This is the first of two blogs (today and tomorrow) on this important topic. I hope you find it helpful.
The Washington Post recently discussed practical strategies for financial security in an article titled "How to pass money on to your children."
Buy life insurance. Life insurance is designed to ensure that your young family will be okay. However, some parents fail to calculate properly when they buy policies. As a result, their families can have a rough time with mortgage payments, college costs, food, and other expenses. You should estimate how much your children would need to cover those expenses until they reach adulthood. The prospect of having to pay any estate taxes on life insurance is unlikely given the current threshold: $5.34 million per taxpayer but many do not realize that naming a minor child as a beneficiary of a life insurance policy can be a terrible idea. In Virginia, the court will demand that a conservator for the child be appointed and a court administered trust be established for those insurance proceeds. While this is not a bad idea, a better plan would be a trust in which the parent has appointed the trustees and have set the rules of distributions from the trust. On the other hand, if you still have a life insurance policy after retirement and plan on leaving the proceeds to your adult children putting the life insurance policy into an irrevocable life insurance trust, where the insurance proceeds would go into the trust and would not be counted as part of the parent’s estates might be a consideration. Another consideration is to designate each child as a “co-trustee” after reaching a certain age, so their inheritance held in a properly designed trust would also be beyond the reach of creditors and wouldn’t have to be split with a spouse if the child gets divorced.
Open a 529 account. In this type of savings account money grows tax free until you use it for college. Parents or grandparents can contribute up to $14,000 annually for each child ($28,000 a year per couple) before there’s any gift taxes imposed on the donor. Another great feature on these 529s is that they can be “front-loaded” for up to five years’ worth of contributions all at once (but that’s all you can contribute for the next five years).
You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.
Reference: Washington Post (November 3, 2014) "How to pass money on to your children"