Between work, school and after-school activities, young families have a lot on their plates. And new parents are occupied with diapers, feeding schedules and getting a good night’s sleep. It’s hard to think about the future when you’re so focused on the present. But there is something else young parents should think about: estate planning. Putting your last wishes on paper is critical to ensuring your family is taken care of when you die.
The word “estate” might sound posh, but estate planning isn’t just for the wealthy. Your estate is simply all the assets you leave behind when you die, including your bank accounts, 401(k) plan, home or car. An estate plan helps to ensure that these assets go to the right people, that your debts are paid and your family is taken care of. Without an estate plan, your estate generally has to go through probate, which is a potentially lengthy court process that settles the debts and distributes the assets of a deceased person.
Many young parents assume that since they do not have a wealth of assets, estate planning is not valuable. But young families do not need extensive assets to make estate planning valuable. Here are a few key estate planning steps that every parent needs to take to make sure they’ve protected their child no matter what the future holds.
Buy life insurance
Raising children can be very expensive. If either parent dies, life insurance ensures there are funds available for the other to continue providing for surviving children. And if both parents die, life insurance can be used to raise the child or to fund the cost of a college education.
For most parents, term life insurance makes the most sense. Premiums are affordable, and the coverage will be in effect long enough for your child to grow up into adulthood and no longer be financially dependent. But if you have a child with special needs who is likely to need care even after you pass away, a whole life policy can provide permanent insurance protection that will leave your child the financial resources necessary to provide lifelong care.
Make a will and name a guardian for your children
For parents, the most important reason to make a will is to name a guardian for your children. If you aren’t around to raise your children, you don’t want surviving family members fighting over who should do it, and you don’t want this decision left to the courts. Your children might end up living with a relative you haven’t spoken to in years, or even in foster care.
By naming a guardian, you get to choose someone who you feel shares your values and who will do a good job raising your kids. This is one of the most essential things any parent should do, and it should be done as soon as your children are born.
Update your beneficiaries
You probably already have some accounts with a designated beneficiary. It’s common, for example, for a 401(k) or IRA to require you to specify who will inherit it if you die. And if you already had life insurance before your children were born, your policy will also have a beneficiary named who will get your death benefit.
However, you’ll need to update all this if you want your children to inherit these assets. In most cases, it probably makes sense to leave your spouse or life partner as the primary beneficiary if you share your children with that person. But you can make your kids secondary beneficiaries so they will inherit it in case of your death.
Consider setting up a trust
If you die before your children turn 18, your kids can’t directly take control of any inheritance you leave them. This can create problems. The court might appoint someone to manage the assets you leave to your child. If you want to specify who will manage assets, how your money and property should be used for your children, and when your children should directly receive a transfer of wealth, consider creating a trust.
When you create a trust, you can name a designated person to manage money on behalf of your children and provide instructions for how the trustee can use the money to help care for your kids as they grow. Trusts aren’t just for the extremely wealthy. Anyone who wants more control over how their assets will help their children after they’re gone should think about creating one.
When you’re raising your family, thinking about the possibility of passing away with young children is difficult. But it’s worth taking the time to talk to a lawyer about creating an estate plan. It can save you significant money in the long run and give you peace of mind knowing your precious bundle of joy can still be provided for even if the worst happens to you.