My client is a new parent

It’s no secret that many Americans put off creating a will, much less an estate plan. If there’s one milestone event that can trigger a shift in mindset, however, it’s the birth of a child. It may not happen immediately, but new parents eventually realize that anything that makes them vulnerable could have an impact on their children. The idea of increased risk often brings with it a realization: “What if something were to happen to us? What would happen to them?”

If the clients have not put their own estate plans into place, state law dictates who gets their assets, and a court decides who will act as guardian of their minor children. This fact can send clients into a state of panic, picturing in-laws fighting over custody of the children, assets being misappropriated and mismanaged, or a spendthrift child 18 years in the future, riding off into the sunset in a shiny new Lamborghini.

A thoughtful and well-constructed estate plan can help alleviate these worries. As a financial advisor, you can help by raising important and time sensitive considerations to discuss with an estate planning attorney or tax professional. If you have clients who have recently had a child, the following questions can get them thinking about the key components of an estate plan, focus their attention on the relevant important decisions (reducing billable lawyer time) and spur them into action.

What are the estate planning essentials for new parents?

An estate planning attorney can help your clients determine which documents make sense depending on their situations. For most people, these are the basics:

• Will. This is the primary estate planning document. It’s used to express how you want your property to be distributed when you die and who should manage the process, known as the executor. A will also enables you to  designate a guardian for your children if they are minors.
  
  
• Revocable living trust. In many cases, it’s important to have a revocable living trust in addition to a will. “Revocable” means you can change the trust over time or even cancel it, unlike an “irrevocable” trust, which is more or less written in stone.
  Among other things, a revocable living trust states how your property will be distributed when you die and who will manage the process. In this case, that manager is called a trustee. The added advantage of having a properly funded living trust is that you can avoid the cost and hassle of court-supervised probate. Probate is the judicial process of certifying that a will is valid, collecting the assets, paying debts and expenses, and then distributing the remaining assets to your beneficiaries. In many states, this process can be expensive and burdensome. If you create a living trust, it becomes your primary estate planning document and can help you avoid a judicial probate. 
  
  
• Financial power of attorney. This document allows you to name someone to handle financial matters on your behalf. The range of powers you grant can be very narrow (i.e., letting someone handle a specific transaction), very broad (i.e., giving someone the authority to take virtually any action related to your financial matters) or somewhere in between.
  
  
• Health care directive and living will. This document goes by various names but is generally used to appoint someone to make health care decisions for you if you’re unable to do so, and to express your end-of-life wishes.
  

Trustee? Executor? Guardian? What’s the difference?

While the terms can be confusing, one easy way to describe them to clients is the executor (of a will) or trustee (of a trust) is in charge of the money or any possessions you leave behind, and the guardian is in charge of the children.

Executor:
If you have a will, this person oversees the gathering of your assets, the payment of taxes and any other final expenses, as well as the distribution of your assets to your children (or whomever else you may have selected as beneficiaries).

Trustee:
If you have continuing trusts to hold and protect your assets for your children, this person or firm handles ongoing management and investment of the assets, including the distribution of the assets to your children (or whomever else you may have selected as beneficiaries) and their guardians.

Guardian:
This person is responsible for raising your children if you’re unable to do so, caring for them on a daily basis.

Should the trustee/executor and guardian be the same person?

It depends on the situation. Sometimes these roles will overlap, but each requires a different skill set. If your clients have a go-to person they trust to serve in dual roles, it may make sense to name that person for convenience. However, different individuals can provide checks and balances and offer diverse perspectives. Just remember that individuals in these roles will need to work together.

Should the trustee/executor and guardian be a family member?

Again, this depends on your situation and relationships. Here are some factors to weigh:

• The age of the individuals you’re considering
• Where they live: Are they in the same city you’re raising your children or across the country?
• Their family composition: Are they married? Do they have their own children?
• Their personal financial situation
  

Is the guardian named in a will guaranteed to be the children’s guardian?

The person your client names in a will is merely a suggestion, as the court is responsible for appointing the guardian based on the best interests of the children at the time. The court will usually follow the parents’ wishes, unless there are extenuating circumstances. In any case, whether trustee, executor or guardian, it’s important to get permission from the person that’s being appointed before naming them in the plan.

What if the children are too young to handle money?

If the children are minors, an outright distribution — giving them all of the assets at once — may not be appropriate. This means that after the clients’ deaths, continuing trusts will likely be put in place for the benefit of the children, and the clients need to decide what these trusts will look like. Although estate planning attorneys will likely have helpful recommendations on how to structure the ongoing trusts for children, some factors clients must consider include:

• The distribution guidelines (also known as standards of distribution): How does the trustee decide whether distributing money or other assets to your child is appropriate?
• The term, or length, of the trusts: Are there mandatory distributions at certain ages, or do the trusts continue for the children’s lifetimes?
• The identity of the trustee: Who would be the best person in this role?
  

Does the client have sufficient life insurance?

Because of the high cost of raising children today, it’s important for new parents to consider purchasing life insurance. There are two basic types:

may make sense to hold the policy in an irrevocable life insurance trust. If structured properly, an irrevocable life insurance trust ensures that any insurance proceeds received by the trust are sheltered from the estate tax. For clients who are young and healthy, term insurance is a relatively cheap and effective way to provide an income-tax-free pool of money to provide for surviving children in the case of clients’ premature deaths.

Reaching out to congratulate your clients on their new addition is the perfect opportunity to remind them about some of the financial planning considerations a new child brings. By working through these questions, you’ll help your clients take an important first step in thinking about their estate plans. This, along with a bit of sleep training, can help your clients rest a little easier at night. 

New parent discussion checklist

Consider using this checklist during client conversations to help new parents cover estate planning basics. You can help get the conversation started by downloading our New parents and estate planning: Discussion checklist to use with clients.

STEP 1: Essential documents in place

• Will
• Revocable living trust
• Financial power of attorney
• Health care directive and living will

STEP 2: Appointment of executor, trustee, guardian

• Understand trustee/executor is in charge of assets, guardian is in charge of the children
• Decide who should be appointed to these roles and why
• Guardian appointment is a suggestion and will ultimately be decided by the court
  

STEP 3: Continuing trusts for children

• Standard of distribution
• Terms of trust
• Identity of trustee
  

STEP 4: Life insurance

• Term versus permanent insurance
• Considerations for an irrevocable life insurance trust