It is incredibly stressful to be a new parent. Parenting is not something that anyone can be adequately prepared for. No matter how long you have thought about it and how much you have read about it. But between weathering the many sleepless nights and stressing endlessly over baby products, and the many challenges of keeping your baby safe, you have to worry about the incredibly murky future that lays ahead. When starting a family, it’s important to think ahead with estate planning.
Preparing for that future is critical. It is one thing to set aside time to talk to your partner about schools and tutors, but it’s another to consider what might happen if you disappeared before your child was ready to be on their own. Estate plans exist not just to help aging adults prepare their adult children for the inevitable, but they are also important for young families to plan for the unthinkable. With just a few simple estate planning steps, you can ensure that your child will be okay, should anything happen to either one of you, or both of you.
Why Should You Start Thinking About Estate Planning?
As mentioned, estate planning is not exclusive to the wealthy or the elderly. Any family with one or more dependents needs to think about setting up a basic estate plan to ensure that, should anything happen to them, their nearest relatives and friends will be prepared to care for their loved one, and have the financial means to carry on.
Estate plans do not need to be complicated. In essence, a good estate plan will ensure that young parents will:
- Appoint a chosen guardian to care for their children,
- Provide a close loved one with the means to act in their name should they be alive yet incapacitated, and
- Find the best way to leave their belongings behind.
Even with modest savings, an estate plan can save the surviving family members a great deal of trouble. Dying intestate (without a will) often means that half of one’s belongings goes to one’s spouse, and the other half goes to the children. If you and your partner are not married, then by intestate law, they will not receive anything.
This can be a big problem if you die without a will, as it would mean that your children inherit everything (while being minors, meaning they have no control over their inheritance and it instead passes onto an attorney until they reach the age of majority), and their other parent receives nothing from you.
Sometimes, setting up an estate plan is as simple as reviewing and amending the documents you already have. Certain properties and accounts can have beneficiaries assigned to them, which can greatly simplify your estate planning even further.
1. List a Guardian in Your Will
A legal guardian must act as a custodian to your child until they are of age, should anything happen to both you and your partner. Choosing a guardian is very important.
Your choice will always be made final by a court to determine whether the chosen guardian is fit to be a parent to your child. You can also assign successor guardians, in the event that your first choice refuses, is found unfit, or passes away before they can take on the job.
Guardians can typically only be listed in a will, and it is not a title given lightly. If you are sitting down to start setting up your estate plan, it is important that you discuss the idea with whomever you are thinking of choosing.
It is definitely an honor to be a person’s first choice to raise their children in their absence. But it can also be an extreme burden. Having a child changes everything. Appointing someone as a potential guardian one day can be a life changer they have to acknowledge and accept.
2. Consider a Trust
The last will and testament is typically what comes to mind when one thinks of a document to bequeath all that one possesses. But a will is not always the best choice. While wills are arguably the simplest way to distribute your belongings, they are greatly limited by their simplicity.
When listing your child in a will, it helps to know that whatever they are entitled to will be held in-trust by an attorney until they become of age. However, that might not be the best way to give your child an inheritance.
A trust gives you far more control over how and when your child will receive their inheritance, specifically by letting you leave behind far more detailed and precise instructions as to the trust’s contents and its distribution.
What Does a Trust Provide?
A trust is drafted and completed by you, the grantor, in agreement with a trustee, who will take over the trust when you pass away. Living trusts go into effect immediately. It limits your control over the assets within the trust. However, it allows you to potentially separate it from your estate for tax purposes, for example. And testamentary trusts only go into effect once you have died.
In either case, trusts give you a much greater list of options for distributing your belongings. Instead of waiting until your child is 18 and bequeathing their entire inheritance onto them, you can direct a trustee to instead grow the trust’s assets over the course of your child’s early years. And then give them a portion of their trust every year until they’re 20, 25, or some other determined age.
Or, you can even set up a conditional trust. It’s where they only receive their full inheritance upon saving up a prerequisite amount themselves, displaying financial responsibility. Trustees also possess a fiduciary duty to both your interests and the interests of the trust’s beneficiary. Meaning that they cannot act in their own self-interest or to the detriment of the trust.
3. Buy Two Life Insurance Policies (For Each Parent)
Life insurance might seem a little expensive and perhaps even superfluous at first glance. But a good life insurance policy can make all the difference should something happen to either one of you. Since you are new parents, it is unlikely that either one of you have substantial savings. A life insurance policy ensures that something is left behind for your child should anything happen to you.
There are countless different levels and plans, so be sure to discuss the idea with a financial advisor or estate planning professional. Life insurance plans can also be permanent, or for a fixed time only, both of which have their fair share of pros and cons.
If either of you are uninsurable, or have an illness, look around locally for guaranteed-issue life insurance policies. As with transfer-upon-death properties and retirement accounts, life insurance policies need a designated beneficiary. Do not assign your child as the beneficiary! They will not have access to the money until they are of age. Instead, make sure your partner has access to the money should anything happen to you.
4. Check Your Retirement Account
Employer-sponsored savings plans (401(k)s) and other retirement plans (IRAs) can also constitute a significant amount in your estate. If your employer or you set up a retirement account early on in your professional career, make sure that the beneficiary for that account is set. Do not make your child the beneficiary.
Instead, make the main beneficiary your spouse or partner. This way, they can manage the money for the whole family. Alternatively, you can feed your retirement accounts (and your life insurance policies) into a special type of trust. And then keep the money in-trust with a trustee until your child is ready to receive their inheritance.
5. Set Up Power of Attorney Documents
If you are left incapacitated but not dead, then your estate plan may not kick into effect yet. Unless you have a trust, which can distribute upon incapacity as well. To ensure that your closest loved ones can continue to manage your finances and healthcare in your stead, create durable power of attorney documents.
These ensure that your partner or someone else has the right to make decisions in your name, from signing off on important medical decisions to paying bills and managing your investments.
There are many options on the table for new parents looking to ensure that, their child is well prepared. Be sure to discuss estate planning options with a professional. It’s important to see what is and is not a good fit for you.