Admittedly if you have minor kids, you are going to make plenty of mistakes. One of my personal bests was letting by daughter eat a whole bag of chocolate chips to teach her a lesson – not a good idea. But I am not alone; many families out there make even bigger mistakes by not having some basic estate planning issues covered once they have children. Here are some of the most common problems we see for these families:
1. Naming a minor as a direct beneficiary on retirement assets, life insurance or a POD account. I covered this problem in my May 2009 newsletter but it bears repeating – do not name a minor as a direct beneficiary…ever! Minor beneficiaries create unneeded administrative problems and usually require the creation of a court ordered guardianship. The added expense often takes a substantial toll on the financial resources intended for the beneficiary.
2. Not having a Will and assuming that a surviving spouse will inherit the entire estate. It is true that if a husband and wife own property jointly or have life insurance and retirement that passes by beneficiary designation, then those assets will almost always pass to the spouse even if there is no Will. However, some assets can only be transferred under a Will or by default under the North Carolina intestacy laws. If one spouse has a substantial amount of liquid assets or real estate in his or her individual name and there is no Will, the intestacy laws dictate that some of those assets must be divided between the children and the spouse.
3. Not having a Will and failing to name a personal guardian for the children. When a couple has their first child the choice of guardian is typically the most important decision in their estate planning. If something happens to both of them who will become the child’s surrogate parent and where will they live? This is a personal and often a very difficult decision, but it is something that deserves attention. Ultimately the courts will decide the choice of guardian, but they rely heavily on the nomination of the parents provided in the Will.
4. Not having enough life insurance to provide for surviving spouse and children’s education. Even though most families now have two wage earners, this doesn’t obviate the need for a decent amount of life insurance to cover the risk that one spouse may die unexpectedly. In that case a surviving spouse is left with the substantial task of raising kids and being the primary source of financial support for the family. Most families also want to ensure that there are enough funds for college education for the children. When all the costs of child care and college education are added up many families simply don’t have enough life insurance in place to foot the bill.
5. Assuming that there are no estate tax concerns if you are just starting to build your net worth. Most young families start out with a zero net worth and they don’t think of themselves as wealthy enough to be concerned about estate tax. However, many of these families have avoided the mistake in number 4 above and have substantial life insurance in place. Remember life insurance is usually counted as part of your estate for estate tax purposes. When the life insurance proceeds are added to other assets many young families are bumped into a net worth that does have estate tax exposure and they need basic tax planning in their documents.
The best advice I can give is simply to begin the process. Talk to your advisors about these issues once you have children. Oh and if any of you have suggestions on how to get melted chocolate out of carpet….