Becoming a grandparent, like becoming a parent, is a life-changing experience. There’s so much to look forward to—not only the arrival of the new baby, but also the transformation of your child into a parent.
As you may recall, that journey is filled with wonder and joy, but in the whirlwind of joyous preparation (and a thousand questions about everything from car seats and baby swings to college savings plans), some things fall through the cracks.
One important thing that gets overlooked more often than it should is estate planning.
In the first installment of this two-part series, we talked about the two estate planning tasks that are most pressing for new parents: choosing a guardian and preparing a Will.
In this second part, we look at three less well-known steps that young parents should also consider if they want to ensure their child’s stability and financial security no matter what happens:
For any beneficiary-designated assets, such as IRA or 401(k) accounts or insurance policies, new parents should make sure that they have designated beneficiaries appropriately and/or have updated them if necessary. This is usually a very simple matter of filling out a form, and it’s also fairly easy to update at any time.
Making sure that your child has designated beneficiaries will ensure that any related funds to be distributed directly to that person without having to go through probate. Click here to see why updating beneficiaries is important.
Establishing a Trust
If your child would like to have a say in how your grandchild’s inheritance is handled, you should recommend establishing a trust. Many people assume that a minor’s inheritance automatically goes directly to the appointed guardian to be used for the care of the child, but this isn’t the case.
Unless otherwise stipulated by a trust, the court controls any minor’s inheritance until the child reaches the age or 18 or 21. When the court appoints someone to oversee such decisions, it will likely be a stranger. In addition, there will be fees (which will be paid out of the inheritance), and the default distribution of funds will probably involve equal lump sums to all children upon reaching the requisite age, without any consideration of variable needs, individual temperament, or parental wishes.
A trust will ensure that your grandchild’s inheritance is handled according to your child’s wishes, not according to the court. There are a multitude of ways trusts can be written to allow for all kinds of circumstances and preferences.
Planning for Emergencies and Retirement
If you were to survey new parents about their most pressing financial concern, the vast majority of them would probably say that they are most worried about being able to pay for their child’s college education. While this is a justifiable concern, you may be surprised to learn that it’s not where young parents should be focusing their attention.
Instead of worrying about tuition costs, it’s actually more strategically sound for new parents to focus on two other areas: saving for near-term emergencies and planning for retirement.
Making sure they have enough in the bank to cover five to six months’ worth of expenses will go a long way toward giving young parents peace of mind. Life is notorious for throwing curve balls like injuries, illnesses, and job loss. Knowing there’s enough in the kitty to cover living expenses while they rebound will make any challenge easier to overcome.
Though it may seem counter-intuitive, the other item that is critical for new parents is retirement planning. While there are many ways to finance a college education, there isn’t a bank anywhere that will lend you money for retirement. By planning for their own future financial stability, new parents are taking important steps to ensure that they don’t become a burden to their child.
As a grandparent, you have the advantage of perspective and experience in all kinds of life matters, including estate planning. Encouraging your adult child to be proactive about his or her own plans is one of the best things you can do for both your child and your grandchild. While estate planning may not be as fun as picking out stuffed animals and adorable baby clothes, it’s something that will provide a much longer-term reward. One day, they’ll thank you for it.