Planning for Your Child’s Future: Five Steps for Everyday Parents

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How can parents provide security for their children’s future, financially and otherwise?  That’s the top question I hear from estate planning clients.  Fortunately, it does not take a plump trust fund.  Here are five essential steps for parents.

Get Life Insurance

If your family relies on your income, then you need life insurance.  Aim to get enough coverage to replace your income through your children’s minor years, to pay off debts, and to cover college.  Also consider getting coverage on a non-working parent’s life to cover the cost of increased childcare expenses.

For most families, term life insurance is a sufficient and affordable option.  You can obtain quotes from an insurance company or financial advisor, but if you don’t have specialized insurance needs or otherwise need hand-holding then a convenient option is an online platform like PolicyGenius or Haven Life.

Plan for College

Saving for college starts first and foremost with your family’s financial health.  If you carry credit card debt, overspend, or are simply unaware of your progress toward your financial goals, you’ll have trouble effectively saving for college.  Consider engaging a financial adviser for a holistic review of your finances and financial goals. (The XY Planning Network is a good place to find a fee-only financial advisor.)

Consider placing college savings in a 529 plan, which is a state-sponsored, tax-advantaged vehicle designed for education savings.  (New York’s 529 plan is here.)  You can contribute $15,000 per year ($30,000 per couple) for each child without gift-tax consequences, and the funds grow tax-free.  New York residents also receive up to $5,000 in income tax deductions ($10,000 per couple) each year. However, it’s generally more tax-efficient (and a good idea) to contribute first to your retirement accounts, such as your 401(k), IRA, and Roth IRA.   Don’t worry if you can’t contribute right away to your children’s 529 plans, as you can make a one-time catch-up contribution of $75,000 for each child ($150,000 per couple).

Put Wills in Place

In New York, every parent of a minor child should have a Will, as the default inheritance rules can result in some messy situations.  Mistakes in the world of estate planning can be disastrous, so consider engaging an estate planning attorney.

If you have minor children, there are two essential items your Will should contain:

Designation of guardians: Ensure your Will designates a guardian or co-guardians (along with backup options) to care for your minor children in the event you’re not around.  Otherwise, a court will pick someone, which may not reflect your wishes and can create family conflict at the very worst time.

Testamentary trusts: Your Will should not leave money directly to your minor children.  In New York, assets left to a minor must be managed by a court-appointed guardian under court supervision until the child is 18 — a burdensome and often expensive arrangement.  Even worse, upon turning 18 the child will receive all assets outright. Including life insurance proceeds, this could be a sizable sum, and history is replete with young heirs blowing their fortune (and worse).  The solution is to include in your Will a testamentary trust (i.e., a trust created only upon death), managed by a trusted family member or other individual, which will support your minor children and pay out responsibly over time.

Designate a Standby Guardian

Several states (including New York) have standby guardianship laws under which parents can designate a guardian to step in on a temporary basis in the event of illness, incapacity, or death.  This fills in the gaps left by a Will’s designation of guardians (which takes effect only after probate) and eliminates confusion and uncertainty over who should step in to care for your child.

A standard New York form to designate a standby guardian is available here.  Provide a copy to your designee so they are prepared to step in if and when necessary.

Reconsider Family Wealth

The traditional goal for estate planning — and a given for most parents — is to preserve family wealth and transfer as much as possible to future generations.  But more money is not always better.  Research suggests that inherited family wealth can hinder children’s development of self-reliance, societal productivity, and even their identity.

Examine your values and consider how best to use family wealth to holistically benefit your children.  This may involve a combination of charitable giving, living below your means, or modeling healthy financial behaviors.  Regardless of where you come out, your children will benefit from your thoughtful approach to your money and your family.