You are planning to start a family, but how do you ensure that you cover your child’s financial needs should something happen to you and your spouse?
By Jessica Anne Wood
Hein Klokow from Secure Legacy highlights that one of the most important conversations you need to have with your spouse and your estate planner is how you will provide for your children’s financial needs in the case of death of one or both of you.
But where do you start? Leopold Malan, executive director of BrightRock, stresses the importance of having your health cover and long-term insurance cover in place when starting a family.
Your parental concerns and plans will differ for parents with young children, to those with adult children. Furthermore, Klokow points out that those with handicapped or special needs children, or with children from a previous marriage will have additional considerations.
The first thing you should do when considering estate planning is to contact a qualified financial adviser who can advise you on your financial situation, and the potential financial needs of your children upon your death.
What financial products should you have in place?
Klokow emphasises that a common concern with minor children is how to provide sufficient income for them. Another is how assets will be managed and preserved to provide the financial resources needed until they reach adulthood.
Will Keevy, head of insurance at Insurance Busters, notes that the first thing parents should do is get a will with a testamentary trust attached to it.
“A testamentary trust is basically if something happens to both parents, then instead of the money going to the guardian’s fund, which is run by the government, it goes into a trust which is managed appropriately for the child, until a specific age, be it 18 or 21. It’s better managed, you don’t want the government to manage the kid’s finances. Whatever is left behind (finances after parents’ death) will then be applied to bringing up the child. It’s also important if you are going to have a guardian, the guardian needs to understand what you have in place,” says Keevy.
It is also important to have adequate risk cover in place. This can include things such as life cover and disability cover to other financial products. Keevy points out that you will need to insure your income so that it can be allocated to help with the education of that child and their other financial needs in the event of your death. Setting up a trust in your will does no good if there is nothing to invest in it when you die.
Malan points out that it is also important to prepare for any loss of income you may encounter. You should have long-term insurance in place that is flexible enough for you to add cover as you start and add new additions to your family.
“Also remember that an unexpected complication with your child – like a heart defect, for example – can have a significant burden on your finances. There are long-term insurance products that can provide cover for childcare in the event of a child’s critical illness, enabling you to be with and to support your child during critical periods like these,” reveals Malan.
The next thing you should consider when you have a child is saving for their education. This is often something that parents prioritise first, but Keevy stresses that while saving for education is important, you need to take care of the risk first. “You will always make a plan to get a child educated if you don’t have the savings,” says Keevy.
What about any property left behind?
Any property that parents may own needs to be considered in estate planning. What you decide will largely depend on where the child will live in the event that both parents pass away. Keevy notes that it is unlikely that in this type of situation a child would remain in the family home.
“I would rather sell the property and invest that money to help the guardians look after the child. You don’t want to dump your child on a guardian without any financial support, it’s also not right,” says Keevy.
Guardianship
When it comes to minor children, it is important to decide who you want looking after them in the event that you or your spouse die. It is vital that you discuss your decision with the person you have in mind to ensure they are willing to take on the responsibility.
“It is important to choose a guardian or set of guardians that are able to provide emotionally, financially and physically for your children, and who have agreed to be guardians for your children in the event of your untimely death. If you have your estate planning and life cover in place that makes provision for your children’s education and day-to-day living expenses (factoring in inflation, as well as the significant jump in expenses for tertiary education), you can have a lesser emphasis on the financial strength of your chosen guardian. Your choice of guardians should also be stipulated very clearly in your will,” highlights Malan.
There are a number of things you need to keep in mind when choosing a guardian:
- The guardian needs to know who they are.
- Explain the responsibilities that a guardian will have.
- Explain what precautions you have taken to care for your children in the event of your death.
“If anyone makes you the guardian of their child, ask if they have a plan in place. It’s all well and good being a guardian, I will bring up your kid as best I can, but you can’t put that financial burden on him/her. Very few people think of that,” notes Keevy.
When choosing a guardian, also be cautious of the age of the people you are choosing. While you may want your parent to be the guardian of their grandchild, are they the most suitable candidate?
“If your parents are younger, fair enough, but you have to take into consideration the environment they are going to grow up in – going and living with grandparents versus growing up with other kids,” says Keevy.
With older guardians health might also be a factor that could impact the desired guardian’s ability to care for your child. However, it is possible to create a hierarchy when choosing guardians. Here you will have your first choice of guardians (for example your parents), but if they are unable or unwilling to care for your child, you have a second person appointed to the role.
If a guardian hasn’t been appointed, Keevy explains that the State will get involved. “What will probably happen is they will go to the closest family. But do you want that decision to be made for you by somebody else?” notes Keevy.
Klokow adds: “Every family is different with its own circumstances. It is essential to have an up-to-date will. Speak to a specialist estate planner to assist you in weighing up the advantages and disadvantages of different estate planning structures, taking into account all the relevant factors applicable to your situation. A rushed decision may have irreparable consequences for your loved ones.”
This article first appeared in Just Money on 8 June 2017. Click here to read the original version.