This article will ... Identify the most important estate planning documents your adult children should have. Outline the protection and advantages life insurance can offer to young adults starting out in their careers. Suggest ways to broach the financial conversation with your adult kids.

We encourage our kids to spend and save wisely when they’re young, habits that (we hope) set them up for a lifetime of sound decision-making. But our ability to impart financial wisdom doesn’t end when they leave the nest.

Parents can continue to support their adult children's financial well-being by encouraging them to get their estate planning ducks in a row — especially as they begin building a family of their own. Young adults, who are, alas, not as invincible as they think, also often need prompting to review their insurance coverage, including disability income insurance and life insurance, to protect themselves and the ones they love.

“One of the critical things that parents can do is to help guide their adult children toward completing some of the basic financial planning strategies, including proper estate planning,” said Brock Jolly, a partner with Veritas Financial in Tysons Corner, Virginia. “Passing along good financial habits to our children is vitally important to continuing good financial stewardship and relationships with money and all aspects of financial planning — investments, insurance, tax, legal, etc.”

Building awareness

Americans of all ages are notoriously remiss when it comes to estate planning, in part because our own mortality is difficult to contemplate. Some also believe that their net worth isn’t large enough to bother, failing to realize that their home, retirement accounts, and investment accounts may be more valuable than they think.

Just 33 percent of Americans have a will or living trust in place, according to a 2022 survey by Caring.com.

But awareness of the importance of estate planning has started to shift since the COVID-19 pandemic, even among younger adults. The Caring.com survey found that the number of 18- to 34-year-olds with estate planning documents in place has increased an impressive 50 percent since 2019. (Learn more: What is estate planning and who needs it?)

Some of that is prompted by parents who wish to help their children protect the assets they have and will one day inherit.

“Consider the amount of wealth that will be transferred to millennials and Gen Zers — it’s staggering,” said Laurie Madenfort, a financial professional with Coastal Wealth in Ft. Lauderdale, Florida. “An estate plan or a holistic financial plan has to be considered.”

Without a plan, she said, it can all be lost to taxes, creditors, or unintentional beneficiaries.

Estate planning document checklist

Depending on their financial assets, their marital status, and any dependents they may have, young adults should consider having:

A will.
A medical power of attorney.
A guardian for their children.
A health care directive.

“When you consider that our lives and circumstances can change in an instant, we don’t have time to waste,” said Madenfort, who prefers the term “holistic plan” to “estate plan.” “Car accidents, breast cancer, finances, etc., change future plans and dreams just like that. Having the documents needed provides that peace of mind at the exact moment you need it.”

Will

Estate planning often begins with a last will and testament, a legal document that states who you wish to receive your assets and, if you have young children, who you want to become their guardians if you should pass away. It also names an executor, the person you select to carry out your wishes.

A basic will is easy and inexpensive to create, in many cases costing just a few hundred dollars to complete. (Related: Wills and the basics of estate planning)

Even if your adult children are unmarried or don’t have kids, there are still good reasons for them to draft a will.

For starters, it can ensure that their assets would be used to pay off student or car loans (so any co-signers don’t get stuck with the bill). (Related: What happens to your student loans if you die?)

It could also name specific charities to which they would like to donate a portion of their assets, which is a growing priority among socially conscious millennials and Gen Zers.

Finally, a will can provide instructions for the care of their pets and designate a trusted friend or family member to manage their digital accounts. According to a 2021 TrustWills survey of millennials who have a will:¹

78 percent of pet parents appointed a pet guardian.
100 percent appointed a digital executor to handle their online affairs and accounts, including their social media pages.

Living will

All adults should also have a living will, also called an advanced health care directive, which details their wishes for end-of-life decision-making if they are incapacitated, including palliative care and artificial resuscitation. It’s a gift you leave to your loved ones.

Absent clear instructions on whether you would prefer life-sustaining treatment or palliative care, for example, your family members would be forced to guess at what you might have wanted at a stressful time, which can lead to family infighting.

HIPAA form

Every adult also needs a Health Insurance Portability and Accountability Act (HIPAA) privacy release form, which gives their medical team permission to disclose their private health information with the people they name so that they can help make informed decisions, if needed. (Learn more: 4 legal forms you need when your child turns 18)

Powers of attorney

A power of attorney document designates the individual you trust most to make decisions for you if are no longer able to do so for yourself.

A health care power of attorney (also called a durable power of ttorney) authorizes someone to make medical decisions on your behalf in the event that you become cognitively impaired or incapacitated.

A financial power of attorney authorizes an individual to manage your financial affairs if you cannot, including paying your bills, filing your taxes, buying and selling insurance policies, investing your money in stocks, and signing real estate closing documents.

Both documents are critical to ensure that your wishes are carried out no matter what may come to pass.

A living trust

Not everyone needs a living trust, but many with a home and/or children elect to have one as it can simplify the transfer of assets if they should pass away.

When you create a trust and place assets into it, such as your home, those assets become the legal property of the trust. As such, when you die, they do not have to go through probate, a lengthy and potentially costly court proceeding. They would pass directly to your heirs without delay.

The other benefit of creating a trust is that the details of your living trust, including the assets held and the beneficiaries you name, are not public record — they remain private. But trusts can also be complex, requiring legal expertise. And they can be costly to create. It’s wise to consult a legal professional for guidance on whether a trust might make sense for you. (Learn more: Wealth management: Is setting up a trust right for you?)

Life insurance and disability income insurance

As part of their holistic financial plan, young adults must also protect themselves with adequate insurance coverage.

Beyond basic home, health, and auto insurance, financial professionals recommend that anyone producing an income consider life insurance to provide for their loved ones if they should pass away prematurely. (Related: Single? 3 reasons why you might still need life insurance)

The purchase of individual life insurance may seem superfluous, especially for young adults with group term coverage at work, but there’s good reason to consider it.

For starters, life insurance is less expensive when they are young and healthy, so they can lock in a lower premium. An individual life insurance policy is also theirs to keep, as long as they pay their premiums, whereas group term life insurance provided by an employer typically terminates when they leave their job. (Learn more: Is group life insurance enough?)

Group term life insurance has some other important limitations to consider:

It may not provide enough coverage to protect their loved ones.
It generally only pays out a death benefit if the policyowner passes while employed.
It does not accumulate cash value.

When purchasing individual life insurance coverage, many younger policyowners start with term life insurance because it offers the biggest potential death benefit for the lowest price. They later add a permanent or whole, life insurance policy as their income allows and their financial responsibilities grow, in some cases converting their term policy to a permanent life policy where possible. (Calculator: How much life insurance do I need?)

Permanent life insurance, including whole life and universal life, has higher monthly premiums, but also provides a guaranteed death benefit to your heirs, as long as you continue to make your premium payments. It also has the potential to accumulate cash value that can help supplement retirement savings during your lifetime. (Learn more: Treat cash value with care)

“If you consider all the insurance we are required to have on our cars, homes, etc., doesn’t it make sense to insure our income and our lifestyles?” said Madenfort. “Life insurance coverage provides instant liquidity at the exact time that it’s needed. That infusion of cash allows a person to grieve and gives them time to make decisions. It’s important for younger adults, especially those with assets, to understand the importance of insurance during life and death.”

Disability income insurance

For most younger workers, their earnings potential is their greatest asset. Disability income insurance can help protect it. (Calculator: How much disability income insurance do I need?)

According to the Social Security Administration, 1 in 4 20-year-olds will become either temporarily or permanently disabled before they reach age 67.² (Learn more: Is disability income insurance worth it?)

Many assume that only a catastrophic injury or illness could take them out of work long term, but the most common disability claims stem from musculoskeletal disorders (including arthritis and back pain), cancer, injuries such as fractures and sprains, mental health issues, and circulatory issues (heart attack, stroke).[3]

Conversation starters

When initiating conversations with your adult child about protecting their financial future, it is important not to be heavy-handed. So …

Don’t talk at them.
Talk with them.

They are adults after all.

Discuss the wins and losses you have experienced on your own financial journey. And share stories of others (leaving names out as appropriate) who may have been caught financially unprepared.

Remember that you need not have all the answers. In fact, it may work best to refer your child to a neutral third party, a financial professional, who can help get their assets organized.

“It is important to have conversations around money — both the positives and the negatives,” said Jolly. “Discuss successes and failures and lessons that parents have learned over the years. Ask questions that elicit great conversations. Talk about why they decided to develop good planning habits or strategies.”

Discover more from MassMutual…

This holiday season, talk estate planning

Term vs. permanent life insurance: 3 considerations

Need a financial professional? Let us know

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