Essential Estate Planning For New Parents
Congratulations! You are a new parent! You are the proud owner of a bundle of joy. This bundle comes with many responsibilities. One of the many things you, as a new parent, have to do, is ensure that your child is protected in the event something happens to you. For this, you should probably consider making an estate plan. In this post, we will explain essential estate planning for new parents.
Designate a Guardian for your Minor Child(ren)
In the unlikely event that something happens to you (death or incapacity), you will need a person to make decisions for your minor child. In the event of incapacity, a person will need to make decisions during your period of incapacity. In the event of death, you will need somebody with immediate authority to make decisions while the Court appoints a Guardian.
In New York, we have a document called the Designation of Standby Guardian. It is found in the Surrogate’s Court Procedures Act §1726. The purpose of this form is to allow you to designate a person to act on your behalf in the event of death or incapacity.
The form, if signed, is valid for 60 days after the triggering event. Within those 60 days your agent may make decisions on behalf of the minor child. Within those 60 days, your agent must also apply to the Court to become the guardian (until the child turns 18) so that they can continue to make decisions for them.
The Designation of Standby Guardian is an essential part of estate planning for new parents because it takes effect immediately (with a Doctor’s letter that you are incapacitated) and bridges the gap between the parent and the Court appointing the guardian.
Create a Will with a Testamentary Trust for the Benefit of Your Minor Children
Many new parents are concerned about something happening to both of them while their children are minors. They call to create Wills. When creating a Will it is important to create a testamentary trust for the benefit of your child(ren). A testamentary trust is a trust that goes inside of the Will. It is not a free standing Trust. (In fact, many new parents do not need a free standing trust).
There are two main reasons why a testamentary trust is needed. The first, and most important reason, is that practically speaking a child cannot inherit money until they are 18. If you leave money to your child outright and the child becomes entitled to the money before they turn 18, then a guardian of the Property will have to be appointed through the Surrogate’s Court before your child can physically access the money. What is worse, once the Guardian of the Property is appointed, the money must be jointly held by the Guardian of the Property and the Court. In order to withdraw money from the Guardianship account, the Guardian of the Property will need to Petition the Court for Permission to Withdraw Funds. This becomes unduly burdensome. To avoid this, you should create a trust inside of your Will. Your Trustee (who by the way can be the same person as the guardian) will not need to go through this step of having to petition the Court to become Guardian of the Property. The Trustee will not need to hold the money jointly with the Court. The Trustee can invest the money without Court approval. The trustee can also spend the money without Court approval. (You should choose somebody that you Trust who will spend the money in accordance with your wishes).
The second reason for establishing a testamentary trust is to allow a person you trust to have authority to manage your money and use it, on the terms that you designate, for the benefit of your children. It is a way for you to continue to have control over your assets and ensure that they are being used on your children the way you would have wanted.
As an essential part of estate planning for new parents, the testamentary trust is affordable and creates maximum flexibility for your family. Indeed, you can state the terms of the trust. You can choose when you want the trust to terminate (whether it’s age 21, 25, 30, 40, or never). You can also state, in your Will, the purpose(s) for which you want the money in the Trust used. Some people decide to provide unlimited discretion to their trustee. Others prefer to create more stringent requirements for how the money should be spent (only for education, or only for a business plan, etc).
Regardless of how you want the money spent, it is important to ensure that the Will contains a testamentary trust for the minor children.
Check your Beneficiary Designations
Some young parents may have their parents or siblings as beneficiaries or contingent beneficiaries on their assets. They may have added those beneficiary designations long before they had kids. Remember, a beneficiary designation overrides the terms of your Will. Therefore, if you have designated your parents or sibling as the beneficiary, then your parents or siblings will be entitled to those assets.
For ease and efficiency, you should check your beneficiary designation after becoming a new parent. Do Not Designate Your Minor Child as a Beneficiary. If you designate your minor child as a beneficiary and if something happens to you before that child reaches the age of 18, a Guardian of the Property will need to be appointed in order to collect that money (even though there is a beneficiary designation). In most circumstances the appropriate designation is either spouse first and then your estate second, or, all pursuant to your Will.
Estate Planning For New Parents – Consider Life Insurance
If you are going to entrust your child to your trusted friends, family, or advisors, those individuals are likely going to need some money in order to raise the child. Unless you or your guardians are independently wealthy (in which case, Congratulations!), you are going to need to provide some liquidity. One of the best ways to provide liquidity is to buy term life insurance. The life insurance is relatively inexpensive (I pay $30 bucks/month). If something happens to you, the money is tax free and received by your Trustee and can be spent in accordance with the instructions that you have designated. You can buy a simple term policy to last until the child is 18 years old.
There are more expensive and more elaborate life insurance policies available but for purposes of essential estate planning for new parents, a simple term policy until the kid is 18 is perfectly sufficient. If you do not have an advisor, you can contact an advisor. I tend to work with Eugene Shkolnikov at Northwestern Mutual.
Estate Planning for New Parents – Power of Attorney, Health Care Proxy for Yourselves
Last but not least, let’s not forget about you. Although you are busy creating a soft, loving, nurturing, caring, and safe environment and structure for your children, it is important to have documents in place in the event that you yourself become incapacitated. In such an event, as part of essential estate planning for new parents you should avail yourself of a Power of Attorney, Health Care Proxy, Living Will, HIPAA, Appointment of Agent to Control your Remains, and Nomination of your Own guardian.
We are happy to sit down with you to discuss essential estate planning for new parents. Contact us for more information.
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