No one likes to talk about estate planning. I mean, who wants to plan for their death? Anyone?
But for new parents especially, it’s an important topic because your estate plan is how you ensure that your children will always be in good hands, both financially and emotionally.
And while the Hollywood version of estate planning usually involves everyone waiting anxiously to hear who gets what from their rich relative’s will, there’s a lot more to it than that.
In this post you’ll learn about the most important pieces of a good estate plan so that you can start to get your own plan in place.
Life insurance provides the financial resources your children would need to get themselves from childhood to adulthood.
Typically, the younger your family, the more important life insurance is. That’s because your children have longer until they will be able to support themselves, and because you’ve had less time to build up savings that could help them.
For more on life insurance, you can check out my four-part series that walks you through the entire process.
Your will is the primary tool you have for deciding ahead of time how your family would be cared for if you died.
For parents, the primary purpose of your will is to name guardians for your children. A will is the only way to do that, and it’s a decision that would otherwise be left up to the courts at the time of your death.
So while this isn’t a fun thing to think about, it’s better to make the decision now so that you can have control over it. You can even name secondary and tertiary guardians just to cover all your bases.
You can of course also use your will to decide where your money and property would go, and even to specify how your pets should be cared for.
A common strategy is to create provisions for a testamentary trust inside of your will. By doing this, money you leave behind would go into a trust for your children and you would appoint someone to be in charge of it for them. This makes sure that there is both money available for your children and someone you trust there to manage it.
Certain types of accounts have beneficiaries or payable on death (POD) designations. These designations determine who would get the money in those accounts and they supersede anything you have specified in your will.
For example, you were likely asked to name a beneficiary for your employer retirement plan. If you died, the money inside that account would go to that beneficiary, even if you expressed something else in your will.
Which means that it’s important to review these designations and keep them up-to-date through big life changes like marriage, divorce, and birth. That way your money will always be going to the right people.
Here are some common types of accounts that use beneficiaries or payable on death designations:
- Employer retirement plans
- Investment accounts
- Checking accounts, savings accounts, and CDs
- Life insurance
Health care proxy
A health care proxy, or heath care power of attorney, names someone to make medical decisions on your behalf in case you’re ever not able to make them for yourself.
Like everything else here, this is a pretty morbid thought. But there are certain situations where you may be in need of serious medical care, and if you’re not able to make your own decisions then this document would ensure that someone you trust could make them for you.
Durable power of attorney
A durable power of attorney is essentially the same thing as a health care proxy, but for your finances instead of your health.
It ensures that someone you trust could step in to pay bills and handle other financial needs in the case that you weren’t able to do it yourself.
You can make this unconditional so that the person you name has access to your accounts at all times. Or you can make it conditional upon something like being incapacitated or traveling in another country.
In addition to your health care proxy, you can create a living will that provides instructions for how you would like your medical decisions to be handled in case you aren’t able to make those decisions yourself.
This serves two big purposes:
- It ensures that you’re treated the way you’d like to be treated.
- It relieves your family members from having to make some potentially difficult decisions on your behalf.
Peace of mind
With those things in place, you’ll have put your family in a good position to get both the emotional and financial support they need if you pass away.
And while this isn’t the most enjoyable part of your financial plan, I guarantee your family will appreciate it.