Most American strive to earn a decent-sized paycheck to support themselves and their families when they go to work. Stay-at-home parents, however, work to provide valuable nonfinancial contributions to their families everyday. They make sure that the home runs smoothly and that their family members have what they need to be successful and happy. If something were to happen to the stay-at-home parent, how would the family's needs be met?
Traditionally, the stay-at-home parent is responsible for:
- cleaning and maintaining the home;
- driving family members to activities;
- preparing meals;
- purchasing clothes, personal items, and household supplies for the family; and
- managing the household's administrative needs (e.g., scheduling appointments, planning events, coordinating family schedules).
While many of these tasks and responsibilities may be overlooked or underappreciated on a day-to-day basis, have you considered how much money or time you would need to complete them if the stay-at-home parent were no longer able to? The employed parent would need an additional source of income to outsource the tasks or would have to take time away from their job or free time to complete the tasks.
Multifaceted Approach to Protecting Your Family
We believe that, for you and your family to be properly protected with comprehensive financial and estate plans, it takes a team. First, you need to quantify the cost of the services provided by the stay-at-home-parent so you know how much money or time performing these tasks will take. A financial advisor can assist you with making sure that these numbers are accurate. They can also help you determine if the employed parent should make larger contributions to their retirement account or contribute to a spousal individual retirement account for the stay-at-home parent.
Then, after you understand what it would cost to replace the stay-at-home parent's efforts, it is important that you meet with an insurance agent who can counsel you on the right amount and kind of insurance that you need to obtain. When thinking about estate planning, many people think of using life insurance solely in the event of their death. However, it is also important to plan financially for what would happen if the stay-at-home parent were to become disabled or incapacitated, because they would likely be unable to complete the same tasks as they did before. You may be able to do this type of planning by obtaining disability insurance.
It may also be a good idea to meet with your certified public accountant or tax preparer to make sure that you are claiming the right credits and deductions and noting the right expenses on your annual income tax returns to maximize your family's single income.
Additional Planning Considerations
In addition to the above-mentioned items, a properly drafted estate plan can ensure that your money and property are protected and used in a way that matches your ultimate wishes. If you have not created an estate plan, the state's default plan will take effect upon your death. Although the laws in each state vary, your money and property will generally go first to your surviving spouse and then to the following in the order listed, depending on who survives you:
- descendants (children and grandchildren);
- siblings; and
- siblings' children (nieces and nephews).
The amount that each person receives also varies depending on your state's law.
One thing that we focus on to protect families like yours is making sure that any life insurance proceeds are protected from your beneficiaries' creditors and predators and are available to support the intended beneficiaries according to your wishes. One way to do this is to name a trust as the beneficiary of the life insurance policy. There are two different types of trusts that can protect life insurance proceeds - revocable living trust and irrevocable life insurance trust.
Revocable living trust. A revocable living trust is one that you create during your lifetime, and you can change it until you die or become mentally unable to manage your affairs. In most cases, you are the trustee and continue to manage the money and property in the trust. In addition, you can continue to use the money and property during your lifetime. If you become unable to manage your financial affairs, a successor trustee that you previously selected can step in without court involvement and manage the trust on your behalf. For individuals with accounts and property valued below the current lifetime estate tax exemption amount or who have already set up a trust, naming a revocable living trust as the beneficiary of a life insurance policy can be a useful option. Naming the revocable living trust as the beneficiary ensures that, at your death, the policy's death benefit will be paid to the trust to be used by or for the trust beneficiaries' benefit according to the instructions already in the trust agreement. Because the trustee must follow the trust's instructions, we can design a plan to better protect this money from your beneficiaries' creditors, divorcing spouses, or other undesirable people.
Irrevocable life insurance trust. An irrevocable life insurance trust is an added layer of protection because it can both own the life insurance policy and be named as the beneficiary. You can create an irrevocable life insurance trust either by transferring ownership of an existing policy to the trust or by the trust purchasing a new policy. Using your annual gift tax exclusion, you make cash gifts to the trust to pay the insurance premiums. Upon your death, the trust receives the death benefit and the trustee distributes the money according to the instructions in the trust document. If you have accounts and property valued close to or above the current lifetime estate tax exemption amount, this strategy allows you to remove the value of the life insurance policy and the death benefit from your taxable estate, potentially saving your loved ones money on estate tax.
Choosing a Guardian for Minor Children
We can also help you name a guardian for your minor children. If the other legal parent is still alive and able to care for the minor children, they can continue to provide care or assume caregiver responsibilities. It is also a good idea to plan for what would happen if both legal parents were unable to care for the children, just in case. Although you can name a guardian (and multiple backup guardians) for a minor child in a last will and testament, this document does not become effective until you die. Therefore, you should also name a guardian (and multiple backup guardians) to care for your minor children if both parents were to be alive but unable to provide care, in a separate writing that meets state law requirements. If you do not proactively and legally establish your choice for your minor children's guardian, a judge will make the decision for you. The judge will refer to state law regarding which relative would be first in line to be responsible for the children's care and custody. This person may or may not be the one you would have chosen. The law gives preference to family members, but the court does not have the time or resources to learn everything you know about these people before deciding on a suitable guardian. Choosing a guardian and a couple of backup guardians in writing gives you a voice in the proceeding.
Protecting families is our passion. We welcome the opportunity to work with you to help protect you and your family. Call us to schedule your appointment, or visit our website to learn more about our firm and process.