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If your minor child might inherit more than a small amount from you, your estate plan should include a trust to manage that inheritance. Do not skip this step. This sort of trust does not have a particular name, and it does not have a particular purpose other than to provide for fund management in the way the parent likes and to delay distribution of funds until the child is likely to have matured. Until that point, the trustee manages the trust assets as guided or instructed by the will (or living trust). The parent usually instructs the trustee to lay out funds for the child’s education, medical expenses, and basic living expenses. He or she may go further, to give incentives for a productive life or to promote certain behaviors. As long as the parent’s instructions are clear and the trustee is faithful to them, the trustee will carry on as the parent would have, had the parent not died. Providing for establishment of a trust may add minimally to the cost of an estate plan, but the cost of failing to call for such a trust is much greater. Without a trust, the court may end up controlling the child’s money. This is expensive, restrictive, and unpleasant. In other words, the downside is far outweighed by the upside. Many people don’t realize how easily this problem can arise. For example, few parents (and very few insurance agents) give a second thought to the common beneficiary designation on life insurance: “to my spouse, and if my spouse does not survive me, to my children.” Of course the insured wants the money to go to his or her loved ones. But what if the spouse and then the insured die while the children are under the age of 18? Or what if any parent with significant assets and minor children dies without a will in a jurisdiction where the intestate distribution divides an estate between a spouse and children? In these cases a court-supervised guardianship must be established — with all the problems it can bring. WELCOME TO COURT The mere suggestion of court supervision likely will get the attention of a client, as it should. Here is the cautionary tale of a young widow. A happily married woman in her 30s, with a toddler, learns that her husband has died in an accident. He had no will, and they lived in a state (not the District, Maryland, or Virginia) where the then current law of intestate succession provided half of his estate to his spouse and half to his children. For many married people the law of intestate succession has little effect at the first death because they own everything in joint names with right of survivorship. But in this case, “Bob” had family business assets that were (thankfully) convertible to cash but were solely in his name. He had more than $1 million of such assets, far in excess of their joint property. “Jane” finds a job in the District and learns from her probate lawyer that a guardianship must be established for Bob’s assets designated for their child, “Babette.” Ultimately, the parties agree that Large Bank would be an appropriate guardian. Jane, the mother, is not eligible because she is not on the court’s list of approved guardians, which consists of banks and lawyers. Large Bank is on the approved list. It does not need to post a bond because it is already insured for defalcations (that is, the misuse of trust funds). Other potential guardians, such as individual lawyers on the list, must be bonded; court procedures require this additional protection for the minor. The minor’s funds, of course, pay for the bond and the annual bond renewals. Large Bank submits to the D.C. Superior Court an estimated inventory of Babette’s inherited assets (the inventory to be refined later) and Jane’s agreement to this guardianship. THE CONSTANT TRUSTEE Because Jane is young, starting a new job, raising a toddler, and in need of financial help, Large Bank’s trust officer meets with her to discuss what it costs her to raise Babette. They agree on a reasonable sum that the bank will dispense to Jane every month to pay expenses for Babette. They agree, but that does not give Large Bank the authority to make the disbursements. The court’s role is to preserve and care for Babette’s funds. In that role the court requires the bank to petition for permission to invest the funds in a certain proposed manner, which doesn’t involve Jane. The court also requires the bank to provide a notarized statement on which Jane discloses her income, assets, and liabilities to show that she needs Babette’s money to help raise the child. Along with this statement, the bank files a petition explaining the need for this allowance. The court reviews the petition and the notarized statement and decides whether to approve it. The petition and the order are served on mother and child. Every year, Large Bank prepares an accounting for the court of the year’s transactions in the guardianship. The court audits the accounting. Jane and Babette (although a minor) receive a copy and may object if they see anything questionable. Large Bank sends tax information to Jane so that she can deal with the income-tax consequences of any distributions made on behalf of Babette. In the meantime, life goes on. Jane marries again. She has a second child, but the marriage does not work out. Soon, Jane is again on her own, this time with an ex-husband who is slow with child support. Now, Jane has a “rich” child with substantial funds held in trust, and a “poor” child with none. When she asks Large Bank to petition the court for an increase in the allowance — each time submitting a notarized statement laying out her financial life — she must carefully demonstrate that she needs Babette’s money to pay expenses for Babette alone. Of course, this money is not to be used to support Babette’s younger sibling. This close scrutiny and reporting of Jane’s financial life will go on until the guardianship ends, when Babette turns 18. Jane is not looking forward to the end of this arrangement, as unpleasant as it has been, because then she will no longer have any say over what Babette chooses to do with her money. (This is where the Porsche dealership comes in.) When Babette gets the money, Large Bank gets the standard “turnover commission” of 5 percent of the trust assets, as allowed in court rules. All of this could have been so different. Had Bob written a will, he could have left his entire estate to Jane. Alternatively, he could have included in his will a trust for Babette, giving Jane or another trustee the control, flexibility, and privacy not allowed in the court-supervised guardianship. GET A FULL PLAN But that is not the end of the story. What of the case where a will includes a well-designed trust for children and names just the right person as trustee? The testator has carefully considered the trustee’s knowledge of the child, responsibility in financial matters, and likely use of the funds in the same way the testator would have done. Is this kind of responsible preparation of a will enough to prevent the foregoing scenario? No. The described case is unusual in that many young couples do not have separate assets to pass by intestate succession. Still, it is far from rare to find insurance proceeds left directly to minors, and the same story occurs in those cases. Needing a release from a person of the age of majority, the insurance company will not disburse benefits until someone — it doesn’t care who — has qualified as a court-supervised guardian. One reason this situation comes up too often is that the insured may hesitate, thinking that he will have plenty of time to change his beneficiary designation after his spouse dies. Another reason is likely some confusion about how a beneficiary designation on an insurance policy interacts with the rest of an estate plan. The confusion results from the fact that a will by itself is not an estate plan. It doesn’t dispose of one’s entire estate. And the assets that a will doesn’t transfer are often of the greatest value, including assets jointly titled (such as a couple’s house) and assets that pass according to beneficiary designations (such as life insurance or retirement accounts). Some people pay little attention to these nonprobate designations, which frequently dispose of hundreds of thousands of dollars of assets or more. They may not even have copies of their beneficiary designations, though they would never misplace a will. But the will controls only those assets in the probate estate. If life insurance proceeds are left to a minor child (instead of the estate), the insurance company will pay out the proceeds only to a guardian appointed by the court. Since these assets are not part of the probate estate, the guardian named in the will is irrelevant to the insurance company. The company can’t transfer the insurance proceeds to the carefully designed trust because that trust is not the beneficiary of the insurance policy. The less-than-happy result: The court will consult its list to name an unknown to “protect” your child’s inheritance — even from a surviving parent. The family finances, and thus the family, will find themselves under ongoing court supervision. Don’t let this happen to your family. Don’t let your spouse wind up with Jane’s problems. Get an estate plan, and check your beneficiary designations. If you have minor children, make sure your estate plan creates a trust to manage their inheritance.
Virginia A. McArthur, a Washington, D.C., lawyer, specializes in trusts and estates.

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