How can parents protect their children should the unexpected happen? Why is estate planning for parents so important? Get all your questions answered!
Estate Planning for Parents
As parents, it’s our duty to protect our children and provide a warm, loving environment for them. Furthermore, we should have plans in place if we pass away prematurely or become disabled. Who will take care of your children if an unexpected event occurs?
Estate planning isn’t solely for the rich. Estate planning is very important for parents. If you are pregnant or have any children under the age of 18, I strongly encourage you to get a Last Will and Testament – at a minimum. It is a legal document that spells out who gets custody of your children if you (and your spouse, if married) die.
Benefits of Estate Planning
The benefits of estate planning documents far outweigh the financial cost. Below are just a few advantages of an estate plan:
- Family harmony
- Your loved ones will already be grieving. Don’t create discourse when family members should be leaning on each other for support. Instead, give them peace of mind.
- Financial necessity
- Without estate planning documents, your family members may be left in limbo. Ensure that your family has money to pay bills and cover other living expenses if something unexpected happens to you.
- Quicker resolution
- Assets may be exposed to a lengthy, public process known as probate. To avoid this, make sure each asset has a proper beneficiary designation.
- Another option to circumvent probate is to create and fund a revocable, or living, trust during your lifetime. Your family will have immediate access to the money they need to pay monthly expenses, funeral costs, and outstanding medical bills.
- Plan for incapacity
- If you suddenly become incapacitated by an accident or severe medical issue, who will pay your bills or manage your healthcare?
- A power of attorney designation makes it much easier for a trusted family member to step-in quickly when you are still living but unable to make decisions.
Estate Planning Terminology
Each state has different laws regarding probate avoidance, spousal property rights, and estate and inheritance taxes. I reference Missouri law because I live here.
If you die tomorrow without a Will, a guardian will be appointed for your minor children and all assets without a specific beneficiary designation go through a very public process called probate. The probate process is still relevant even if with a Will. Your Last Will and Testament explain to the probate court exactly who will care for your children, who is in charge of implementing your wishes (also called the executor), and how your property will be distributed.
Beneficiary designations indicate how certain assets will be distributed and work especially well for retirement accounts. For example, listing your spouse as 100% beneficiary on your Traditional IRA means your spouse can access that IRA after you’re gone.
What if you aren’t married? Listing your minor child (or children) as the beneficiary is problematic. Instead, create a revocable trust and name the trust as beneficiary.
A revocable trust provides better asset protection and privacy. Revocable means you can change or revoke the terms of the trust while you are still alive.
By contrast, irrevocable trusts are set in stone. It is very difficult to change them unless you have a trust protector. Families with significant financial assets often use irrevocable trusts as a holding place for permanent life insurance policies for tax reasons.
When you hire an estate attorney to prepare a will and/or trust, any reputable estate attorney will advise you to have a Healthcare Directive (also called Living Will), Medical Power of Attorney (POA) and HIPAA Release, and Financial Power of Attorney. The Medical POA and Healthcare Directives are essential when you can no longer make medical decisions for yourself. Financial Powers of Attorney ensure your bills are paid and other financial matters are addressed if you are incapacitated.
Your spouse is typically listed as the Power of Attorney if you are married. Most parents designate an adult child, family friend, or other relative to serve as a backup Power of Attorney.
Guardians and Trustees
Ensuring adequate care for minor children if you pass away prematurely is critical. Your Last Will and Testament will appoint a guardian who cares for the children in your absence. If you’re married, this duty naturally falls to your spouse. Extended family members and close friends are typically great backup guardians.
Think about the history you have with a particular family member and his or her lifestyle. Does it closely mimic yours? Is your parent physically and emotionally able to take care of your children in their sixties, seventies or eighties? Will acting as a guardian change their pace of life in a positive or negative way? Perhaps your sibling is a more suitable guardian.
Ultimately, the decision to choose a guardian for your child(ren) is yours. Hopefully, this article provides a fresh perspective on guardian selection that an attorney may not discuss.
If you move forward with a revocable trust, the Trustee must follow the terms of the trust to ensure any life insurance proceeds or other financial assets are used and distributed equitably. Naming the same Trustee and guardian can be administratively simpler, but please ensure that this person will take great care of your kids in a fiscally responsible manner.
Remember, estate planning documents are focused on long-term, rather than short-term, needs. Selecting a guardian [and possibly trustee] can be challenging. But it’s a necessity.
You Get What You Pay For
Unfortunately, estate planning documents cost money. Some people try to circumvent this process and go online to create the estate documents. I do not suggest this strategy for parents (especially of minor children). It would be very hard to craft a revocable trust online. Estate planning for parents is too important to cut corners.
Attorneys have a wide variety of specialties, so look for an estate attorney in your geographic area. An attorney who fixes speeding tickets, guides clients through divorce, or helps with business formation may not have the professional expertise to draft current estate documents. If you reside in greater St. Louis, I recommend Kirk Estate Planning or Tucker Allen. Martindale serves as an excellent starting point for everyone else since attorneys are reviewed by their peers and you can limit the search geographically.
Deborah L. Meyer, CPA/PFS and CFP®, is a fee-only financial planner and the author of Redefining Family Wealth: A Parent’s Guide to Purposeful Living. Deb is also the owner of WorthyNest®, an independent advisory firm dedicated to helping parents build wealth. She is Saint Louis University’s School of Business 2019 Distinguished Young Alumni and a recipient of the 2018 AICPA Standing Ovation Award for Personal Financial Planning. Outside of work, Deb spends time with her husband Bryan and three sons.