Preparing for the arrival of a new baby is a busy time, and it’s important not to let nursery design and baby name books distract you from the important task of estate planning. Many new parents incorrectly assume that they don’t need to do any estate planning if they don’t have many assets. Even if you don’t have a large nest egg before you become a parent, your child’s well-being will become your most important “asset.” Determining who will care for your child in the event of your death, and arranging for his or her inheritance of your property is an important step that you should take as soon as you have a new baby.
Wills
Most new parents need nothing more than a simple will for their estate plan. Unless you are older, more likely to die in the near future, or have a large estate that you think would be subject to estate tax at the time of your death, a will should suffice. A will is a written document that details how your assets should be distributed after your death. Many new parents choose each other as primary beneficiary and their child as secondary beneficiary, in the event that both die at the same time.
Your will should list the name of an executor, the person who has the authority and responsibility to carry out the terms in your will. As parents to a minor, your will should also designate a guardian for your child and someone to manage the assets and property you leave to them. If you don’t create a will or update it after you have a child, you’re leaving the decisions to the courts.
Guardianship
In general, the legal guardianship of a child goes to the surviving parent in the event of the other parent’s death. But under special circumstances, or if both parents die at the same time, a guardian would need to be chosen. Your child’s guardian can be a friend or family member, and it’s a good idea to talk it over with your chosen person ahead of time. Make sure you choose someone who has the time and resources, as well as your child’s best interests in mind. You and your spouse should agree on the same guardian to avoid messy court battles. You don’t need to choose the same guardian for each child, though most parents choose to keep their children together. You also don’t need to choose the same person to raise your child and handle his or her inherited property. In fact, it’s often better if you don’t.
Trusts
A trust is a legal entity for holding and managing assets for children. You can leave your assets and property to a trust when you die, and a trustee (designated by you) would manage the trust, handling payouts to the child, paying taxes from the trust, and transferring the property to the child when he or she reaches a certain age. Many trusts make assets available when the recipient turns 18 or 21, but you can choose any age. This is to ensure that children don’t inherit money before they are responsible enough to manage it on their own. Without a trust, your assets are subject to taxes, probate, and abuse if they fall into the wrong hands.
Life Insurance
Life insurance exists to provide financial support for your family if they were to lose your income in the event of your death. It can also cover your funeral and burial expenses. The more people who depend on your income, and the more expenses they have, the more life insurance coverage you’ll need. You might not have taken out a life insurance policy before you became a parent, but it may be a good idea now that you have an additional person depending on you financially. New parents who are relatively young and healthy can buy affordable term life insurance.
As with your other assets, you need to list beneficiaries for your life insurance benefit. While your child is still a minor, you may want to create a living trust as beneficiary of your life insurance payout. That way, if both parents die at the same time, the child will have access to the money via a trustee.
It can be difficult to think about estate planning and death during such a happy time in your life, but planning for unexpected events is an essential item to add to your new parent to-do list. Planning now will eliminate the unnecessary grief caused by the red tape your loved ones may encounter if you don’t have a plan in place.
Related Reading:
4 Tips to Remember When Creating an Estate Plan
Does Your Family Need an Estate Plan?
