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Updated on Thursday, April 14, 2016
Estate planning is no one’s favorite topic. Let’s acknowledge that up front. But for new parents especially, it’s an important one, because a good estate plan is how you ensure that your family will be cared for, both emotionally and financially, if (and when) you die. It’s a morbid topic for sure, but doing it right is a great gift to your family because of the security and stability it provides. So here are the 8 pieces of a good estate plan that every new parent should have.
1. Have a Will
For new parents, the primary purpose of a will is naming legal guardians for your children. These are the people who would be in charge of raising your children if you died before they reached adulthood. Your will is the only place you can make this decision, which makes it essential even if you have no money to pass along.
Of course, a will can also handle many of the financial logistics, including naming financial guardians for your children. These are the people who would be in charge of any money that’s left behind for your kids, including life insurance proceeds.
Often the same people are named as both legal and financial guardians, but you don’t have to do it that way. You can make whatever decisions you think are in the best interest of your children.
2. Get a Life Insurance Policy
While your will ensures that your children are cared for physically and emotionally, life insurance makes sure that they’re cared for financially.
Generally, you need life insurance if there’s someone who depends on you financially. New parents clearly fall into this category, since your children rely on you for their basic financial needs. A reasonable rule-of-thumb is to get 20x your income in term life insurance. That should cover most situations.
But it’s important to recognize that even most stay-at-home parents need life insurance, since their family would have new financial needs if they were no longer there. And of course, every situation is different, so the 20x income rule doesn’t work for everyone.
If you want to dig into the numbers and determine your precise need, here’s a calculator that will help you do it.
3. Beneficiary Designations
Many accounts allow you to name beneficiaries. These are the people who would inherit the money within the account. This is important because these designations take precedence over your will. That is, even if your will says something else, money within these accounts will be passed along according to their beneficiary designations.
For example, if you got divorced and remarried but didn’t update your beneficiary on a 401(k), then your first spouse will inherit the money even if your will dictates the second spouse should.
Which means that it’s important to keep these updated through life’s changing circumstances. One idea is to keep a list of all your accounts with beneficiary designations and check them once per year to make sure they’re still set the way you want. You can also check them after any big life changes, like the birth of a new child, marriage, or divorce.
Here’s a quick list of common account types that use beneficiary designations:
- Checking and savings accounts (often called payable on death designations)
- Retirement and investment accounts
- Life insurance
4. Health Care Power of Attorney
A health care power of attorney (or health care proxy) allows you to appoint someone to make medical decisions for you in case you’re ever unable to make them for yourself. This is often a spouse or partner, but it could also be a parent, sibling, friend, or anyone else you trust to make these decisions. You should notify anyone who you designate as your health care power of attorney as well as give this person directive about your wishes. For instance, do you want to stay on life support for a certain period of time?
5. Financial Power of Attorney
A financial power of attorney appoints someone to make financial decisions for you in case you’re ever unable to make them for yourself.
For example, if you were in the hospital and unable to handle things for a period of time, this document would kick in and allow someone of your choosing to access specifically designated bank accounts to pay your bills and provide for your family.
Again, this is often a spouse or partner but could be anyone you trust.
6. A Living Will
A living will allows you to specify ahead of time how end-of-life decisions should be made on your behalf.
Yes, this is very morbid. But creating this plan does two big things for you:
- It ensures that these decisions are made how you want.
- It takes a lot of pressure off your family members, who otherwise might have to make some difficult decisions on your behalf.
Taking the burden of said decisions off your family during moments of grief is a gesture of love that’s worth a few awkward moments of your time before the circumstance presents itself.
7. A Living Trust
A living trust is not an essential step for everyone, but it often makes a lot of sense. Here’s how it works:
First, you create the living trust and name yourself as trustee. You can do this with the help of an estate planning attorney.
Then you transfer ownership of assets like bank accounts, investment accounts, and even your house to the trust. And because you are the trustee, you still have full control over all of those things. It’s essentially the same as if you owned them directly.
The difference is that a trust contains specific provisions for how those assets should be handled if you die. This is sort of like a will, but a will has the downside of having to go through probate.
Probate is the process through which a court evaluates your will and manages your estate after you die. It can be time-consuming and expensive, and it’s also a public affair, meaning anyone who wants to can challenge the plan you lay out in your will.
The big benefit of a living trust is that it completely avoids probate. All of the terms of the trust are executed immediately, privately, and without the opportunity to challenge them, which has a few big advantages:
- Certainty – It’s more likely that your plan will be executed exactly as you want.
- Speed – The right people will be put in charge of the right things immediately, meaning your family will have the support it needs right away.
- Cost – You avoid many of the costs of probate (court, lawyers, etc.), which means more of your money can go directly to your family.
The downside of a living trust is that it can be expensive to set up. I would highly recommend using an attorney to do it, and that can cost a few thousand dollars.
So here’s how I would make the decision:
- If the up-front cost would jeopardize your immediate financial security, skip it.
- If you can afford it, the added protection and certainty is often worth it.
8. A Written Plan
Putting your plan in writing can make it easier for people to follow and more likely that everything goes according to plan.
Based on the documents above, create a short, written summary letting people know who’s in charge of what and what money is going where. Also create a list of key bank accounts and insurance policies, including usernames and passwords.
Make sure that the people you’re putting in charge know how to access all of this information. That way if the need arises, it will be as easy as possible.
Emotional and Financial Security
None of this stuff is fun to put in place. But the good news is that once it’s done, it doesn’t require much ongoing maintenance other than making adjustments based on big life changes. And of course, it provides your family with a lot of emotional and financial security. It’s hard to put a price on that.