protective Services to oversee your children until a court makes a determination.  In the meantime, your children, already traumatized by your absence, may end up in the care of strangers.  Not good, and something that can be avoided by taking a few important steps to safeguard them.

5. Your spouse/partner (or your children’s guardian) may have inadequate resources to raise your family in the event of your incapacity or death.  Many couples have inadequate life insurance to provide for a surviving spouse and/or children if they were to unexpectedly pass away. Some couples have none.  Even if you have designated a guardian legally, will that person have the necessary funds to raise your children as you would want them raised?  Will your surviving spouse be able to make ends meet given the added time and care the survivor would have to invest in ensuring the emotional as well as the physical well-being of your children? 
   
   A rule of thumb many use to determine how much is needed for the long years of child-rearing and higher education is to calculate the yearly rate of return on the death benefit of your insurance amount.  For example, a policy for one million dollars reaps $50,000. yearly if the rate of return is 5%.  But consider today’s rate of return!  For the moment you may need more insurance than that to yield the $50,000 a year that is a fairly modest amount to raise a family on.
   
   Nonetheless, a $1 million dollar insurance policy on the life of the big earner in your family would be a great start.  And don’t forget to insure both parents. If you can’t afford $1 million on each partner, then perhaps an additional $500,000 on the partner/spouse who earns less.
   
   Additionally it is wise to check on what happens to life insurance if it is tied to your place of work.  Will you be able to keep this policy if you change jobs?  If not, will you then have to go through medical review again, perhaps at a time when your health (and age) make premiums more expensive for your family?
   
   In short, insurance, particularly term life insurance (which is the most economical), is an excellent way for young families starting out to create wealth for their loved ones if something were to happen.  It is also important to check the terms of your policy so that it will be there when you need it, regardless of the changes in your life.

6. The guardian of your children may have a very limited idea of how you want your children raised in your absence.  Even if you have been responsible enough to designate a guardian, does the guardian know how you want your child raised?  Your values?  Your parenting style?  The things you consider important to spend money on, or not?  Unless you spell this out with some level of detail, there will be a lot of guesswork, and more of an opportunity for your children to rebel against a guardian’s decisions.  In short, it’s a set-up for the guardian and your children that is unfair.  And most of all, your children will miss out on having your direction, the voice of your good counsel guiding them through their lives, a presence that could well have been there in spite of physical absence.  There are some great ways to pass on this critical information to your chosen guardians—and to your children.

7. Your children will receive equal amounts regardless of circumstances  and receive all the assets at age 18, with no oversight or guidance as to how those assets should be used.  In the absence of adequate planning, the court will take charge of any funds a child inherits and administer them under rigid rules of accountability and permissible investment.  If there is more than one child and the parents are deceased, the court will divide the assets equally, regardless of the age differences among the children.  Therefore, if one child is ten and the other three, they will still each get the exact amount as an inheritance, regardless of the fact that the younger child has a seven-year disadvantage in terms of what he/she will receive.  More importantly, if one child has a serious health problem that the other children do not, that child will still get only his or her share, even though medical expenses could well decimate that child’s inheritance.  In other words, there is no flexibility for allocating more from a family pool for the child that has the greater need, as one would do in the course of ordinary family life.
   
   Furthermore, once each child reaches eighteen, the court will hand over that child’s share free and clear.  It could be $50,000, $100,000, or several million.  Just ask yourself if any eighteen-year-old you know is capable of handling that kind of money without guidance!
   
   Another issue that is not addressed when you have the government’s “guardianship of the estate” for your child’s assets is that no money can be distributed to the guardian for special expenses.  For example, if your guardian is a wonderful person, but has a modest income, and needs to build an extra room in the home to make your child more comfortable, the guardian would not be able to make that expenditure from your child’s account.  The court would simply not allow it.  In contrast, in your own customized documents you can make that possible to the degree that you desire.
   
   Finally, even the inheritance left by a grandparent to a minor child could potentially be tied up in the court process for years if the proper mechanisms have not been put in place in the grandparent’s estate plan.  Contrary to popular belief, the parent of the child cannot simply take over the inheritance for the child and manage it until the child is mature enough to handle it responsibly.  There are formalities that must be observed if the funds are to be kept out of the court system and you want to be sure that your parents’ estate planning documents provide for some mechanism that prevents the assets from going to the minor child directly.

8. The public, including unscrupulous persons, will have full access to public records spelling out all the details of your children’s inheritance.  Most of us have heard of the predatory practices targeting elderly widows and widowers…so-called “contractors” that have the elderly unwittingly sign away their property to pay a debt they didn’t know they had incurred for “necessary” repairs.  Less well-known are accounts of glitzy business propositions made to vulnerable young inheritors who barely know anything about handling money responsibly.  The tactic such exploiters take is often to search the public records, which are available to anyone if your estate goes through probate. There they will find all the specifics of who inherited what amount of money, including names and addresses.  In most cases, you can preserve your children’s privacy and prevent potential exploitation if you do the right planning.

9. Anywhere from more than 2% to 4% percent or more of the fair market value of your assets could go to, courts, lawyers, and probate referees instead of to your loved ones.  Many of you are aware of the high cost of probate in California if you have assets over $100,000 without the appropriate beneficiary designations or have real estate without a revocable trust. Consider this:  if you have as little as $10,000 invested in your house, and its fair market value is $500,000, the probate attorney fee would be calculated on the $500,000! Thus, the fee would be $20,000—an amount greater than the equity in the house!
   
   Furthermore, if no executor had been named, or if you didn’t provide for a set fee in your planning documents, the executor would be entitled to an additional fee equal to the attorney fees, from 2% to 4%.  Practically speaking, if a close relative or friend became your executor there is little probability that he or she would demand the full amount of the statutory fee even if you failed to specify in the estate planning document what the executor should receive. However, the executor does have the legal right to it, and if his or her financial situation is difficult at the time of the estate’s administration, they would be well within their rights to claim the statutory amount.  Alternatively, if a stranger is appointed to the role because there is no one else that steps forward to do it, then you can well imagine that s/he would exercise his or her legal right to the full fee that the law permits,

10. A public and expensive court proceeding called a conservatorship will be necessary if you become incapacitated and need someone to handle your care and finances.  If you do not have the proper legal documents, it is highly unlikely that any financial institution is going to risk the liability of disbursing funds to unauthorized persons once you are incapacitated.  Someone will have to initiate a public and expensive court proceeding to determine incapacity so that a judge can appoint a conservator to manage your finances.  Almost always, this is unnecessary if you have the right documents in place.

Why People Fail to Plan

In my practice the following reasons for not planning come up again and again:

1. “I’m too busy.  I’ll get around to it soon”.  This view is directly tied to what I’ve discussed above:  the sense that “it can’t happen to me” so I can afford to put it off for an indefinite period of time.  Too often the months continue to tick by and a disturbing percentage of otherwise responsible parents do nothing and forget the risks involved.  My own feeling, as both a mother and a lawyer, is that you “forget” at your own peril. Given the potentially devastating effects of inaction on your children’s lives, most parents would agree that no degree of risk is acceptable.  Any small step you can take in the direction of planning and organizing your affairs is a great accomplishment.  Just stay with it and before you know it, you’ll have it all done!

2. “I can’t afford an estate plan.  It’s too expensive.”  Usually this argument surfaces when people don’t really understand what is at risk. Once we are self-educated on the implications of “no-plan”, and decide to determine our own fates, we then need to do two things:
   
   For one, we need to re-assess our priorities and make sure that we are spending our money on what’s most important.  We all tend to “leak” money on things that in light of the Big Picture are inconsequential:  a $ 4.00 latte when we’re in a rush, the “must-have” electronic gadget, the pricey evening movie instead of the matinee or the dvd, the birthday party that could have been a simpler, less costly affair without sacrificing any “fun” value for the kids.  That is just part of our collective impulsive consumerism, a compelling little force that we’re all susceptible to!
   
   The present economic crisis, of course, is changing all of that, and none of us can continue to spend without thinking first.  This constraint, however, can help us get clearer on what really is important and motivate us to invest our dollars in the long-term well-being of our loved ones, whether it be by investing in education, health care, financial literacy and planning, organic food, life insurance, a clean environment for the generations to come, or legal protections to shield us in an emergency.  To paraphrase our president, difficult times often call forth the best in us and force us to participate responsibly in our lives in a way that we fail to do when everything seems to be going our way.
   
   Secondly, if funds are truly not readily available, and we in fact understand the need for the legal protection that estate planning affords, we need to draw up a savings plan to ensure that our intention to “do it sometime soon” will actually have some grounding in reality.  My clients have come up with a number of creative strategies

   a) Using whatever automatic savings plan your bank offers.

   b) Emptying your change purse at the end of the day or week into a cookie jar designated as the “Family Protection Fund”;

   c) Requesting a contribution toward an estate plan as an anniversary/birthday/holiday gift.
   
   One of my recent clients, a one-income couple of modest means with a toddler and another baby on the way gifted each other with a plan for Christmas. That was THE major gift of the season, and they were deeply gratified to do it knowing that they had done their best to protect their babies from the unforeseen. Others have let their parents know that what they’d appreciate most as a gift is cash for this purpose.
   
   Another “delay the process” argument:

3. “I can’t decide on a guardian for my child.  No one fits the bill”.  Don’t let this stop you!  The first obstacle to overcome in tackling this dilemma is to understand that any choice you make will be better than leaving the decision to a court that knows nothing about you, your children, or your hopes and dreams for them.
   
   Secondly, accept the possibility that no choice will be perfect.  If you are like most parents, you probably feel that there is no one who can adore your child as much as you do!  Just make peace with that and trust that you will make the very best decision you can, and remember that you can always change your mind.  Swallow the momentary pain of imagining someone other than you taking care of your kids and view choosing a guardian as an exercise in PROTECTION, not as a meditation on tragedy.  I found that in my own case, and in the case of all my clients, this has been the only way to get through this consideration. 
   
   Thirdly, go through the exercise that I describe in my “Choosing a Guardian” handout and see how it is not as difficult as you imagined!  Feel free to e-mail me for this document so you can get started making these crucial decisions for your beloved family.

Last words

I hope that having this introduction to the important issues affecting parents of minors will empower you to make wise decisions for your loved ones. My professional ethical standard is to treat my clients as I would want my loved ones to be treated in the same situation, and this inevitably means going the extra mile so that my clients feel secure and well taken care of.   I truly love working with young families and invite you to call me for an initial complimentary consultation. Also, if you are interested in having me speak in greater depth on estate planning to a group of parents or at a community function, please contact me at the e-mail on this site.

 My best wishes for your happiness and well-being.  May your family flourish and become all that it can be, for your sake and for the sake of our world.

© Aida M. del Valle.  All Rights Reserved.