Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
New To Parenthood? Don’t Miss This Planning Opportunity
Published Date : August 27, 2015
When a young family adds a new member, the first few months are laden with a host of complications and new adjustments. But when the dust settles (and the baby is sleeping through the night), there are a few key areas you can address to provide financially for your family today and in the future. The birth of a child is a timely reminder to review your estate plan and financial goals to ensure you are taking full advantage of wealth transfer opportunities. Below is the shortlist of areas to review:
Update Your Estate Plan and Review Wealth Transfer Strategies
Most likely you already have an Estate Plan in place, but you must remember to amend the language of your Living Trust to include your new child as a beneficiary and provide guardianship instructions in the event of your death. If you have significant wealth (above the basic exclusion limit of $5,430,000 in 2015, or $10,860,000 if married), a new child provides an opportunity for wealth transfer. Explore options such as a Grantor Retained Trust (GRAT or GRUT), Family Limited Partnership, or Generation Skipping Trust. Each of these vehicles must satisfy specific requirements from a taxation standpoint, so speak with your Wealth Manager to evaluate their appropriateness. The IRS Section 7520 Interest Rate (also known as “Hurdle Rate”) is still at an historic low, so reviewing your estate plan now may afford you more options in restructuring your plan. For additional information on these topics, see Estate Planning Basics and GRATS Are Great.
Obtain or Update Life Insurance
In the event of your untimely death, it is important to put mechanisms in place today to protect and care for your family. Term Life insurance provides a death benefit (income tax free) to the named beneficiaries if the insured dies during the policy period. Proceeds can pay off your mortgage or other debt, and can also be used to replace the earned income lost at your death, affording your surviving partner the means to support your family without entering the workforce or tapping into other assets.
Obtaining insurance is important, but ensuring the payout is transferred to the appropriate beneficiaries is just as essential. The insured typically names their spouse or partner as the primary beneficiary. In the event of your simultaneous death, the secondary beneficiary is often your trust, or another wealth transfer vehicle. An appropriate beneficiary designation in combination with an up-to-date estate plan is paramount to ensuring the death benefit is distributed to your remainder beneficiaries.
As with any major life event, the birth a child should serve as a reminder to review your current insurance coverage and beneficiary designation. For more detailed information on Term Life insurance, see my article Understanding Term Life Insurance.
Strategize Around Education Planning
Saving for college is often a top-of-mind issue for new parents, and with the ballooning cost of higher education, this attention is warranted. However, it is important to first think through the various savings vehicles available for minors, and specifically consider each of their limitations.
529 Plans are a fantastic way to save for college in a tax-free manner. Similar to a 401(k) or IRA, 529 funds are allowed to grow over time sheltered from taxes. But unlike a retirement plan, if the funds are withdrawn to pay for qualified higher education expenses (tuition, fees, books and supplies), that withdrawal is tax-free. If your child does not end up attending college, the beneficiary can be changed to any family member, even yourself. It is important to note that the funds from a 529 plan cannot be used to pay for private primary or secondary school education, which can be a major limitation to this option. For information on a hybrid option, called a Custodial 529 Plan, I invite you to read Are You Optimizing Your Child’s Custodial Account?
Many parents want to save for higher education costs while also providing assistance with their child’s other life expenses, such as their first home purchase. With these varying goals in mind, a Custodial Account (UTMA/UGMA) may be the better option. The funds must be used for the benefit of the child, and when the child reaches age of majority (18 or 21 depending on the state), they have the ability to take full control (by removing you as custodian and converting the account into an individual account in their name). Custodial accounts are a great option to pay for all levels of education, but keep in mind, the child is liable for any investment earnings and capital gains tax associated with selling assets to pay for expenses.
For more information on how to strategize around 529 Plans and Custodial Accounts, see Gift Ideas. This article also discusses how grandparents can make tuition payments directly to the school (for all levels of education), avoiding the reduction of their annual gift exclusion. This is a great option for family members to reduce their taxable estate outside of their standard annual gift.
Take Advantage of Tax Breaks
With the projected cost of raising a child now in the quarter million dollar range,1 reducing your annual tax liability is one way to soften the blow. There are a few tax exemptions and credits available, but eligibility does phase out for higher income earners.
- Even if your child is born on December 31st, you can file for an additional dependency exemption in that year ($4,000 for 2015).2 This exemption begins to phase out when Adjusted Gross Income (AGI) reaches $309,900 for joint filers and $258,250 for single filers in 2015.
- The IRS allows a $1,000 Child Tax Credit,3 but eligibility begins to phase out when income levels reach $110,000 for joint filers and $75,000 for single or head of household filers.
- If you have adopted a child, there is an adoption credit available of up to $13,400 (for 2014 adoptions, phasing out for taxpayers with Modified AGI starting at $201,010).4
Becoming a new parent is an incredibly rewarding experience that should be enjoyed and cherished. When the baby is finally asleep, take the time to plan and execute these to-do’s so you and your partner can enjoy these precious moments with peace of mind. Life does not always go as planned, so give your loved ones the best opportunity to succeed and thrive. There are pros and cons to every planning strategy and wealth transfer vehicle, and I encourage you talk to your Wealth Manager to see what works best for your family’s needs.
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