As you’re knee-deep in nursery colors, registries, and picking out the perfect name for your new baby, your estate plan is likely at the bottom of your to-do list.
Growing families have a unique set of needs and considerations when it comes to their wealth. As strange as it may seem, having a plan for when you’re gone should be near the top of the list.
How will your money be distributed if you were to pass? Who will take care of your children? Is your current level of wealth adequate to provide for your family?
Let’s take a look at a new parent estate planning survival guide.
Update (Or Draft) Your Will
If you’re a new parent and don’t have a will, now is the time to draft one. In general, a will is a legal document that coordinates the distribution of your assets after death and can appoint guardians for your minor children.
Sounds pretty important, right? According to a survey conducted by Caring.com, only 36% of adults with children under 18 have estate planning documents in place.
Primary benefits of drafting a will:
- You can specify who receives your assets and how much they receive.
- You have the chance to clearly define who does not receive your assets.
- You can thoughtfully select who should care for your minor children.
- You simplify the process for your heirs, making it easier for them to access your assets and execute your wishes.
If you have simple estate planning needs, you could consider using an online provider such as trustandwill.com or legalzoom.com to keep costs low (often under a couple of hundred dollars for the basic documents).
If your needs are more complex or you want to avoid mistakes, hiring an estate planning attorney may make sense. Attorneys charge different prices for this service, but you should find one to draft the basic documents at a reasonable flat cost.
Establish A Guardian and Trustee For Your Child
A guardian is someone legally responsible to care for your children if you pass away. They will take on a parent’s “traditional” roles like housing, food, clothing, etc.
On the other hand, a trustee is a person that manages the finances for the benefit of a 3rd party. For example, your elected trustee would be responsible for distributing funds to beneficiaries, filing taxes, and keeping a record of transactions.
Many people do not realize that one person can fulfill the role of both guardian and trustee. This may seem like a logical choice. After all, if you can trust someone to raise your children, shouldn’t you trust them to handle the finances?
Three key considerations when choosing a trustee:
1. Trustworthiness: While it may seem obvious, you must select someone you trust. The remaining considerations are kind of out the window if you don’t trust this individual.
2. Financially Astute: At a minimum, the trustee should be familiar with the basic concepts of investing, saving, and money management. Ideally, this person will have some level of personal wealth and experience navigating financial complexities. The trustee will likely have to hire other professionals (i.e., financial planners, accountants, or attorneys) and should be capable of making these decisions.
3. Organized: Being a trustee can become quite complex. There are many moving parts, and you want someone sharp, organized, and prepared to manage it.
Double-Check Beneficiary Designations
Beneficiaries are the people you name to receive your assets when you pass. It’s important to review these regularly, especially during a significant life change (i.e., the birth of a child). Many accounts, such as 401ks, IRAs, and life insurance policies, require you to designate your beneficiaries.
Many people do not realize that designating beneficiaries and drafting a will are not the same thing. You need to be very careful with these elections. It’s easy to make decisions that seem logical at the time but can create some issues in the future.
The beneficiary election checklist:
1. Gather Your Accounts: Start by taking inventory of all your accounts that require a beneficiary election. Be sure to include old or inherited accounts (i.e., a 401k from a previous employer or an IRA inherited from your grandfather).
2. Elect Primary and Contingent Beneficiaries: Your primary beneficiaries are first in line to receive your assets. Your contingent beneficiaries would receive the inheritance if something were to happen to your primary beneficiary. A typical example would be designating your spouse as the primary beneficiary (100%) and your two children as contingent beneficiaries (50%/50%).
3. Coordinate With Your Will: Beneficiaries actually supersede your will. In other words, if you designated your brother as 100% beneficiary on your IRA but your will designated your spouse as 100% beneficiary, your brother would receive the money.
4. Consider Minor Children: Minor children cannot take possession of inherited money until they turn 18 (or 21 in some states). Until that point, any inherited funds or assets will be managed by a parent or guardian on behalf of the child. This is yet another reason to be extremely careful on who you elect as guardian and/or trustee within your will.
Take Another Look At Life Insurance
Life insurance is an easy way to protect your family in the event of an unexpected death. As a new parent, there is no better time to get some coverage in place.
Why new parents should consider life insurance:
1. It’s Cheap: As a young and healthy parent, life insurance coverage is probably as cheap as it’s going to get. As you get older and the risk of you dying increases, insurance companies will inevitably charge more to cover you. You can lock in a low rate now (while you’re young) and keep costs low for the long term.
2. You Need It Now: It might be easy for the 60-year-old couple with millions in the bank to ditch their life insurance policies. But that’s not you yet. You are still accumulating wealth, and your family is likely dependent on your earning potential.
3. College Expenses: In all likelihood, you are nowhere close to being able to fund your newborn child’s future education. As discussed in our recent blog post on college costs, tuition is on the rise, and there are plenty of unexpected expenses associated with a 4-year college education.
4. Lifestyle Expenses: If you were gone, how would your family function financially? How much income would they need to replace your earnings? What level of death benefit on a life insurance policy would enable your family to withdraw money for long periods without completely depleting the assets?
Take Control Of Your Estate Plan
As a new parent, estate planning is simply not your primary focus. You have a million and one balls in the air and are doing your best not to drop them.
Schedule a call with us today and let us help you take the next steps towards creating your personalized estate plan.
The contents of this article are for general information and educational purposes and should not be construed as specific investment, financial planning, tax, accounting, or legal advice. Please consult with a professional advisor before taking any action based on the contents of this article. All investment and financial planning strategies involve risk of loss that you should be prepared to bear. We cannot guarantee any investment performance whatsoever, and past performance is not indicative of potential future returns.