Parenting is hard. From the moment your child comes into your life, you become responsible for that child until they reach adulthood. But what if something happens to you and your partner? How can you be sure your child is taken care of if you are gone? It’s something people don’t like to think about, but it is one of the most important things you can do as a parent.
The following are estate planning steps and considerations for parents through all stages of a child’s life.
Appoint a guardian
When your child is born, it is important to consider what would happen to the child from a physical and financial perspective if both parents were to become deceased. It is recommended that parents establish a guardian for that purpose and list that person in their will.
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Establish a trust
Parents should consider creating a trust for their child(ren) to ensure there is money to provide for the child(ren) if both parents pass. A child under the age of 18 cannot legally hold title to property, so a trust would hold assets for the benefit of the child. The trust would have instructions to provide for the child(ren)’s education, health and support.
There are two types of trusts to consider. A revocable trust is created during an individual’s lifetime, and it can be changed at any time in that lifetime. A testamentary trust is created as part of a will. Neither trust need be funded until the individual passes away, at which time the property of the testator (i.e., the deceased) would be placed in a trust based on the instructions of the will.
Assign a trustee. A trustee will manage the assets in the trust. The trustee should be a financially responsible person who can manage the fund effectively for the child(ren). The trustee could be a family member, but ideally it should not be the person chosen as the guardian for the child(ren). Keeping the guardian and trustee separate ensures the guardian is not using trust assets inappropriately. Another option would be to hire a professional to serve as the trustee. Professional trustees, such as banks or financial advisers, will charge a percentage of assets, while a lawyer may instead charge an hourly fee.
Establish terms of distribution. A parent can decide if they want their child(ren) to receive one outright principal distribution, or they can mandate principal distributions at certain ages (e.g., a third at 25, a third at 30 and a third at 35). Even though a parent can dictate the rules/terms of distribution, the trustee will be the one who makes distributions to provide financial support for food, health, education and extracurricular activities. If a parent has specific wishes regarding distributions, other than the timing of the distribution, it is recommended that they write a letter to the trustee outlining these wishes. While the letter is not binding, the probate court would put great weight on the wishes expressed in the letter if there was ever a question regarding the validity of a distribution.
Ensure there will be money to provide for your children
Get life insurance. The easiest way to ensure there will be money to provide for your child(ren) is to get life insurance. Most young parents do not have a lot of liquidity, and life insurance addresses that situation. There are different types of life insurance. Level premium term policies are the least expensive. They can be for a period of 10, 20 or even 30 years, during which the policy is guaranteed as long as you pay the premium. The premium payment will not change during the life of the policy. Another option is to look at life insurance through your employer. These policies are usually handled by your employer’s human resources department and provided through a third party.
Set up a 529 account. A big concern for many parents is how to pay for the ever-increasing cost of college. Automatic withdrawals can be set up from a checking account and deposited directly into a 529 plan. Most large financial institutions offer 529 plans, and it is common for states to offer their own specific 529 plan. Sometimes, a state plan includes a state income tax benefit for residents. The biggest benefit of using a 529 plan to save for college is the tax benefit. If funds from the 529 plan are used to pay for qualifying educational expenses, such as tuition, room and board or supplies, the growth is tax-free. This is a great tool for parents and grandparents to save for a child’s education.
Additional considerations
When your child turns 18. (See my article Three Legal Documents Your Child Should Sign When They Turn 18 for more information on this topic.) Once a child turns 18, parents lose their parental rights, and children can legally enter into contracts on their own. Parents should advise their children to get their own estate planning documents in place. At a minimum, the child should establish a health care proxy that designates someone to make medical decisions for them if they are incapacitated and execute a HIPAA disclosure form so that health care professionals can share medical information with parents.
Additionally, the child should create a durable power of attorney so that a parent can make financial decisions on behalf of the child if the child is incapacitated. If your child is headed to college, consider reaching out to the college and asking if there are any forms the student should be completing so that a parent can access transcripts and grades (just because you are paying for college doesn’t mean you have access to these records!).
If you have a child with special needs. If a parent has a child with special needs, it is important that they consider setting up a special needs trust. A special needs trust is an irrevocable trust where assets go into the trust for the benefit of the child, and a trustee is appointed to manage the funds. This type of trust is specifically designed to enable a child with special needs, who may be eligible for government benefits, to continue to receive those benefits in addition to distributions from the trust.
If you have grandchildren. There are a few ways grandparents can incorporate grandchildren into their estate plan. Grandparents can consider setting up separate trusts for the sole benefit of their grandchildren, or grandparents can establish a 529 plan for their grandchildren.
Final thoughts
As your children get older, and as life events occur, look at your estate plan to see if it is still consistent with your wishes. Your estate plan should mirror your family dynamics and evolve as your family changes. Wills, durable powers of attorney, health care proxies and revocable trusts can generally be modified at any time.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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