A new year has arrived and a new you (if you’re on Oprah’s plan) will be following shortly.  In the interim, a new year presents a new opportunity to take care of some of those tasks that we put off the rest of the year because of the nice weather, school starting, Halloween, Thanksgiving and the Holiday Season.  One item usually left on most parents’ to-do lists from year to year is planning for the worst, also known as sensible estate planning.

I won’t bore you with the details in this post because we’re all still a little groggy from the New Year.  Although, check this out if you’d ever like a brief and (most importantly) interesting overview of what is included in an estate plan (even if you’re not a Hilton or Rockefeller).

Generally, the best way I can make my point about why parents (especially) should take care to think about and act on this moribund topic is by highlighting horror stories in the news.   If you want to see the effects of bad estate planning, examples are plentiful: Anna Nicole Smith, Britney Spears and Jerry Garcia are included among a whole bunch of other notables whose post-death or disability problems could have been easily addressed with some front-end planning.

The latest…Casey Johnson.  Although Casey was a trust fund baby (and adult), part of her story is not uncommon to the situation most parents are concerned about addressing: the unexpected passing of both mom and dad before the kids reach adulthood.

It has been reported that Casey Johnson’s trust was “shut off” because of her exorbitant spending habits.  In other words, she (allegedly) wasn’t able to handle the funds to which she had access.  The same planning is required for parents who, after death, still wish to limit their children’s access to funds until the children are adults and ready for the responsibility.

When I draft an estate plan, there is a tried and true method for accomplishing this goal…and it goes like this (assuming the unfortunate circumstance of both parents dying before the children reach adulthood):

-All of the parents’ assets are first held in a single “pot” for the benefit of the children.  The funds in the “pot” are used to support the children’s needs at the discretion of the trustee (a trusted friend or family member);

-When the youngest child reaches some age (often 23), the large “pot” is broken up into equal shares for each child.  This allows the single “pot” to be large enough to support expenditures like college, space camp, etc. for all children equally;

-After division of the “pot”, the income of each share is distributed to the child to whom the share belongs, while the child can request (but has no power to require) the trustee to make principal distributions as needs arise;

-Finally, as the children reach certain ages, they receive the right to withdraw principal as they choose (usually 50% at age 25 and 50% at age 30).

While this structure is tried and true, the details are completely adjustable by the parents…don’t think your kid will be ready to handle money until age 35, no problem.  This always gives parents something to think about and debate, and applies in both the simultaneous death situation and also where parents simply setup trusts for other purposes.

Clint Costa is a licensed attorney and registered CPA practicing in Chicago, Illinois with the law firm of Shaheen Novoselsky Staat Filipowski & Eccleston, P.C.  Besides reading the tax code for fun, Clint and his wife Julie live in the land of milk and bungalows on the northwest side of Chicago.  Clint can be reached at ccosta@snsfe-law.com or by phone at (312) 621-4400.