Congratulations are in order for one of my best friends and his wife on the birth of their first child – a sweet baby girl. She is adorable and it is clear from the joy in his face that his heart is stolen away forever (cue Van Morrison song). My wife and I have been enjoying reliving through them the joys of finding out they were pregnant, to getting the house ready for the new arrival, to now cuddling and loving on their new bundle of joy (even in the wee hours of the morning). It has been a wonderful experience to watch their transition towards being parents for the first time. They are naturals for sure and we have no doubt they will be great parents who will continue to work hard to provide that little girl the very best in life. But their experience also reminded me of the immense responsibility that literally sits in their lap and just how important it is to start planning to protect her and her future now. So in the time honored tradition of current parents providing new parents with insights and advice I thought I might weigh in but with an often overlooked message…
In the process of becoming new parents, we become experts at planning – scheduling the birthing classes, planning the new nursery, picking out the right car seat, baby-proofing the house to name a few. There is so much to think about before you welcome your new child. Especially for brand new parents, most of it is centered around how to best protect your new baby. Unfortunately, one of the most important things you can do to protect your child is often overlooked: an estate plan. Here are five things to think about to help you get started with the process (even before your baby is born):
Select Guardians and Trustees and Make it Legal. Part of estate planning includes choosing the people who will be surrogate custodial parents and surrogate financial parents for your child(ren) if you are no longer living or able to do so. Parents who delay naming a guardian or choosing an executor or successor trustee usually do so because they cannot agree on that “perfect” choice. Get comfortable with the fact that there is no perfect choice. You can always amend your choice if you change your mind. However, if you don’t choose, then a court will select one for you which might not lead to a desirous result. Certainly think about choosing someone who shares your beliefs, who will naturally be a part of your child’s life, and who is willing to take on the responsibility of raising your child if you are unable to do so. But above all, make a choice early and review often.
Saving for education. The cost of college is already sky-high; can you imagine what it will be like in another 18 years? You probably want to start saving right away, either through a 529 plan or an educational trust so you can realize some tax benefits while you save.
Passing on your assets. Assets cannot pass directly to children under the age of 18, so you will need to think about setting up a trust and naming a trustee to manage the assets you would leave your children. You also need to examine your beneficiary forms for retirement accounts and insurance policies to be sure your new child is included as a beneficiary. Even if you name them in a will, a beneficiary form for these accounts will determine who inherits.
Avoiding probate. Naming beneficiaries on pay-on-death bank accounts, retirement accounts, and insurance policies are one possible way to keep those assets out of probate. However, what happens if the beneficiary is no longer living, cannot be found, or is a minor, disabled, or incapacitated? Creating a trust (whether revocable or irrevocable) is another option to avoid probate that provides more detailed instruction and planning to better account for contingencies and scenarios that life presents.
Asset protection. Planning with a trust also allows for a level of asset protection if you are interested in your inheritance having a more lasting impact. Remember, anything that you give as an outright gift can be used, spent, or taken as circumstances arise. Planning with asset protection in mind can provide for longer lasting and more impactful security and impact for your family.
Tax planning. If you have an estate worth more than the federal estate tax and gift exemptions (currently $5.45 million per person and $10.9 per married couple in 2016), you will want to discuss asset protection strategies that will help you minimize estate taxes and protect assets for your heirs. If you are among the 99% of Americans that have estates valued under the exemption amounts, tax planning can still be an important focus. Appreciable assets such as real estate (your home) or a stock portfolio might engender capital gains taxes upon their sale. Capital gains taxes are income taxes that affect everyone and could be a drain on the inheritance you wish to leave for your family. Fortunately, there are estate planning strategies you can use to minimize these taxes in order to increase the value of your legacy.
There are numerous reasons why you’re more ready to protect your children by creating your estate plan than you realize. The biggest ones are the the ones that you can cradle in your arms.
