Two Decisions Every Parent Must Make

Welcoming a new child into the family is one of the most exciting things a person can experience. It can also be terrifying, and it comes with a long to-do list to make sure everything is in order for the new addition. You’ll probably have the nursery ready long before the baby comes, and the diapers will be stocked up. 

You have to make sure you know how to install the car seat, and you’ll want to sanitize plenty of bottles. After the arrival, on the business side of things, you can’t forget to apply for a birth certificate and contact your health insurance company.

Less exciting and eminently more important is the need to revise (or create for the first time) an estate plan. Although you obviously hope you’ll always be around to care for your children, you need to plan for the possibility that something may happen one day so that you can’t. It’s hard thinking about someone else caring for your kids, but failing to do so can devastate your family.

Any estate plan, for the parents of young children, must include two separate but related decisions. When considering how to protect your children you need to decide: 1) who will care for them on a day-to-day basis, and 2) who will look out for their financial needs. These are two different roles that can be filled by two different people.

As to the physical care of your children on a day-to-day basis, you should designate who you would like to serve as their guardian. This designation is usually made in your Last Will and Testament. Whoever you designate will still have to go to a judge to obtain the legal authority needed to serve as guardian, but the court will go with the person you name in your will unless there is a pretty strong argument against it. This mandatory court involvement means there will always be oversight to ensure your children are being properly taken care of by the individual or individuals you nominated.  

For the management of your children’s finances, you should set up a trust that names your children as the beneficiaries but appoints someone you trust (pun intended) as the trustee to manage the assets being held in the trust for the benefit of the child or children. Although a three-year old can’t own a home or accept life insurance proceeds, a trust can on their behalf. This avoids probate court when you die, and it also ensures that the right person has control and authority over the assets you leave behind.

In a trust you can also set restrictions for how you want your children to receive their inheritance as they grow up. You can give guidance to your trustee for how you would like the funds to be used while they are young and distributed when they get older. For example, you can specify that the funds may always be used for their health, education, and support. 

You can also state the ages at which your children can gain direct access to their inheritance. You may think that 18 is too young to receive a lump sum of money (I would agree), but that your children could handle a third of it when they’re 25, another third when they’re 30, and the remainder when they’re 35, for example.  

Some people think a safe alternative to a trust is to transfer ownership of their estate to a third party with an “understanding” that the third party knows what they’d want done with the money. This is a terrible idea. Aside from the obvious problem that they might not choose to do what you think they’d do, this approach also opens up the entire estate to any legal or financial problems the recipient might have, which would jeopardize your children’s inheritance. 

The inheritance should be held in trust, separate from the personal assets of the trustee you choose, and be accessible solely for your children’s benefit. This keeps it out of the reach of creditors, divorce court, and other legal problems, both of the trustee and of your children.  

Planning ahead gives you the peace of mind of knowing that even if something should happen to you, your children will be taken care of both in their day-to-day needs and in their long-term financial needs.