Last month, I wrote about the need to protect seniors from the hazards of the world. This month, we visit the other end of the spectrum, to discuss the need for parents and others to protect younger people from financial hazards that accompany emerging into adulthood.
Bequests to Younger Individuals
When I counsel families about the possibilities of minor children or younger adults becoming heirs or beneficiaries, most are unaware that individuals who have not reached the age of majority are generally not permitted to directly inherit property or money. When a minor child is left an inheritance, or is named the beneficiary of life insurance, retirement plans, or other financial instruments or property, the court will require that a guardian be appointed to manage the inherited funds or property until the individual reaches the age of majority, at which time,any remaining assets will be distributed to the beneficiary.
This is problematic for two reasons – first, under most circumstances, guardianship fees and costs can be very high, effectively reducing the final amount available for the beneficiary. The second is that the distribution to the minor occurs at the date of majority, which is age 18. Most 18 year olds are not equipped to handle a large or even a small bequest. Thankfully, there is a better way.
Establishing a trust for the benefit of the younger person is the recommended strategy to leave assets as a bequest to a younger individual. A trust can be established as a living trust (existing during the lifetime of the individual who is making the bequest), or as a testamentary trust (established through the giver’s last will and testament). A trust for the benefit of a younger person can include a robust set of “holdback provisions”, which are instructions to the trustee of when and how distributions can be made to the younger beneficiary. For example, a trust may include terms that a young person who is named beneficiary can utilize their share for college expenses, medical expenses, support, or other purposes without distributing funds to the beneficiary directly. The trust can specify an age for distributions of principal, or a series of distributions, at appropriate times when the beneficiary should be able to handle a larger sum of money.
Assets can be placed in the trust for the benefit of the beneficiary, and the trust can be named the beneficiary of life insurance and retirement plans, negating the need for the guardianship arrangement. This is a preferred arrangement for all bequests to younger individuals.
Power of Attorney issues for Young Adults
When an individual reaches the age of majority, their parents are no longer their legal guardians. In Florida, this means that Mom and Dad no longer have the right to handle the legal affairs of their son or daughter, or to make medical decisions for them, even if they are ill, injured, or incapacitated. We recommend that all 18 year olds establish appropriate power of attorney documents to name Mom and Dad, or whomever they choose, to maintain these rights after adulthood. Florida does not recognize the concept of “next of kin” for these purposes, and so parents of young adults should be aware that even though they may still be contributing financially to their young adult, their right to control and make decisions disappears at age 18, unless proper legal documents are established at that time.
College Loans and Student Debt
Another financial plague affecting many young people is the procurement of unwieldy amounts of student debt, which becomes an oppressive financial burden when the student finishes school. Parents and mentors can assist students from saddling themselves with student debt in many ways. The first smart way is to plan ahead. The Florida Prepaid College program allows parents to purchase college credit for their future college student for an in-state school, immediately after birth, at today’s prices. The return on investment in this program is almost priceless, at the rate that college tuition is rising. Investing in a tax-advantaged 529 plan, or establishing an IRA account for a younger student can also accumulate funds for college expenses at pre-tax savings.
For those who didn’t save enough, scholarship services can assist students in getting financial aid and applying for scholarships that are often not well publicized. Parent planning and careful completion of the FAFSA form can also yield financial aid rewards that are not loan-based.
Military service is another great option for many young people, who can utilize the generous GI bill benefits to pay for their college educations. While military service is required, the modern military teaches job skills, leadership, and discipline, which will benefit the young person for a lifetime. Other institutions offer full scholarships to students who will commit to a term of service in a particular geographic area, or discipline, and these can also allow a student to obtain even a graduate degree at little or no cost.
Finally, consider advising the student to work during school, to assist with college costs. The necessity to have a job while attending school will actually help and not hinder the student, as they learn the real-life skills of time management, and prioritizing long term goals over short-term indulgence.
Other Life Lessons
Navigating “the system” can often prove daunting for a young person. Having an experienced adult mentor, whether it is a parent or other financially-savvy individual who can assist them in navigating banking, loans, health insurance, and other “adult” matters can ease the transition into adulthood and help them avoid costly mistakes. Consider being such a mentor to the young people around you, as it benefits all of us for the next generation to become productive and responsible grown-ups! Chechele Law can advise parents and young adults about all of these issues, and help to establish all the appropriate planning tools necessary to win at the game of life.
Trusts & Taxes by Samantha Chechele, MBA