NEWS & INSIGHTS

When you are young and either newly married or beginning to start a family, establishing an estate plan may be the last thing on your mind. A common misconception is that an estate plan is something that people put in place once they are rich, old, or both.

In reality, an estate plan should be established whenever there are individuals who depend on you and who could be harmed by your passing. In other words, all adults should have an estate plan in place.

In particular, newlyweds have a new spouse to think of. For parents, there is of course their children to consider. Although it would be nice to think that without planning these individuals would be taken care of, unfortunately the reality is far different.

Issues With Intestacy

When someone dies without a Will, they are considered to have died “intestate.” Intestacy laws vary from state to state and often don’t match what common sense would otherwise dictate.

For example, in Pennsylvania, if a married parent dies with minor children and the deceased individual owned any assets in their own name (that is, not jointly with their spouse), most people would think that everything would pass to the deceased individual’s spouse. That would be wrong. Instead, it would be distributed as follows:

• The first $30,000 would pass to the deceased individual’s spouse
• Half of the remaining amount would also go to the deceased individual’s spouse BUT
• The other half of the remaining amount would go to the deceased individual’s minor children, and, as we will see shortly, a minor beneficiary receiving an inheritance outright is nothing short of a legal disaster.

As bad as the Pennsylvania intestacy laws may treat parents of minor children, married couples without children are treated even more nonsensically. In this situation, the deceased individual’s assets would be distributed as follows:

• The first $30,000 to the deceased individual’s spouse
• Half of the remaining amount would also go to the deceased individual’s spouse BUT
• The other half of the remaining amount would go to the deceased individual’s parents, if they are surviving at that time. That’s right, in Pennsylvania, a deceased individual’s spouse will split their spouse’s funds with their mother-in-law and father-in-law.

Issues With Minors Receiving Outright

For most parents there is nothing more important than caring for their beloved children. These littles ones are entirely dependent on their parents, and a major component of this dependence is financial. 

Although nobody wants to think about it, it is nevertheless the case that tragedy does strike and sometimes minor children either have one or both parents die early in their life. If a child were to become entitled to an inheritance through intestacy because of their parents’ failure to plan appropriately, the funds that their parents would have wanted to be used for their benefit may be otherwise tied up or needlessly wasted.

In virtually all states, including Ohio and Pennsylvania, a minor is not permitted to receive funds in their own individual name. When a minor child becomes entitled to an inheritance, the courts are required to become involved to establish a restricted account to hold for the minor’s beneficiary. This process, needless if proper planning were done during the parent’s life, typically costs thousands of dollars in legal fees that could have been used for the child’s benefit. Additionally, further expenses are required to provide minute details to the court regarding all the transactions in and out of the account.

Even worse, in many states (including Pennsylvania), a “sequestered account” may be required to be established to hold the minor’s inheritance until said child reaches the age of majority. In Pennsylvania, the statute which governs this scenario is 20 PA Cons Stat § 5103.

Outside of being expensive and time consuming to establish, as it requires an attorney presenting a petition before the court, a sequestered account is draconianly restrictive. The court has to be petitioned every time a distribution is requested from the sequestered account, incurring further legal expenses and making such requests impractical except for significant expenses. And then, as soon as the minor turns eighteen (which everyone knows is an age at which young adults are financially mature and generally responsible in their decisions) the entire amount held in the sequestered account is dumped on them, to be used by them as they will. 

IMPORTANT NOTE: One particularly bad trap for the unwary are minors listed as contingent beneficiaries on life insurance policies or other beneficiary designated accounts like certain retirement accounts.  Even with a Will in place, it is critical to update beneficiary designations on such accounts because these accounts actually pass outside of the structure of the Will. This is because such accounts transfer “by operation of law,” in other words, like contracts, and unless there is proper coordination with a custodial account or trust established by a Will, the minor beneficiaries will be subject to the disastrous proceedings listed above.

The Importance of Appointing a Guardian

For parents of minor children, even more important than caring for their children’s financial needs is making sure they have a loving caregiver. Nominating a guardian in a Will is precisely the method for parents to address this concern and it is as simple as including a few short, well-drafted paragraphs in a Will.

Without a guardian being appointed in a Will, an individual, typically a family member, will have to petition the court to be appointed guardian. Almost without exception, this is an expensive and complicated process. To compound the messiness, if family members disagree, the situation could be family-destroying and could easily result in prolonged court hearings at the expense of a minor child’s well-being.

Although the courts will be involved even when a guardian is nominated in a Will, a guardian nominated by a parent is heavily preferred by the courts and the process is streamlined, resulting in an appropriate guardian being in place in less time and with less financial waste.

Plan Now and Avoid Heartache Later

For your loved ones, an estate plan is the least expensive and most effective insurance you can provide. If tragedy were to strike for young parents and married couples, the heartache and grief are a sufficient trial without compounding the tragedy with financial hardship. 

Establishing even a simple estate plan composed of a Will, a financial power of attorney and a healthcare power of attorney, in addition to making sure all beneficiary designations are appropriately worded on life insurance and retirement accounts, is an easy, inexpensive way to make sure your loved ones will be taken care of despite what the future may hold.

Drew Durbin is an Associate Attorney at The Lynch Law Group. If you would like to discuss establishing an estate plan, contact Drew via our contact form or by phone at 724-776-8000.