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:

• Will. This is the primary estate-planning document in that it dictates how a person’s property will be distributed at death. A will also names the individual in charge of managing distribution of the property — the executor — and includes a nomination of a guardian for any minor children.
• Revocable living trust. In many cases, it’s important to have a revocable living trust in addition to a will. For example, in states where probate is unusually expensive or burdensome, a properly funded living trust avoids the expense and delay of a probate proceeding. The living trust becomes the primary estate-planning document, dictating how an individual or couple’s property is distributed upon death and who manages the process (in this case, a trustee).
• Financial power of attorney. In a financial power of attorney, an individual names an agent to act on her behalf with respect to her financial matters. The powers granted under a financial power of attorney range from very narrow (i.e., granting the agent power to act on behalf of the individual with respect to a specific transaction) to very broad (i.e., giving the agent the authority to take virtually any action with respect to the individual’s financial matters).
• Health care directive and living will. In this document, which has many different names and comes in many different forms, the individual appoints an agent to make health care decisions in the event she is unable to do so, and also makes known her end-of-life wishes. 

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:

• Guardian – Charged with raising the children if the clients are unable to do so, caring for the children on a daily basis.
• Trustee/executor – In charge of overseeing the gathering of the clients’ assets, the payment of taxes and any other final expenses, and then the distribution of the assets to the clients’ beneficiaries. If the clients’ estate-planning documents provide for continuing trusts for the children, the trustee will handle the ongoing management and investment of the assets, as well as the distribution of the assets to the children and their guardians.

Some common questions clients may have about the two roles are:

• Should the trustee/executor and guardian be the same person? It depends on the clients’ situation. As described above, the roles require two very different skill sets, but if the clients have a go-to person that they trust to serve in both roles, then it may make sense to name the same person. That being said, the checks and balances and diversity of perspectives afforded by two different individuals serving in the roles can be beneficial. It’s important to remember, however, that if the clients decide to name two different individuals, they’ll need to work together.
• Should the trustee/executor and guardian be a family member? Again, this depends on the clients’ individual situation and relationships. Some things the clients should keep in mind are the age of the individual they’re considering, as well as where the individual lives (i.e., does the individual live in the same city where the clients are raising their children, or across the country), the individual’s own family composition (i.e., is the individual married, does the individual have his or her own children) and the individual’s personal financial situation.
• Is the guardian appointed in the will guaranteed to be the children’s guardian? No, it is merely a suggestion. The supervising court must officially appoint the guardian but is usually deferential to the parents’ wishes, unless there are extenuating circumstances.

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:

• The standard of distribution (How does the trustee determine if a distribution is appropriate?)
• The term of the trusts (Are there mandatory distributions at certain ages, or do the trusts continue for the children’s lifetimes?)
• The identity of the trustee

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:

• Term insurance – Provides coverage for a term of years and pays out a death benefit if the insured dies during the term.
• Permanent insurance – Includes an investment component and is usually structured to pay a death benefit no matter when the client dies.

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

• Sample congratulations email (download PDF) – Start a dialogue with new parents on important financial-planning considerations
• Terminology guide (download PDF) – Help clients understand key concepts in estate planning