Even when you're young, childless, and don't have many assets, you need to do some basic estate planning. But estate planning takes on a new urgency when you become a parent. It's essential to spell out who you'd want to care for your children if you're gone and also to provide for their financial security.
Here are three estate-planning documents parents should consider. Ideally, you'd work with an experienced attorney to draft these documents. However, some legal websites allow you to use a do-it-yourself estate plan for a minimal cost.
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Last will and testament
A last will and testament is probably the most basic estate-planning document you should have. You'll use it to leave instructions about how you want your property to be distributed when you die. But you can also use this document to appoint a legal guardian to care for your child if you and their other parent die before the child reaches adulthood.
Technically, when you name a guardian for your child in your will, you're just making a recommendation. But courts will typically only override your wishes if there's a compelling reason to do so.
Revocable living trust
If you die before your kid has reached the age of majority, which is 18 in most states, a court-appointed guardian will manage any assets the child inherits. Then, when your child reaches adulthood, they can take control of the property.
But that can be a problem if you have substantial assets. You may not want an 18-year-old coming into a lot of money at once. A revocable living trust is like a will in that you can use it to specify who gets your property. But it allows you to be more specific about how you want your property to be distributed.
Most people who create a revocable living trust serve as the trustee. They will manage the assets in the trust while they're still alive and then name a successor trustee to take over when they die or become incapacitated.
You can use a trust to make sure your child receives their inheritance over an extended period vs. all at once on their 18th birthday. Or you could make distributions contingent on your kid completing their education.
Financial power of attorney
A financial power of attorney is a document that lets you name someone to manage your finances if you become incapacitated. It's especially important that parents have this document so that someone has access to their bank accounts and can pay bills, if necessary.
Without a financial power of attorney, getting this access will typically require a court order. You'll want to make sure money is available for your kids' expenses with minimal delays in an emergency.
What about life insurance?
Once you become a parent, buying life insurance is absolutely vital. Term life insurance policies, which only pay a benefit if you die within a specified period, are usually quite affordable. For example, a 35-year-old non-smoker in good health can generally obtain a 30-year $500,000 policy for less than $50 a month.
No one likes to think about their own mortality. But when you have children, preparing for the worst is something you can't afford to put off.
