New baby? Time to make an estate plan


Chris Walters

Chris Walters

Blog author Chris Walters

Chris Walters writes for Policygenius, a digital insurance brokerage trying to make sense of insurance for consumers. He previously wrote for The Consumerist.

Published July 28, 2016 | 9 min read

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Featured Image New baby? Time to make an estate plan

Updated August 11, 2020. With so many financial concepts thrown around these days, from insurance terms to investment products, the phrase "estate planning" might seem like overkill. After all, it’s estate planning. That sounds like the kind of thing you deal with when, you know, you have an actual estate to worry about, not student loans and a mortgage.

But the term actually applies to pretty much everyone, because your "estate" is the sum of your assets – for example your house, investments and savings – minus any liabilities. Estate planning simply means making arrangements to deal with these assets should you become incapacitated or when you die.

If you're just starting a family or building a career, you may still wonder why estate planning is something to worry about right now. Here's why: Because while designating beneficiaries for your life insurance policy is pretty straightforward, when you start trying to plan for contingencies, things can get complicated. If you don’t take steps early on to impose some structure on how your estate will be handled when you die, you might end up leaving behind a mess that you never intended. One way to get started is through our app, which allows you to make an online will and shop around for insurance to protect your family (and financial future). Sign up here.

We asked Kevin Kane, a Florida attorney who regularly advises clients on trust and estate issues, to explain when it makes sense for the average person to think about estate planning, and how to go about it.

Why you should have an estate plan even though you're not a one-percenter

" is less about your age or asset level," Kane says. "For most people, The first time to think about planning your estate is when you have a child." That’s because it’s a good way to protect any children or young adults who might receive your life insurance policy's payout.

A strong estate plan starts with life insurance

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Take the following scenario. You have two children, a 12-year-old and a 17-year-old, both minors (at least in Florida, where Kane practices), and you want to name them as contingent beneficiaries in the event your spouse also dies. But because they're minors, your life insurance can't pay the benefit directly to them, so the funds would go into an account controlled by whomever you appoint to be guardian of their property.

Here's where the complications can start. Often the person you name as guardian of your children is also guardian of their property, but there's no natural law that states someone has to be good at both raising kids and managing money.

"That guardian may be both a kind and nurturing person, well suited to raise children," Kane says, "And they may also have the skill sets needed to engage in the necessary financial management. they may not have that ability. There's a big difference between someone who's responsible with a twenty thousand dollar checking account and somebody who knows how to manage two million dollars."

In other words, you may want to designate a guardian for your children and a guardian for their property, which isn't something you can do by simply naming a contingent beneficiary on your life insurance policy.

Kane thinks this matters even if your children are legally adults but still pretty young. "A million dollars for an 18-year-old is probably physically dangerous," he says. As an alternative, you could name a trust for the benefit of the children, so that someone with more experience can remain involved with distribution and investment decisions until your children are older.

Here's another scenario from Kane that illustrates why you might want to put together an estate plan with specific instructions. Imagine you have a family business and three children. Two of them are closely involved with running the business, while the third is pursuing a separate career.

It may not make much sense to leave the business to all three children equally since the third has no use for it. Instead, you could choose to buy a life insurance policy equivalent to half the value of the family business and name your third child as its beneficiary. If the business is worth $2 million, you buy a $1 million life insurance policy, and now all three children will get $1 million in assets.

Putting a plan together and what it costs

So you've decided it's time to put together an estate plan that takes into account things like the age of your children and your total asset pool. Great! But now there are other questions. Where do you go for help with this, and how expensive is it?

The short answer is that a lawyer will have to help prepare the documents, but that still leaves you with at least a couple of options.The first option is to go to a lower-cost, higher-volume estate planner who uses form-based standardized planning. You'll be able to customize your plan to some degree, and for 80 to 95 percent of the population this will be adequate, Kane says.

If you go this route, expect to spend roughly between $1,000 and $2,500. On the lower end you’ll get a set of forms from a general practitioner, and on the higher end you’ll get forms and advice from an attorney at an estate planning seminar. While this may seem pricey for a "low-cost" solution, remember that what you're paying for is largely the lawyer's time and expertise. If you think about hourly rates for attorneys, you can see that a $500 estate planning service will translate into less than a handful of hours spent actually looking at your documents and helping you set up the right plan.

"You're actually not getting much advice at all" in the $500 scenario, Kane points out. "You're just buying somebody else's documents." In this price range, you're probably better off with an online self-service solution like LegalZoom, "because at least you're you're taking your own time to analyze and answer questions."

The second and more expensive option is to pay for the type of estate planner that Kane likens to a custom tailor. "There's more time to talk about goals, options, and consequences, and actually tailor the plan to what you intend." That kind of attention costs more, but if you have unique concerns—a special needs child, for example, or a blended family, or assets over $5 million so that you're worried about the estate tax—Kane recommends this approach.

5 estate planning pitfalls to watch out for

Estate planning doesn't have to be complicated, but it does need to be thorough and well-designed to avoid problems in the future. Here are some of the most common estate planning pitfalls Kane sees.

1. Not fully thinking through the trustees and executors in your plan"All too often a sufficient amount of time is spent on who gets what, but not on the delivery," Kane says. "A lot of litigation results from getting that piece wrong." Kane says if you have two kids who don’t get along, naming them as your trustees or executors is probably a bad idea. The same goes if you have three kids and you name one of them, but the other two don't recognize her as the proper choice.

"Being mindful of family dynamics is an important part of an estate plan, because what you don’t want to have happen is your estate plan driving a wedge between your children because of slights or perceived slights."So how do you go about being mindful? You have to go through what Kane calls an "intellectually honest" exercise where you look for candidates who have the aptitude and the inclination to be a trustee or executor, and who don’t have any significant conflicts of interest that could cause problems down the line.

If nobody among your family or close friends is suitable, the next place you should consider is a local financial institution with fiduciary trust powers. As for having the estate planner act as the trustee or executor, Kane says that's rarely the best choice, especially if they suggest it before you ask. But if you do decide to go with your lawyer, just make sure he or she meets the aptitude and inclination requirements, and that there aren’t any significant conflicts of interest.

2. Giving money to children too early

As Kane mentions above, it's probably a mistake to give a 20-year-old a million dollars and assume he will know how to properly invest and manage the funds. "I recommend to clients to keep those decisions away from children until they're at least thirty, and that's a personal bias based on my own financial decision-making as a younger man."

3. Assuming your wishes will be followed

If you say you want your assets distributed a certain way but you don't write those instructions into the plan, don't expect them to be followed.Kane offers a scenario where a husband and wife both have two children from previous marriages. Ten years after the husband dies and the children are all adults, the wife might decide to change the estate plan to cut out the children from the other marriage.

What's the solution? Kane says you have to either adjust your expectations or exert greater control than you otherwise would."When we talk about the control of assets we're really talking about trust planning. Sometimes that's protecting the assets to make sure what you want to have happen happens. Sometimes it's protecting the beneficiary, either from themselves or from others."

4. Not thinking through what happens if the people you expect to survive you don’t

Part of good estate planning involves coming up with fallback plans when something goes wrong. This is why you need to set up contingent beneficiaries, and then think through whether those parties will be able to handle the assets appropriately on their own.

5. Failing to match assets to the plan

This is a simple mistake that can have profound consequences on your estate plan. It simply means you don't take the time to make sure all the parts of your estate plan are in accordance. Kane offers this example: If you set up a trust for the benefit of your children, but you don't go back and change the beneficiary on the life insurance policy to the trust, then upon your death the money will still go straight to the kids.

Buying life insurance is the most important thing you can do to protect your family. But it's not the only thing, and an estate plan will let you put together a more nuanced set of protections should something happen to you. "People tend to think about an estate plan as a set of documents," Kane says, "But that's about as accurate as thinking your investment account is your statement. Your estate plan is is far broader than just a set of documents. It's the assets involved. It's the people involved."