Dependent children require resources for health, maintenance, support and education. Some support is provided through guidance while other support requires money. Parents must provide both but what happens if the parents aren’t there to provide either?
The first step is crucial: have reasonable life insurance.
Could you imagine raising someone else’s child if the parents left no money? Most current statistics state raising a child to the age of 18 costs $250,000. Costs are higher in the earlier years due to doctor visits, diapers and daycare. On the back end, higher education could require additional money beyond age 18.
Even if only one parent is gone can the remaining parent alone afford mortgage payments, taxes, utilities and the costs of raising children?
What would the quality of life be for the surviving parent?
A family with one young child should consider having $500,000 in coverage.
What are your life insurance options? Three common forms are term, universal and whole life. Universal and whole life insurances are more expensive because they never terminate if you properly pay your premiums. Part of the premiums builds cash value, which one can borrow against or withdraw.
For many families term insurance is the best option because it is much cheaper and ends when needs for life insurance often diminish. It does not continue indefinitely nor does it build any cash value. If the term is 20 years, you pay the same premium for 20 years and after 20 years the policy ends.
How much does term insurance cost? $500,000 of coverage for a healthy, non-smoking parent is often less than $40/month.
It’s a good idea to have coverage on a stay-at-home spouse to help cover child-care costs and future retirement earnings if that parent were to return to work when dependent children are older.
Step two is naming legal guardians for your children. Otherwise a court is left to decide who will raise your children. If you have a valid Will naming guardians, a court still appoints your children’s guardians but a court will almost always honor your request unless a valid reason is provided to the court to consider otherwise.
In addition to naming guardians a last will and testament can indicate distribution terms for your assets and appoint people to handle your estate. Wills can be created online or by attorneys and can cost anywhere between $100-$1000, depending on the attorney, your state and the complexity of your estate.
The third step is creating a trust. While a will is just a piece of paper with distribution and guardian instructions, a trust can be pictured as a box to hold assets for beneficiaries long after the parents pass until children are mature enough to manage money (from the sale of a primary residence, life insurance and other assets).
Some statistics show beneficiaries, regardless of age, spend their inheritance within two years. With a trust, beneficiaries can be forced to wait until predetermined ages before receiving their inheritance. If they need money prior to that age for reasonable health, education, maintenance or support needs, they may make a formal request to the acting trustee who says “yes” or “no”, based on how they think you would have responded.
It is this estate planner’s opinion that even age 25 is too young to receive money without any guidance because many children graduate from college at age 22 or 23. If a graduate knew in two years he or she would be receiving a decent sum of money, that child might not pursue and develop a career with the same intensity as a child not expecting to receive a sum of money in the near future.
Example: At age 30, beneficiaries can receive ¼ of their inheritance with no strings attached. At age 35, beneficiaries receive another ¼ and perhaps the remainder at age 40. Hopefully if the first ¼ is spent recklessly, they will be wiser the second and third time around.
Trusts can also maintain a residence for children and their appointed guardians until the children have finished school. This is very appealing for parents whose kids are entrenched in their school with their friends and if potential guardians don’t have a large enough home without buying a new home.
For beneficiaries with special needs who receive disability income, trusts can hold distributions to those specific beneficiaries to avoid a disruption in government assistance.
A Will can create a trust, called a Testamentary Trust, which forms after you pass. The downside to Testamentary Trusts is they will not help your estate avoid the court process of probate, which is how the state ensures the wishes of your Will are carried out correctly and creditors are given an opportunity to make claims against your estate.
Depending on the state you live in, probate can delay the transfer of the estate by months or even years. Quite often attorneys are hired to assist with the probate process, which can increase the overall cost of the process.
A common and simple way to ensure any delay in your estate’s transition is avoided is to create a Revocable Living Trust. Assets held by the trust avoid probate and can be distributed immediately once all debts have been settled. Living Trusts typically come with a Will called a Pour Over Will, which will name the guardians for children.
Living trusts can be found online or through an attorney. Costs average $500-$1500 though it’s not uncommon for attorneys to charge up to $5000 for a living trust.
Begin by contacting multiple insurance agents. Research estate planning online to understand the basics and prepare yourself with questions for an estate planner. To find an estate planner ask for referrals from family, friends, your insurance agent or your financial adviser. If they have none to refer, a search on the Internet and a few phone calls should help you find someone affordable.
The most important thing to understand about estate planning is it is not a one-time event of signing documents and feeling safe. It is a process that periodically needs review and updating. Find a good planner you can afford who will ensure the estate planning process fulfills your needs.