A To-Do List for When a New Baby Arrives
Written by Teresa D. Lancaster
Welcoming a baby into the family is a joyous occasion. Along with that joy come some planning questions for both parents and grandparents. Below are some things you should consider discussing with your estate planning attorney.
For new parents, having children comes with a lot of decisions. With the stress and chaos of a new family member, it is easy to overlook the estate planning aspect. The first discussion among the parents is the selection of a guardian if neither parent is able to care for the child. It’s a tough decision for many parents, but a necessary one, and one that’s relevant even if a young family has very little in financial assets. No one wants to leave this question up to a court, should the need arise. This nomination should be made under your Will.
A second discussion is how should the money be handled in the event a parent dies? For minor beneficiaries, some arrangement must be made to handle the assets, and a strong consideration should be made to have that money held in trust. This allows a trustee to handle the money until an age predetermined by you (25, 30, etc.), while also giving the child creditor protection. Especially when the child is young, it is difficult to know what type of money manager your child will be. A trust offers more protection than an outright inheritance provides. Remember that any of these decisions can be modified as your child ages and you get to know who they are as a person. Sometimes a state’s Uniform Transfers to Minors Account can be used in lieu of a trust, but that cannot continue past age 21. This is discussed below as a “Custodial” account.
Each parent should also update beneficiary designations on bank accounts, brokerage accounts, life insurance policies, and retirement plans. A new child does not automatically revoke prior designations, so you want to ensure those funds are handled properly. Your estate planning attorney can assist with those designations. As noted above, just naming a child is not enough; considerations must be made to have some arrangement to manage the assets if a child is a minor.
Also, even before the child arrives, make sure mom has a health care power of attorney in place. The hope is that the pregnancy will be smooth and uncomplicated, but if issues arise, it is important to have a person in place to make decisions should the need arise. A copy should be given to the OBGYN and midwife.
Later on, remember to delegate parental authority. Although it may seem impossibly far away, the child will eventually be old enough to stay or travel with friends or family (giving the parents a brief break). Many people do not consider what would happen if a medical emergency were to arise and a grandparent or other babysitter had to take the child to the doctor or hospital. A parent can ensure that the person has temporary legal authority to deal with medical issues by executing a Delegation of Parental Authority that extends for the duration of the trip. For those in the know, this is a critical part of planning for any absence from your minor children.
For the Grandparents
When a new grandchild arrives, grandparents often want to set aside funds to assist the child as he or she reaches adulthood–whether for starting off in life or for education.
One way to help financially is to set aside a specific gift or percentage for your grandchild under your estate plan. This can be done as an outright gift that would be held in what’s called a “Custodial Account” until the child turns either 18 or 21. A trust offers more flexibility, among other things, to customize terms (perhaps dictate or suggest how the funds be used), provide creditor protection beyond a child’s minority, and have a separate trustee until a designated age.
Another popular idea is giving gifts each year. You can do this through a 529 plan, which can be set up on your own or through your financial advisor, or by establishing an irrevocable trust. You may give up to $14,000 each year to each grandchild without affecting your gift/estate tax exemption. (Gifts above the $14,000 annual limit chip away at your individual $5.49 million gift/estate tax exemption and require a gift tax return to inform the IRS.) If you are married, you and your spouse can each gift a grandchild $14,000, for a total of $28,000. And this can be done for each grandchild. You also can make larger gifts, if that fits better into your overall financial plan. Your estate planning attorney can help you decide what makes the most sense for your goals and tax situation.
All in all, the welcoming of a new child warrants a discussion with your estate planning attorney to decide whether you might want to make changes.