New Kids on the Block: Planning for Young Families
Brent Armstrong, CFP®, Wealth Management Advisor, Partner | Ryan Richardson, CFP®, Wealth Management Associate Advisor | November 15, 2018
One of the most exciting events in human life is the birth of a child or grandchild. While we can’t prepare you for the challenges of parenting, we can help with ways to get a head start on the financial and legal considerations that come with being a parent, grandparent or significant contributor to the family unit. In this month’s blog, we’ll outline some of the important steps that can be taken to promote a healthy financial future for young families.
1) Obtain Birth Certificate and Social Security Number (SSN): These documents are important and are required for some of the activities outlined below. They are typically received within a few weeks of birth and are important for enrolling in health insurance. For world travelers, getting a jump start on a US Passport or Global Entry identification as early as possible helps save stress and time before your next vacation. More information on obtaining a SSN can be found here.
2) Add your child to your health insurance: Most insurance companies will automatically cover your child for the first 30 days, but beyond that, you typically must add them to your plan. If you are a resident of California, you can find additional information here. If you are a resident of another state, take a look here.
3) Set up a will or trust: Wills and Trusts are already great tools to avoid probate and taxes, but they play an increasingly important role as the family grows. If something happens to you and your partner, the Trust will define both financial and legal guardianship for your child, and they don’t need to be the same person. For example, one party could become custodians and daily caretakers for the child, while another party could manage the finances for the child’s benefit. Trusts (such as a sprinkling trust) can also set parameters on what assets the child can access while a minor, or even as an adult as necessary. We have discussed wills and trusts in our previous blog post and the importance of each.
4) Review and change beneficiaries on your financial accounts: This is particularly important for retirement accounts where you typically name people, rather than a trust, as beneficiaries. A typical scenario would be to name your spouse/partner as the primary beneficiary, with your trust as the contingent to care for young children. We recommend checking with your advisor or estate planning attorney to see if you need to make changes to your current beneficiaries.
5) Adjust your W-4 form with your employer: The W-4 form lets you take allowances which adjust the tax withholding from your paycheck. The more allowances you take, the more take home pay you will receive. Often, children open up new tax breaks and you may not need to have as much money withheld from your paycheck as prior years. We suggest using budgeting tools like www.mint.com as a way to understand your current finances and where you might need to make changes.
6) Budget: While you may get some new tax breaks, one thing we can guarantee is that raising a child will cost money. The government recently released a report that estimates it costs $233,610 to raise a child born in 2015 to age 18 without taking into account tuition or inflation. Cost of living varies around the country and some regions may carry higher costs than others. Make sure you plan for these costs and increase your emergency fund to have at least 3-6 months’ worth of liquid living expenses.
7) Start saving for the future: 529 plan college savings accounts are one of the most popular ways to save for your child’s future. Money is gifted to the account where it grows tax-free for the purposes of education. These accounts can also be transferred to other family members. There is the option to ‘supercharge’ your 529 contribution by placing 5 years’ worth of gifts into the account. We often see grandparents looking to reduce the size of their estate utilize a supercharged 529 account for gifting. UTMA accounts are also great ways to save for a child, but keep in mind, these accounts will be considered assets of your child for college financial aid purposes. With the recent tax changes, an additional benefit is that 529 funds can be used for high school tuition. We’ve included some useful tools below to help you decide which savings account is right for you and your family.
Consider a Term Life Insurance Plan: Term life plans for younger parents can be relatively cost-effective ways to ensure that your child or partner have sufficient assets to sustain their quality of life should something happen to you. Many young families use these tools to bridge the gap from their asset accumulation years to when they have built up sufficient net worth later in life.
Considerations for grandparents: Beyond utilizing a supercharged 529 account for gifting, grandparents can utilize annual gifting to each beneficiary. For 2018, gifts of up to $15,000 can be given to each beneficiary without chipping away at lifetime gifting amounts or filing a gift tax return. In addition, gifts above the exclusion amount can also be made for tuition as long as they are made directly to the institution.
How WAM can help: We work with both parents and grandparents of young children who may be considering the planning strategies we outlined above. We welcome a time to have a dialogue about your family’s unique needs and how we can help to plan for a successful financial future.
** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.