There’s so much to think about when you’re preparing for parenthood. For my wife and I, it was an unbelievably exciting yet incredibly daunting experience. Between planning for the birth, arranging the nursery, and figuring out how to work the car seat, we were overwhelmed! As first-time parents, we also had to think about how we were going to provide for our son in the weeks—and years—ahead.
This is where planning your estate can help.
You may think of estate planning as something people do when they’re old and gray, but the reality is, it’s something you should consider doing now. Planning your estate gives you peace of mind that your child will be provided for in the event you’re unable to do so, and in accordance with your wishes.
Here are the estate-planning activities that soon-to-be parents should complete as soon as they can.
Purchase life insurance
This was the first thing my wife and I did when we were preparing for the birth of our son. Having life insurance gives you a way to provide for your child and spouse if you were to pass away. There are two types of life insurance: term and whole life. Term life insurance is just like it sounds—it’s for a specified length of time. Purchasing a 25-year term life policy, for instance, would provide a safety net for your family until your child reached the age of 25.
Whole life is typically more expensive than term life. The upside of whole life insurance is that the policy’s cash value slowly builds over time. Should you decide to cancel the policy, you receive the cash value less any fees.
Write your will
Having a will is critical as it establishes guardianship for your child in the event you and your spouse were to both pass away. It also gives you a way to direct how your life insurance payout should be spent and dictate to whom your assets should pass. You can find a boilerplate will template online, fill in your information, and have it notarized. It is also important to set your healthcare directive and power of attorney. If your estate is more complicated, it’s wise to hire an attorney to draft your will—or you may even want to consider setting up a trust. A trust gives you a way to pass on assets (similar to a will), but in a way that doesn’t go through probate, which can be expensive, not to mention emotionally taxing, on your family members.
Update your beneficiary designations
As a rule of thumb, you should review your beneficiary designations on your retirement accounts, including your IRA, Roth, and insurance policies, every five years or upon major life events (e.g., the birth of your child). Beneficiary designations supersede wills. For instance, if your will stated that your retirement savings should go to your spouse, but your ex-spouse was still listed as the beneficiary, the savings would go to your ex-spouse.
Open an education savings account
There’s no time like the present to begin saving for your child’s education. A good way to do this is to set up a tax-advantaged 529 savings plan. With a 529 plan, the money you put into it is taxed, but the earnings you take out is tax-free—as long as it goes toward qualified education expenses. A Roth IRA can be used to fund your child’s education, too. You can pull out your Roth contributions, not the earnings, at any time and put them toward qualified education expenses.
Ready to take your first step?
The most important thing to have in place before the birth of your child is your life insurance policy. But I don’t recommend putting off other estate-planning activities. Once your child is born, life moves at warp speed. Taking care of the rest of the details now, including your will, beneficiary designations, and education savings accounts, will give you more time to enjoy your new role as a parent. Although it will also give you more peace of mind, I can’t promise you’ll sleep more soundly at night—at least not until the teething phase is over.
Your JAK team is here to help guide you through the estate planning process. If you have questions or are unsure of where to start, give us a call today.