Estate-Planning Musts for New Parents

The most important thing is to be sure that you have a will. This is not only to transfer assets but to appoint a guardian for your child if for some reason the child is orphaned. People don't realize that a will is the only document they can use to do this, and if they don't, then the whole matter has to go to court.

And, by the way, not being able to agree on a guardian is a major stumbling block for young parents--even those who are fairly diligent about wanting to do their will.

If the spouses for whatever reason happen to pass away at the same time then a court would need to decide, but at least you have named guardians out there and available rather than having the court start from scratch.

It's also wise to let your guardians know that you are appointing them as guardians and make sure that they are comfortable with that assignment. People should choose them carefully. If your college roommate has a wild and woolly social life, this is not the person to chose. So, you need to think in terms of, is this someone who could stand in your shoes as a parent. They are never going to do as good a job as you did, but you do need to consider their suitability.

It is also advisable to create a trust for the money that you leave the child under these circumstances, and put someone in charge of that trust who is not the same person who you make the guardian.

Many people think that trusts are only for the wealthy, but much less affluent people ought to think in terms of a trust, so that if you pass away, the money that you leave to raise your child is in safe keeping.

When you make the guardian of the child the same person as the guardian of the money, you do build in certain conflicts of interests, and you don't get the kind of checks and balances you would get if you name different people for different functions.

Excerpted from Morningstar