Planning For Children

One of the greatest joys I’ve personally been able to experience in life is being a father. My daughter is now 2 years old and my wife and I have another girl coming in March of 2021. The experience has come full circle as I’m now looking back at my childhood and really starting to understand lessons that were once drilled into my brain by my parents. Being a dad thus far has truly been one of my favorite experiences in life and it’s extremely humbling.

Now, with having kids comes a major shift in finances for any family. First, there’s the immediate and obvious new expenses that nearly every family can expect. These can include medical bills, diapers, wipes, childcare, toys, diapers, wipes, clothes, diapers, wipes, medicine, diapers, and wipes. Did I mention diapers and wipes? That in and of itself is certainly an adjustment, especially if it’s the first kid. But beyond that, there are many other planning and saving items to consider for your children that you can start on from the day they’re born:

 

Life Insurance – Chances are, life insurance on children is unlikely to be used. However, if you don’t have quite the cash reserve that you’d like, term insurance on a child can be worth the small expense. If the new child is healthy, adding a child rider of a few thousand dollars on the parent’s term policy can be extremely inexpensive and worth the small cost. If something does end up happening, extra expenses are covered with this kind of policy.

529 Plan – Today, this is one of the most popular venues to save for college and higher education. Each 529 plan is state sponsored; meaning, each state has their own 529 plan due to certain tax benefits you get for contributing depending on where you live. In Tennessee, we do not have a state income tax, so you don’t get a state tax deduction for contributing to a 529 plan. However, other states have tax deductions for contributing to your state’s 529 plan, so it’s worth the research!

A 529 plan enables you to save for your child’s higher education and reap benefits of tax-free capital gains. If you save money for your child, invest it in the market, and then take all the money out 15-20 years from now to pay for their qualified higher education expenses, it’s all tax-free, even the capital gains! This can be a great gift to your children to help minimize the burden of student loans. If you end up having money leftover in the 529 account that was not used, you can either transfer the account to another beneficiary tax- and penalty- free or you can take the money out and just pay taxes and a 10% penalty on the gains.

UTMA – This acronym stands for “Uniform Transfers to Minors Act”. An UTMA account is a standard brokerage account in the name of the child but with a parent as the custodian and decision maker of the account. There’s no special tax benefit here, it just allows a child to have a brokerage account and place savings here to invest. The purpose of the account is infinite, just like a regular brokerage account. Throughout the years, taxes on dividends and capital gains must be reported and paid. Once the child reaches the age of majority (different in each state, but around 21), it by law becomes their own property and they have full authority over the account. The only restriction is that once money goes into this account, it becomes legal property of the child. So, if money is pulled out, it has to be used for their benefit.

Personally, I’m using an UTMA account for my daughter to place monetary gifts family and friends give her. I have a log I’m keeping of all the people who have given into this account and I plan to share it with her one day to show who all has made this account possible. However, the possibilities are endless with this account.

Brokerage account – Lastly, a plain taxable brokerage account. For some parents, you might not know if you want to open up an UTMA and allow free access to that account once your child reaches the age of majority. Or for some, higher education may not be as high or a priority and saving into a 529 plan isn’t the right path to go either. So, where else can you save?

One of the easiest things you can do is place money in a taxable brokerage account in the parent’s name and bookmark it for your kid. Now, this is more of a mental-accounting type of saving versus actually placing money in the name of a child. I’ve seen many clients and friends open up new brokerage accounts and put money in them all for the purpose of being for the child. It could be for a vehicle, college, down payment on a first home, or anything. There’s no tax benefit since taxes will continue to be paid on dividends and capital gains each year. So, all it does is mentally set aside funds for the benefit of your child without having to commit to a 529 account or an UTMA.

 

At the end of the day, regardless of how you choose to save for a child or niece/nephew, the more important thing is that you put one foot down and start. The benefits of giving and saving for others will far-outreach the lives of our own. Saving and giving to others (especially family) can setup a path of success and further giving that is passed down from generation to generation. Treasure the new life that you have and let our team know what we can do to help guide you through these decisions.

 

This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk regardless of the strategy selected

Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan.  Such benefits include financial aid, scholarship funds, and protection from creditors. Favorable state tax treatment for investing in Section 529 college savings plans may be limited to investments made in plans offered by your home state. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.

Life insurance policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased.  As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Riders and additional features may be available at an additional cost. Consult the policy for benefits, riders, limitations, and exclusions Guarantees are based on the claims paying ability of the insurance company.