My niece just had her first child last night. That is such an exciting and overwhelming blessing. What do the new parents need to know about estate planning?
In addition to all the logistics involved with a new baby, what estate planning should she and her husband do now to take care of financial and legal matters?
U.S. News & World Report’s recent article, “Financial Steps to Take When You’re Pregnant” reminds us that pregnancy is a terrific time to review your financial life. It’s a great time to assess your budget, emergency savings, estate planning documents, and insurance needs to see if anything needs to be refreshed.
Here are a few things to do to prepare for a new baby:
Employee Benefits. Take a look at your employee benefits or have a conversation with HR to determine how much time you can take off and whether you’ll be paid your salary while on parental leave. This is important because many families are faced with higher living costs by the presence of a new baby, and taking parental leave may cut their take-home pay. New parents may have to use the Family and Medical Leave Act (FMLA), which offers eligible employees 12 weeks of unpaid leave; or tap short-term disability insurance, which typically only replaces a portion of your salary. The amount you receive in short-term disability will also be impacted by whether you pay premiums with pre-tax or post-tax dollars. If you pay with pre-tax money, your benefit will be subject to taxes, which will decrease the overall amount received.
While reviewing these policies, look at your health insurance and see whether prenatal visits and pediatric care are covered. You could be liable for health insurance premiums if you’re taking leave from work. Remember that you’ll need to add your baby to your medical insurance within 30 days of the birth.
After birth, having a will to take care of guardianship issues, with a trust incorporated in that will, is very important. Once the will is done, get beneficiary designation forms for your work-related insurance and retirement benefits to modify beneficiaries if necessary.
Budget. Calculate new baby expenses, such as childcare.
Life Insurance. Determine if your current life insurance will meet your needs. If you need more, look at term life insurance. It’s usually affordable and expires after a set term, typically anywhere from 10 to 30 years. This policy payout would help a surviving parent or guardian care for your child.
We often see that mothers are underinsured. If either parent dies, the career course of the survivor will be dramatically affected as a single parent.
Estate Planning. Consider who would care for your child if both parents were to die before he or she turns 18. Talk to family or close friends about who you’d like as guardian of the child. Talk to an estate planning attorney to update (or create) a will and guardianship choices. In addition, ask about formulating a plan for how inheritance, insurance, and other assets will be handled if you die while the child is a minor. A testamentary trust is a way to direct a future inheritance. You can designate your child’s trust as a beneficiary and name a relative or close friend as the trustee. The trustee will help decide how the money is spent. This trust is usually included in the will and activates after the death of the person who created it.
Beneficiary Designations. Update any beneficiary designations on your retirement and insurance accounts.
529 College Savings Account. You should also look into funding a 529 college savings account. However, making certain that your budget, estate, and insurance needs are tailored to meet your new family dynamic are more pressing concerns.
Taking these steps will seem very grown-up. They are, just like you, as a parent of a newborn.
For new parents, estate planning takes on a whole new and special purpose.
Reference: U.S. News & World Report (August 29, 2019) “Financial Steps to Take When You’re Pregnant”