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A new parent's mind is occupied by thoughts of diapers, feeding schedules and getting a good night's sleep. But there's something else new 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, and the birth of a child is a great time to start. New parents can begin planning their estate by thinking about what they want for their spouse, children and assets when they're gone.
Although 76% of Americans polled say having a will is important, just 18% of those aged 18 to 34 and 34% of those aged 35 to 44 actually have one, according to a 2019 SSRS survey. The top reason people give for not making an estate plan? Half of survey respondents said "I just haven't gotten around to it." About 1 in 5 respondents without wills say they haven't made one because they have no assets to worry about.
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 and 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.
For a new parent, the primary benefit of an estate plan is making sure your child is provided for financially when you pass away. Another thing to consider: Should you and your spouse both die without wills stipulating a legal guardian, state laws regarding custody of minor children will apply. That means your child might end up living with a relative you haven't spoken to in years, or even in foster care. An estate plan is especially important in providing for children with disabilities or special needs.
How to Create a Will
A will is the basic foundation of an estate plan. If you make a will, your estate will still go through probate, but the process will be faster because the judge can use your will as a guide in making key decisions. Your will should:
Name a guardian and trustee for your children. It's possible you and your spouse could both die or become incapacitated, so you'll want to name one or more people you can trust to care for your children by serving as a guardian or trustee. A guardian will step in to raise them, and a trustee or property guardian will handle their finances and manage any money or property they inherit. Often, the guardian and trustee are the same person, but they don't have to be. You may want to name alternate guardians and trustees in case your first choices can't handle the job or are no longer living when the need arises.
Name an executor for your estate. After you die, your debts need to be settled, your taxes need to be paid and your property needs to be distributed to the beneficiaries you name in your estate plan. Your executor makes sure all of this is handled. The executor can be an attorney or any adult you trust to handle the process. Often, it is a family member, close friend or even an heir.
If you don't name an executor, the court will appoint an estate administrator and the judge will direct the administrator how to divide your assets. When choosing an executor, make sure the person is comfortable with the role. Consider naming some alternative executors in case your first choice doesn't want to or can't perform their duties for any reason.
Specify who inherits your assets. In many states, naming someone as the beneficiary of financial accounts, such as bank accounts, retirement plans or life insurance policies, means those assets automatically go to that person when you die. In this situation, as long as you have the desired beneficiary listed on the accounts, you don't need to specify them in your will. For example, if you have employee death benefits from your job, naming your spouse as beneficiary is generally enough to ensure they receive the benefits after your death.
Assets that you co-own jointly with your spouse, such as real estate, typically do not go through probate; they transfer to the co-owner named on the title. As long as your title to jointly owned assets is properly worded for the laws of your state, your will doesn't need to specify who should inherit the assets.
You may have other assets that you want certain people to receive. For example, maybe you want your daughter to inherit your heirloom silverware or your jewelry. You might want to leave money to a favorite charity or to distant family members the court might not consider when distributing your assets. This type of wish should be included in your will.
A will is not, however, a good place for wishes related to funeral ceremonies and the disposition of your body. Since your will may be read weeks after you die, it's better to include things like where you'd like to be buried and where you'd like your services to be held in another document, such as as a health care directive.
Assign Power of Attorney
Deciding on your health care and financial power of attorney is another key element of an estate plan. There are two basic types of power of attorney: financial and health care.
Financial power of attorney: Giving someone financial power of attorney allows that person, known as your agent, to make decisions and act on your behalf regarding your finances and property. Power of attorney can be limited to certain situations or be more general; it can be temporary or permanent. For instance, durable power of attorney gives your agent permission to make financial decisions for you even after you become incapacitated due to illness or accident.
Health care power of attorney: Health care power of attorney gives your agent permission to make decisions about your health care if you can't do so. For instance, if you had a serious car accident and were in a coma, the agent could decide what types of measures the doctors should take to keep you alive. Making these tough decisions will be easier for your agent if your estate plan includes a living will, a document that explains the kind of medical care you want in different situations. A living will is sometimes combined with a power of attorney and called an advance directive or health care directive.
Many people name their spouse or other family member as their agent for financial and healthcare power of attorney. However, you can choose anyone you trust who is age 18 or older. As with executors and guardians, it's wise to name secondary agents in case your first choice cannot fulfill their duties.
Consider a Living Trust
Setting up a living trust is more complex than just writing a will, but it can be a smart move if you have a lot of assets or a more complex family situation, such as an ex-spouse, children from an earlier marriage or a child with special needs.
A living trust lets you shift ownership of your assets to a separate fund during your lifetime. This can have some crucial advantages over a will. Assets that are put in a living trust won't have to go through probate, so your heirs won't have to wait to inherit the property. A living trust also provides privacy, because unlike a will, it is not part of the public record. Finally, a living trust may enable you to protect money that would otherwise have to go to creditors after your death.
Living trusts may be revocable or irrevocable. A revocable trust can be changed whenever you want, up until your death. During your lifetime, you are the trustee and the property in the trust remains yours. When you die, the property becomes part of your estate, and the successor trustee you selected will distribute it according to your wishes. Once all the assets have been distributed, the revocable living trust is dissolved.
A revocable trust does not protect the assets in the trust from lawsuits. If you are sued by a creditor and lose the lawsuit, you might have to pay the judgment out of money from the trust.
An irrevocable trust cannot be changed once you sign it. All the assets listed become the property of the trust. This means they aren't subject to estate taxes and can't be taken to pay your debts (unless the court determines you're using the trust to illegally hide money from creditors). An irrevocable trust is commonly used by people who have extensive assets. A revocable trust, which offers the flexibility to adjust as your family grows, is the better option for most new parents.
There's another reason a revocable trust is generally preferable for young parents. When you apply for a loan, lenders will ask you to list your assets so they can see how much money you have in reserve. Lenders know they can access the assets in a revocable trust if you default on the loan. However, they can't access an irrevocable trust, so you can't list it as an asset. This can make it harder to get a loan.
Is Estate Planning Expensive?
Depending on your needs and assets, setting up an estate plan could be as simple as writing a will, choosing beneficiaries, and assigning your financial and health care powers of attorney. There are plenty of websites you can use to create these documents yourself, and that may be sufficient if your needs and financial arrangements are very simple.
However, consulting an attorney can help ensure you aren't leaving anything to chance. Most attorneys offer flat-rate estate planning packages. Another option: Create a do-it-yourself will and pay a lawyer to review it. Since the average hourly rate for an attorney in the U.S. can run from $210 to $350, you may be able to purchase an estate planning package for less than a few hours of an attorney's time. This is usually less costly than working with an attorney from the get-go.
A 2018 Martindale-Nolo Research/Lawyers.com survey of people who used attorneys to draw up estate planning documents, 82% paid a flat fee. One-quarter of those paid between $500 and $1,000; 32% paid between $1,000 and $2,000. Some 80% of these respondents set up living trusts, which cost more than wills to create. If you only need a will, your costs should be on the low end of the scale. Many estate planners and attorneys will provide a free initial consultation.
Look for Professional Advice
Depending on your own financial situation, family needs and available time, you may want to hire an attorney or estate tax professional to help you create your estate plan. To find one, start by asking friends, family, coworkers and other professionals, such as your tax preparer or financial planner, for recommendations. The following resources can also help you with estate planning:
Get Your Estate in Order
Laws related to estate planning vary from state to state, so you should get advice from experts familiar with your state laws to ensure your plan covers all the bases. A lawyer, accountant, life insurance agent and financial planner can all be part of your team, helping you design an estate plan that's right for your family.
Be sure to revisit your estate plan on a regular basis and whenever you have a major life change, such as having another child, buying a home, getting divorced, moving to a new state or inheriting money. While you're at it, take the time to check your credit score and set up free credit monitoring, which can keep tabs on your credit and alert you to any changes. After all, now that you have children, you have plenty of other things to worry about.