Becoming a parent means taking on a whole new level of responsibility. After all, you've now got a new life in your hand's and your child is dependent on you for everything.
While the list of things you need to do as a new mom or dad is endless, there's one essential item that should make its way onto it: making an estate plan. People often don't think about estate planning when they're young, healthy, and starting a new family, but your child is depending on you to make decisions now that will set him or her up for a secure future even if the worst happens.
In particular, there are a few key estate planning steps that every parent needs to take to make sure they've protected their child no matter what the future holds.
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1. Buy life insurance
Raising children can be very expensive. If either parent dies, life insurance ensures there are funds available for the other to continue providing for surviving children. And if both parents die, life insurance can be used to raise the child to adulthood or to fund the cost of a college education.
For most parents, term life insurance makes the most sense. Premiums are affordable, and the coverage will be in effect long enough for your child to grow up into adulthood and no longer be financially dependent. But if you have a child with special needs who is likely to need care even after you pass away, a whole life policy can provide permanent insurance protection that will leave your child the financial resources necessary to provide lifelong care.
2. Make a will and name a guardian for your children
For parents, making a will is important not so much to designate who gets your possessions -- although of course you'll want your will to address that. Instead, the most important reason to make a will is to name a guardian for your children.
If you can't raise your children, you don't want surviving family members fighting over who should do it, and you don't want this decision left to the courts.
By naming a guardian, you get to choose someone who you feel shares your values and who will do a good job raising your kids. This is one of the most essential things any parent should do, and it should be done as soon as your children are born.
3. Update your beneficiaries
Your will should address what happens to most of your assets, but you probably have some accounts with a designated beneficiary. It's common, for example, for a 401(k) or IRA to require you to specify who will inherit it if you die. And if you already had life insurance in effect before your kids were born, your policy will also have a beneficiary named who will get your death benefit.
When you have children, you'll need to update all this if you want your kids to inherit these assets. In most cases, it probably makes sense to leave your spouse or life partner as the primary beneficiary if you share your children with that person. But you can make your kids secondary beneficiaries so they will inherit it in case of your death.
4. Consider setting up a trust
If you die before your children turn 18, your kids can't directly take control of any inheritance you leave them. This can create problems. The court might end up having to appoint someone to manage assets you leave to your child. And your child could also end up inheriting a whole bunch of money and property with no strings attached at age 18.
If you'd prefer to have more control -- including specifying who will manage assets, how your money and property should be used for your children, and when your children should directly receive a transfer of wealth -- consider creating a trust.
When you create a trust, you can name a designated person to manage money on behalf of your children and provide instructions for how the trustee can use the money to help care for your kids as they grow. And you can set conditions on your children's receiving a direct transfer of assets, such as requiring your kids to reach age 21 or requiring them to use the money to cover college costs.
Trusts aren't just for the extremely wealthy -- anyone who wants more control over how their assets help their children after they're gone should think about creating one.
Don't neglect these estate planning steps
When you're caring for a new baby, handling your estate planning probably isn't a priority. But it's worth taking the time to talk to a lawyer or to look into DIY estate planning so you'll have the assurance of knowing your precious bundle of joy can still be provided for even if the worst happens to you.
