This post is part of Mom and Dad’s Guide to your personal financial plan.
Estate planning is a pretty fancy sounding term. When I talk about estate planning, I feel like I should be sipping brandy and smoking a cigar next to my collection of leather bound books.
But estate planning is actually a pretty simple concept: it’s the process of planning what will happen with your children, money and possessions in the event that you die. So it’s not a particularly fun topic. But it’s one of the most important things that every parent can do to make sure their children are properly cared for if they’re gone.
The good news is that while it’s not all that enjoyable, it’s also not overly complex. Today I’ll talk about the basic steps that every parent can take to get their plan in shape.
Make a will
For a parent, the primary purpose of a will is to designate guardians for your children if you die. If you don’t have a will, or if it isn’t properly done, then the state will decide who takes care of your children. Not a position I think any of us would want to be in.
Choosing guardians is a pretty significant decision, so it’s definitely something that both parents should agree on. Good choices will probably be people that your children already know well and that you have supreme trust in to care for your children responsibly. This isn’t the time to worry about stressful family dynamics, such as that one person who would “freak out” if he or she didn’t get guardianship. This is about making the best decision for your children. You could even specify people you specifically didn’t want to get guardianship, although this kind of provision wouldn’t be iron-clad.
Ideally you will name primary, secondary and even tertiary guardians, just to cover yourself for scenarios where you initial choices were no longer able/willing to do it for whatever reason. Best to have your backups named.
There are several ways to do your will. A lot of people use online resources. You can even hand write it in certain states. This is just a personal opinion, but I would always recommend that you seek legal counsel. It should only be a few hundred dollars, and I think it’s worth it to make sure that you follow the specific laws of your state, which can sometimes get very nuanced. Take some time to talk to a few attorneys and pick one you feel comfortable with. You can search for “estate attorneys” to find some in your area.
If you ever move to another state, you’ll want to have your will reviewed. Again, each state has it’s own laws. You should also review your will any time your family situation changes, such as divorce, marriage or new children.
Get life insurance
Unless you have a huge amount of non-retirement savings (and I mean HUGE!), life insurance is an absolute must as part of your estate plan. You need to make sure that your children will have enough money available to get them to independence, and life insurance is the best and cheapest way to do that.
I’ve written extensively about life insurance before. You can read through my thoughts with these posts:
-When do you need life insurance?
-Determining how much life insurance you need
-Choosing the right type of life insurance
-How to buy life insurance
Name your beneficiaries
Keeping your beneficiaries and “payable on death” (POD) designations up to date is very important. All of your bank accounts, brokerage accounts, retirement accounts, life insurance policies, etc. will have either a beneficiary or a POD designation, where you name who the money would go to if you die. These designations supersede anything written in your will, so it’s important to stay on top of them.
In most cases you will be able to name a primary and a secondary, and I would definitely suggest you name both. If you don’t have a trust (which I’ll talk about in next week’s post), it’s likely that the primary beneficiary should be your spouse (if you have one) and the secondary beneficiary should be your children. You can usually even specify percentages, so that each child would get the same portion of the money.
Keep these designations up to date as your family situation changes. You don’t want your money going to the wrong people, or to accidentally leave anyone out.
Name a power of attorney and healthcare proxy
A financial durable power of attorney is a legal document that gives someone else the power to make financial decisions in your name. You can choose to put conditions on it, such as you being incapacitated for it to take effect, or you can leave it unconditional, which would typically only be done with a spouse. In either case, you’ll want to name someone trustworthy to handle your money in the case that you’re unable to for some period of time.
A healthcare power of attorney, or healthcare proxy, is basically the same thing on the medical side. If you’re injured or ill and are unable to make medical decisions for yourself, your healthcare proxy will be called upon to make those decisions for you. Otherwise, it’s up to the doctors and other powers that be to determine how to handle your situation.
For reference, my wife and I have named each other as both financial power of attorney and healthcare proxy.
The rest is gravy
If you have the above handled, you’ve taken care of the necessities. Next week I’ll talk about some of the (only slight more) advanced ways you can choose to handle your planning.
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