Life Changes

Baby on Board: A Financial Checklist for Parents and Grandparents

These four actions should be at the top of your financial to-do list when you have a new child or grandchild.

by Suzanne Bopp - October 01, 2018

The arrival of a new baby is a cause for celebration, joy, wonder—and, most likely, a few worries and anxieties. Whether you’re a new grandparent or a first-time parent, here are four important steps to take to help protect the child’s financial future.

1. Review (or create) your estate plan

“If you don’t have a will, create one—and/or a trust, as well as other estate-planning documents, such as medical directives and powers of attorney,” says Kirk Pacatte, Planning and Life Events Specialist at Wells Fargo Advisors. Individual situations vary, but creating a will is often a simpler and less expensive option, while a revocable trust offers the advantage of avoiding probate.

This step is especially important for parents, even if they do have an existing estate plan. “You will need to update the documents now that you have a direct heir. What vehicles do you have in place to provide for them in case of both parents’ untimely deaths? Have you named a guardian?”

In reviewing estate plans, Pacatte suggests new grandparents and parents consider questions such as: Do you want to change the way assets are funded or utilized upon your passing? Do you want to set up any vehicles to provide for the health, maintenance, or support of the child? “New grandparents may have all their assets being passed to their children; they may want to carve a certain amount out specifically for the grandchild,” he says.

2. Start saving for education

New grandparents and parents can offset future education expenses through contributions to a 529 plan, a tax-advantaged savings vehicle specifically for the education of a beneficiary. Every state sponsors at least one 529 plan; contributing to one now will give the investments more time to potentially grow. (See “Changes to 529 Plans and Other Tax Reforms for Education Savings” for recent updates to these plans.)

Another option is a Coverdell Education Savings Account, for those who meet the requirements, Pacatte says. These have modified adjusted gross income limits, and contributions are limited to $2,000 per year per beneficiary. While the 529 is administered by the state, a Coverdell account custodian directs how its funds are invested. “You have more investment choices in a Coverdell, but the 529 is more popular because the contribution limits are greater.”

To establish a fund that could be used for education but is not limited to that purpose, you could also choose a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) account, managed by an appointed custodian. When the child reaches the age of majority in their state, the assets become theirs. Consult your accountant to understand the taxability of income within a UTMA or UGMA.

3. Review your insurance coverage

New parents need to add the baby to their health insurance coverage. Many plans require that it be done within 31 days after the birth.

Next, review your life and disability insurance coverage, Pacatte says. “Are they sufficient to meet the needs in the event of your death or if you become disabled? Do your beneficiaries need to be changed?” It’s more crucial for parents than grandparents to look at replacement of income to provide for the child, he notes.

Some experts advise that you change your coverage amount to at least 10 times your annual income, and don’t overlook coverage for a stay-at-home parent—in their absence, household expenses would likely increase.

4. Create a strategy for gifting

An effective gifting strategy can benefit both the giver and the child, Pacatte says; periodic gifting may be a simple, effective way to reduce potential estate tax liability.

There are many ways to gift, which is why it’s best to take a strategic approach. “Gifting Strategies to Help Pass on Wealth” details five such approaches that new grandparents and parents can consider, from an irrevocable gifting trust to the transfer of ownership of investments.

Suzanne Bopp has written for USA Today and National Geographic Traveler.

Image by iStock

Additional Resources

Learn how you can prepare for the unexpected.

Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.

Trust services available through banking and trust affiliates in addition to non-affiliated companies of Wells Fargo Advisors. Wells Fargo Advisors and its affiliates do not provide legal or tax advice. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.

Insurance products are available through non-bank insurance agency affiliates of Wells Fargo & Company and underwritten by non-affiliated Insurance Companies. Not available in all states.