Having children is a life-changing experience, as you suddenly become responsible for a whole new person you created. Your child depends on you for everything until at least the age of 18 and likely for much longer – and this means your bundle of joy comes with a bundle of legal and financial responsibilities.

Making plans as early as possible for current or future children is essential to ensure your kids are provided for throughout their childhood and teenage years. And, it’s important not to just plan for expected events – such as your child going to college – but also to prepare if something goes wrong. In fact, making an estate plan is something every parent needs to do because otherwise your child could be left in very dire straits if something should happen to you.

While it’s not fun to think about a serious illness or an untimely death that renders you unable to raise your kids to adulthood, you must prepare for this possibility. These are some of the tools that could help.

Estate Planning Tools for Parents

Parents should plan for their child’s physical and financial care, both when things go right and when something goes wrong. Some of the different steps parents need to take include:

Name a legal guardian for children

If you become incapacitated or pass away, you’ll want to ensure that a guardian of your choosing is put in charge of raising your children to adulthood.

Ensure sufficient assets to provide for children

It’s very expensive to raise children. Unless you have substantial personal assets you can leave for your child’s care if you pass away, it’s a good idea to purchase a life insurance policy.

Preparing for a child’s educational costs

Private schools or colleges cost tens of thousands of dollars annually. A 529 is a tax-advantaged account parents can use to invest for a child’s education. The money in a 529 plan can cover K-12 tuition costs as well as college expenses. Contributions are made with after-tax dollars but you don’t have to pay taxes on gains and qualified distributions used for educational expenses are tax-free.

Planning for the transfer of wealth after a parent’s death

A child cannot manage an inheritance until he’s a legal adult, and many parents don’t want an 18-year-old inheriting assets with no strings attached. Tools such as the Uniform Transfers to Minors Act allow parents to simply and easily name a trustee to manage assets left to a child. Those parents who want more control over assets left to children can instead opt to create a trust, which names the child as a beneficiary and which names a responsible person as a trustee to manage trust assets. Parents can place conditions on a trust, such as requiring trust assets to be used to pay for college.

Reducing estate tax

When assets are left to children, rather than to a spouse, parents of larger estates may also need to take steps to ensure part of an inheritance is not lost due to federal or state estate tax. A Grantor Retained Annuity Trust is one way to limit tax implications of an asset transfer to children. Parents can also use other tools such as a family Limited Liability Company to reduce estate tax owed.

Depending upon your child, there may also be other steps you need to take as well. For example, if your older child is not responsible with managing money, you may wish to create a spendthrift trust instead of simply leaving money directly to your adult son or daughter. A spendthrift trust gives a trustee control over trust assets to be used for your child’s benefit. Since your child has no access to trust assets, wealth can’t be lost in bankruptcy, to creditors, or to irresponsible spending.

Parents of special needs children also need to address where children will live after a parent is no longer able to provide care, as well as how children will receive financial support. A direct transfer of wealth to a disabled child could cause a loss of access to means-tested benefits such as Medicaid or Supplemental Security Income. Parents can use a special needs trust to provide funds for a disabled child’s supplemental needs. The creation of a special needs trust allows a responsible trustee to be chosen to manage trust assets for the disabled child and protects a child’s need-based benefits.

Estate Planning Deadlines and Considerations

It’s important that parents start planning for their children as early as possible. Saving for college should begin as soon as a child is born to amass a sufficient nest egg. And, every parent should make sure a guardian has been named and financial plans are made for the care of a child, as you don’t want your son or daughter left unprotected if you’re not able to be there to care for them yourself.

An experienced attorney can provide assistance with estate planning for current or future kids so you can get the right tools in place. Knowing your kids are provided for will give you peace of mind and will give your children the security they deserve.

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