It’s no secret that many Americans put off creating a will — even those who need it most. But one milestone event often triggers a shift in mindset: the arrival of a child. Usually it hits people right before they get on a plane for the first time following the child’s birth: “If the plane crashes, what happens to our children, and how do we make sure they’re taken care of after we’re gone?”
If the clients have not put their own estate plan into place, the answer to that question is that state law dictates who gets the clients’ assets, and a court decides who will act as guardian of their minor children. This answer usually sends clients into a state of panic, as they picture in-laws fighting over custody of the children, their assets being misappropriated and mismanaged, and a spendthrift child 18 years in the future, riding off into the sunset in a shiny, new Lamborghini.
A thoughtful and well-constructed estate plan can make all of these worries obsolete. If you have clients who have recently had a child, discussing the four questions below will get them thinking about the key components of their estate plan, focus their attention on the relevant important decisions (reducing billable time with their lawyer) and spur them into action.
1. Are estate-planning documents in place and up to date?
For most people, “basic” estate-planning documents include the following:
Even if your clients are ahead of the game and already have an estate plan in place, if that plan was created before the major tax law changes of 2018, it should be reviewed by an attorney.
2. Who should be trustee? Executor? Guardian? Do your clients understand the roles and the differences between them?
These terms can be confusing for clients (consider providing them this terminology tip sheet), but here’s a simple distinction they’ll understand: the trustee/executor is in charge of the “stuff,” and the guardian is in charge of the children. There will be many intersections of the two roles, but each requires a different skill set, meaning different individuals may be needed:
Some common questions clients may have about the two roles are:
In any case, whether trustee, executor or guardian, it is important to get permission from the person being appointed prior to naming them in the plan.
3. What if my children can’t handle money?
If the children are minors, an outright disposition of the clients’ assets is not appropriate. This means that after the clients’ deaths, continuing trusts will likely be put in place for the benefit of the children, and the clients need to decide what these trusts will look like. Although estate-planning attorneys will likely have helpful recommendations on how to structure the ongoing trusts for children, some factors clients must consider include:
4. Do the clients have sufficient life insurance?
Because of the high cost of raising children today, it’s important for new parents to consider purchasing life insurance. There are two basic types:
One of the primary benefits of insurance is that beneficiaries receive the proceeds free of income tax. Further, if the clients have substantial net worth and purchase an insurance policy with a significant death benefit, it may make sense to hold the policy in an irrevocable life insurance trust. If structured properly, an irrevocable life insurance trust ensures that any insurance proceeds received by the trust are sheltered from the estate tax.
For clients who are young and healthy, term insurance is a relatively cheap and effective way to provide an income-tax-free pool of money to provide for surviving children in the case of clients’ premature deaths.
Starting the conversation
Reaching out to congratulate your clients on their new addition is the perfect opportunity to remind them about some of the financial-planning considerations a new child brings (consider sending an email using this sample message as a reference). By working through the four questions above, you’ll help your clients take an important first step in thinking about their estate plan — and they may rest easier while traveling to their next business trip or weekend getaway.
Tools for use with clients
Tax & Estate Planning
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