People who have small children for the most part have not had the opportunity to accumulate a significant store of financial assets. When you think about this from an estate planning perspective it can be somewhat disconcerting because you have a combination of dependents with long term financial need and limited resources in reserve.
Should both parents pass away together in an accident of some kind the children will need to be cared for personally and financially. On the personal side young parents should select a preferred guardian when they are drawing up their will. The way that the financial element is commonly addressed is through the purchase of life insurance. However, the minor children are not going to be able to handle their own financial affairs, so this must be accounted for in the will.
The administration of funds that have been bequeathed to a minor is often accomplished through the creation of a testamentary trust. We have all heard the term “last will and testament,” and in the past the will was used to pass on real property and the testament was the vehicle of transfer for personal property. These days the terms are largely interchangeable, so the testamentary trust is a trust that is contained within a will or testament.
The person who draws up the will is called the settlor, and upon the death of the settlor some or all of the assets in his or her estate are placed into the testamentary trust in accordance with the wishes of the deceased. Of course this can include insurance policy proceeds earmarked for the dependent children. When you draw up the will you appoint a trustee, and this person will be responsible for administering the funds that have been placed in the trust with the children as the beneficiaries. The term of the trust must last until the children become legal adults, but exactly when you want to allow them to assume direct ownership of the assets that remain in the trust is up to you.