Having a baby is an exciting and chaotic time. As a new parent, you’re probably busy changing diapers, adjusting to life with your baby, and too sleep deprived to think worry about creating an estate plan. However, while it’s not easy to think about death during such a happy period in your life, it’s is essential that new parents prepare proper estate planning documents to ensure that their children are taken care of in case the unimaginable occurs. As a parent, nothing is more important than providing for your child, which includes planning for their care in the event of your passing.
What are the basic estate planning decisions that all new parents need to consider?
1. Appointing a Guardian for minor child in your Last Will a Testament
Everyone should have a will, but that is especially true for new parents. After having a child, it is vital to have a Will that is valid in the state where you live. In my opinion, the most important reason for new parents to have a Will is to designate who you want to serve as guardian of your child. A guardian is the person responsible for raising your child in the event that you pass away, while your child is still a minor. If you do not have a Will nominating a guardian, the court will appoint someone they believe will serve the child’s best interests without being able to consider what you, as the parent, would have wanted. For instance, maybe your sister appears perfectly fit to raise a child but has certain values or beliefs that go against the ones you want for your children. Another all too common example, involves multiple family members (parents, grandparents, siblings, in-laws ) fighting over guardianship in a prolonged legal battle for control of your child. You may consider the spouse of one of your siblings unfit to raise your child or an unscrupulous family member could seek guardianship of your child for their own financial gain. All of these are reasons to not leave this decision to a judge who does not know your wishes and has limited time and resources to make a decision for your child’s future. Drafting or updating an existing will to include a guardian provision enables you to ensure the person you appoint after careful consideration will serve as your child’s guardian.
2. Creating a Children’s Trust and Naming a Trustee
If a parent unexpectedly passes, guardianship is only one half of the equation necessary to provide for a child. While the guardian takes over certain parental responsibilities, they do not have an obligation to support the child financially out of pocket and may not have direct access to your funds. As such, creating a trust and naming a trustee for your child is the second half of the equation to make sure your child is provided for both emotionally and financially upon your passing.
- Creating a trust for your children allows you to make sure your assets are managed properly and your children are supported financially.
- With a trust, you choose the trustee who will be in charge of managing and investing the assets for your children.
- You decide how the money in the trust should be spent. For instance, a common standard is to give the trustee power to make distributions for the health, education, maintenance and support for your child.
- You can also decide at what age you want your child to receive the remaining balance of the trust, which could include: periodic payments over time, paid as a lump sum at a specific age, or held in trust for the child’s lifetime.
What happens to a minor child’s inheritance without a Trust?
Since minors generally cannot directly receive money or property left to them as an inheritance, any assets you leave to your minor child outside of a trust must be overseen by the probate court. Often the Court will hold the funds or appoints a conservator to manage the minor’s money until the child turns 18. Upon turning 18, the child is entitled to the money, whether or not they are capable to managing it on their own. As with anything supervised by the court, the conservatorship process moves slowly and can be expensive. Appointing a conservator is a lengthy legal process that involves going to court, appearing before the probate judge, posting a bond, paying filing fees, filing annual accountings audited by the court, and seeking the court’s permission to spend the money for the child’s benefit, which distributions may or may not be approved by the court.
How to create a trust for your Child?
While a children’s trust should be part of any parent’s estate plan, there are two ways it can be accomplished: (1) a Testamentary Trust – a Trust created upon your death within your Last Will and Testament or (2) Revocable Living Trust – a trust you set up while you are alive. Each type of trust can accomplish your goal; however, there are some additional advantages using a revocable living trust.
3. Life Insurance for New Parents
A parent’s responsibility to provide for a child also includes replacing their income to support a minor child after the parent’s death. Getting life insurance is a simple way to make sure your child will be financially supported in the event of your death. Relying on a life insurance policy through your employer that pays 1-2x your salary is generally not enough and is going to leave you underinsured.
For most young parents, a term life insurance policy is an easy and inexpensive way to accomplish this goal. You control the amount of coverage you buy. You set the beneficiary who receives the death benefit. You set the term, such as 10, 20, or 30 years. If you die during the term, the policy pays the cash death benefit to the beneficiary.
There are numerous insurance options out there that have additional saving, retirement, or long-term care benefits built in, but every policy has a “term” component to it, which is the cost of insurance or risk the insurance company takes that you will die while the policy is in effect. A term policy is the cheapest way to get the largest death benefit, which is why I generally advise young parents to start there. You will likely be surprised how inexpensive a $1 million term life policy can be.
Once you have your life insurance in place, it is important to update your policy beneficiary designation to add your trust as the named beneficiary (or as the contingent beneficiary if your spouse is your primary beneficiary). This will make sure the policy proceeds are paid and distributed according to your wishes. All parts of your estate plan should to work together. Don’t go through the time and expense of setting up a Will and Trust, but forget to update your life insurance beneficiary to fund your child’s trust upon your death.
Expecting a Baby? Now is the time to do your Estate Plan
If you have a baby on the way, now is the time to get your estate planning documents in place. This will make the chaotic time after your child’s birth a little easier to manage. However, I have had numerous client consultations with a new baby in tow.
The experienced Fort Mill estate planing attorneys at Nosal & Jeter, LLP are here to discuss how you can create a plan to provide for your children both emotionally and financially in the event of your passing. We serve the both North Carolina and South Carolina clients from our Fort Mill, SC law office and provide Lake Norman estate planning legal services from our office in Cornelius, NC.
Contact our law firm today at (704) 608-3429 or email@example.com to set up a free initial consultation for your family estate planning.