A friend called me the other day with a simple question: I’m having a baby. Now what?
The answer depends, of course, on the family expecting the baby. Families have different structures and goals. They may be wealthy or just getting started; they may have one child or four; they may have two working parents or a stay-at-home parent or a single parent; they may have special needs children or responsibilities to other family members.
So let’s make it easy: here’s a very basic outline of an estate plan that a typical middle-class family with young children might have.
A good estate plan will have documents that plan not only for death, but for incapacity. Plans vary in form and in length depending on a family's specific situation, but the documents described below are common components.
- Wills: A will is the document that tells the probate court who you would like to receive your assets after you die. You can also use a will to appoint a guardian for your children and a guardian for your children’s assets. (This doesn’t have to be the same person. For some families, it’s a great solution to appoint one person to raise the children and another person to manage the children’s money.)
- Nominations of Guardian: This freestanding document allows parents to appoint someone to have custody of their children and/or control over the children's assets if the parents are incapacitated or deceased. You can also use this document to outline your desires for your children's visitation with your relatives, and anything else you'd want the judge deciding custody to know.
- Powers of Attorney for Finances and Health Care: Powers of Attorney allow you to appoint people to manage your finances and make your health care decisions if you are unable to do so.
- Trusts: A trust is an arrangement where one person (the trustee) holds property for another person or persons (the beneficiaries). A trust is often a part of a young family’s estate plan because it allows parents to set rules for the management of any assets they may leave to their children. I often recommend a trust because it allows parents to have money managed for their children until the children are in their twenties, thirties, or beyond. The alternative is having your children gain access to their inheritance at 18, which isn’t something most parents want. And even if you don’t have a lot of assets now, you may (and should!) have a significant life insurance policy to replace your income if something happens to you.
[The trust in question is almost always going to be a revocable trust, sometimes also called a living trust. Revocable trusts are flexible and can be changed or updated later. Irrevocable trusts are less common, and are commonly used for asset protection and tax planning, among other uses. For most families, a revocable trust is the better option.]
It's important to have a good estate plan. It's also important to have the assets to fund that plan. A trust requires money to accomplish your goals, after all. (Money for tuition, clothing, food, etc.; the things a parent would pay for if he or she were alive or able.) Life insurance is the easiest way to accomplish this. When you're young and healthy, you can often get an affordable term life insurance policy that will replace your income if you die. Life insurance has saved many bereaved young families from losing their homes and lifestyles. It's a good idea to buy through an insurance agent or financial advisor, as those professionals can help you calculate the amount of coverage you require and can afford.
How to Get a Plan
So how do you go about getting these documents? There are, of course, self-service kits and websites that offer these documents for a low cost. I’m biased, obviously, but I always suggest talking to a lawyer. Many lawyers offer complimentary consultations. And while hiring a lawyer is more expensive than doing your estate plan yourself, it can save you and your kids many thousands of dollars in legal fees by ensuring that your plan is properly drafted and organized from the start.
How do you find an attorney? Ask around. Friends, family, neighbors, or co-workers may have used estate planning attorneys in the past and will be happy to recommend ones they like (or think you should avoid). You can also search for attorneys on the internet. If you don't know where to start, most state bar associations have referral services and can direct you to a qualified attorney who can help you get started. (I've linked to the New Hampshire and Massachusetts referral services below).
When you're choosing an attorney, choose someone who listens to you and will answer all of your questions. The goal of estate planning is always to make you feel better; you want to ensure that your concerns and your goals are being addressed. You want to be sure that you understand your plan and are comfortable with it.
For those of you embarking on the journey of parenthood, congratulations! Oh, and get a copy of Sandra Boynton’s Hippos Go Berserk!
It’s the best.