How should you prepare financially for little ones joining the family?
6 Financial Tips for a Growing Family
Whether you’re expecting a baby, preparing for adoption, or already busy with children at home, it’s easy to overlook or postpone dealing with the financial aspects of a growing family.
Here are six tips to consider, sooner rather than later. If you wait, it will be even more difficult to find the time.
Parents instinctively want to provide security for their child. Estate planning strategies should be high on your to-do list. The risk of death or incapacity may be low, but the consequences are great, so having an estate plan is an important way to help protect your child. Here are six things to consider:
A will or revocable trust
A will not only provides instructions for distributing property you own, it’s also the only way to specify who would be the guardian of your children if both parents die.
A revocable living trust is an alternative way to distribute property while avoiding the probate process. It also lets you provide for continued management of trust property during your lifetime if you are incapacitated.
Wills and trusts can be simple or include complex provisions. Your attorney can help you determine whether a will or revocable trust is appropriate for you and design a document that fits your needs and objectives.
A trust for children
If you die and leave assets to a minor child, those funds will end up in a guardianship proceeding supervised by a probate court. When your child reaches the age of majority (18 in most states), all of those assets would be distributed outright. Providing that assets will go into a trust for children may be a better approach. A trust can provide a mechanism for managing assets, income, and expenses until your child is old enough to take on these responsibilities. You can specify that assets will stay in trust until a child reaches a particular age, and you can choose a trustworthy person to manage assets and provide necessary income for a child’s care. Your attorney can help you design a trust that is appropriate for your particular family situation.
A durable power of attorney
This a legal document in which you give someone authority to make financial and legal decisions on your behalf. A spouse does not automatically have the authority to act for you; and if you are not married, designating a trusted person is even more important. Even a temporary period of incapacity can create serious difficulty for a young family, so having this document in place is essential for any parent.
A durable power of attorney for health care
A power of attorney for health care authorizes someone to make medical decisions for you in the event you are unable to do so yourself. This document allows you to specify what care you want (or do not want) and choose the person who will speak on your behalf. It’s also helpful for avoiding family conflicts and possible court intervention if you cannot make your own health care decisions.
A living will
A “living will” is often included in the same document as a power of attorney for health care (although sometimes it is a separate document). A living will explains your intentions about the use of life-sustaining measures in the event of a terminal illness. It expresses what you want but does not give anyone the authority to speak for you.
Update beneficiary designations
Talk with your attorney about your primary and contingent beneficiary designations on insurance policies or other accounts such as IRAs, annuities, and employee benefit plans. Make sure they’re in line with your overall estate plan.
Insurance can play a major role in your lives when you have a growing family. Here are some ideas about how insurance can help to mitigate some of the most serious risks families face:
Insurance can help mitigate some of the most serious risks families face.
Check your health insurance coverage
If you’re welcoming a new child to your family, talk with your health plan administrator about the effective date of coverage upon birth or adoption. For pregnancy and delivery, review what is covered and what expenses you would be responsible for.
Children need regular checkups, vaccinations, and care during illnesses. Take some time to understand the maximum amounts you could be responsible for through copays and coinsurance.
Look into life insurance
How will your child be provided for if one or both parents die? Life insurance can help replace income that would be lost if a parent dies unexpectedly.
Consider long-term disability insurance
How would you replace your income if you became unable to work because of an illness, injury, or disability? There are private companies that offer supplemental coverage in addition to what your employer may provide.
Many hospitals have a process to help you apply for your child’s Social Security number.
Your child’s Social Security number will be needed to:
Receive ongoing health insurance coverage.
Contact your health plan administrator to find out if you are required to provide one within a specific time frame to maintain coverage for your child.
Obtain child-related tax benefits when filing your federal income tax return.
Overlooking this step could mean a higher tax bill.
Open a savings or investment account in your child’s name.
Many hospitals have a process to help you apply for your child’s Social Security number. Waiting a couple of months requires more documentation, and it may take longer to complete the process. Visit www.ssa.gov to learn more.
How will you pay for all the new expenses that come with having a baby or adopting a child? Planning ahead and adjusting your budget early can help you stay in control. Remember to factor in the cost of child care, medical, food, diapers, clothing and other necessities.
College may seem far away, but kids grow up fast, and the cost of college continues to increase. If you put just $50 a month into an account at a hypothetical 8% annual rate of return, in 18 years you would have more than $24,000. You can always increase your savings along the way if your financial position changes.
There are a variety of ways to save for education. Your financial advisor can work with you and your tax advisor to determine which one best suits your situation.
Whether you are married or single, having a child may entitle you to claim a dependent which could provide certain tax benefits. Some are in the form of deductions reducing your taxable income while others are credits directly reducing your taxes.
Deductions reduce your taxable income while credits directly reduce your taxes.
Single filers now claiming a dependent can file as Head-of-Household (HH). HH filing status enables you to claim a higher standard deduction reducing your taxable income.
If your employer’s benefit plan includes a Flexible Spending Account, you can allocate a portion of your pretax wages to the account, which reduces your taxable income. You can use the account for qualified dependent care expenses (like daycare costs) or for qualified medical expenses.
When deciding how much to contribute to a Flexible Spending Account, keep in mind that some employers may allow you to roll over a limited amount of an unused portion to the following year’s account balance. However, in many cases, any unused funds remaining at year-end are forfeited. In other words, you have to use it or lose it.
The Child Tax Credit lets you reduce your tax bill for each qualifying child. (This credit is reduced for high-income taxpayers.)
If you pay childcare expenses for your child who’s under age 13, you may also be eligible for the Dependent Care Credit.
For parents who adopt a child, you may be eligible for the Adoption Credit, which can help offset the significant costs of adoption.
Create a team to help
Your lawyer, tax advisor, and financial advisor can provide more information about these topics. They can help you evaluate options and explain how each can fit into your personalized plan and situation.
Create your team: lawyer, accountant, financial advisor.
Make an appointment to create or update your estate plan.
Review your budget, insurance needs, and taxes.
Start your child’s education fund.
Trust services available through banking and trust affiliates in addition to nonaffiliated companies of Wells Fargo Advisors.
Insurance products are offered through nonbank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.
Wells Fargo Advisors does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.