Estate planning for children involves more than just distributing assets; it’s about securing your children’s financial future and well-being. By creating a comprehensive estate plan, you can appoint guardians, set up trusts, and make healthcare decisions that reflect your values and wishes. Thoughtful planning helps minimize legal complications and financial burdens, especially by avoiding some of the key mistakes below.
If you want to safeguard your children’s future, a financial advisor can help you create an estate plan to look after their needs.
9 Steps to Protect Your Children With an Estate Plan
Planning for your children’s future can require you to take several steps. Here are nine common estate planning ones to consider:
A will outlines how your assets should be distributed after your death. This estate planning document will name an executor to manage your estate and distribute assets to your children. Without a will, state laws determine asset distribution.
Life insurance provides financial security for your children in the event of your death. The payout can cover living expenses, education costs and other needs. It’s a way to ensure your children maintain their standard of living even after you are gone.
By naming your children as beneficiaries on retirement accounts, such as 401(k)s and IRAs, you can transfer these assets directly to them. This process bypasses probate, allowing quicker access to funds.
A trust can hold assets on behalf of your children until they reach a certain age. Trusts offer more control over how and when assets are distributed, which can be particularly useful for significant inheritances.
Appoint a Guardian for Minor Children
Naming a guardian in your will can help you appoint a trusted person to take care of your minor children if you pass away. This person will be responsible for their upbringing, including their education, healthcare and daily needs.
Naming your children as secondary beneficiaries on insurance policies and retirement accounts provides an additional layer of protection. If the primary beneficiary cannot inherit, the assets will go to your children without delay.
An advance healthcare directive outlines your healthcare wishes if you become incapacitated. While this document primarily addresses your care, it indirectly affects your children’s future by following your medical preferences.
A durable financial power of attorney appoints someone to manage your financial affairs if you cannot do so yourself. This person can handle bills, manage investments and take care of other financial responsibilities.
Establish a Special Needs Trust, If Necessary
For children with special needs, a Special Needs Trust ensures they receive proper care without jeopardizing their eligibility for government benefits. This trust can provide for supplemental needs while maintaining their access to essential services.
6 Common Estate Planning Mistakes to Avoid
These six common mistakes can help you create a comprehensive estate plan that can provide for your children’s future:
Not Designating a Guardian
One common estate planning mistake is failing to name a guardian for minor children. Without a designated guardian, the court decides who will care for your children, which may not align with your wishes.
Overlooking a Trust for Minor Children
Many parents neglect to set up a trust for their children, which can protect assets until they reach a certain age. A trust ensures that funds are managed according to your instructions rather than being handed over outright at 18.
Ignoring Special Needs
If you have a child with special needs, you should establish a special needs trust. This type of trust can provide financial support without disqualifying your child from government benefits.
Not Updating Beneficiary Designations
Another common oversight is failing to update beneficiary designations on life insurance policies and retirement accounts. Make sure that these align with your overall estate plan to avoid conflicts and unintended outcomes.
Forgetting Health Care Proxies and Powers of Attorney
Parents often forget to set up health care proxies and powers of attorney for their children. These documents allow a trusted individual to make medical and financial decisions on behalf of your children if you become incapacitated.
Neglecting Regular Reviews
Estate plans should be reviewed regularly and updated to reflect changes in family dynamics, financial status and laws. Neglecting this can lead to outdated plans that don’t meet current needs or objectives.
Bottom Line
Taking the time to craft a detailed estate plan for your children goes beyond asset distribution and secures their financial stability and future well-being. Thoughtful planning can alleviate future burdens and provide peace of mind, as you know your children will be cared for in alignment with your wishes.
Tips for Estate Planning
- If you’re thinking about creating an estate plan, here’s a checklist with five common steps to get you started.
- A financial advisor can also guide you in creating an estate plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/Kateryna Onyshchuk, ©iStock.com/digitalskillet, ©iStock.com/digitalskillet