Preparing for a baby can be an exhilarating time for parents and grandparents. When it comes to planning for a baby, often the focus is on spending wisely for short-term needs such as buying cribs or choosing adjustable car seats. But they should also make sure they have current estate and investment plans for the short and long term.
“Estate and investment planning may not be at the top of your mind, but things like having a will and life insurance become really important once you have a family,” says John F. Padberg, Planning & Life Events Specialist with Wells Fargo Advisors. He recommends that parents and grandparents consider these five important steps.
1. Write or update your will
A will is more than just a way to spell out how your property should be distributed once you’re gone, Padberg says. It is an essential tool to help make sure your child will be looked after as you wish if something should happen to you. A will is also important to put a comprehensive estate plan together. (Learn more about documents that can create the foundation of your estate plan in “Your Estate-Planning Checklist: 10 Documents to Get Started.”)
You should also: Name a guardian to care for your child. Many people nominate a family member, but the choice is yours. Most important is that you choose individuals who share your values and would care for your child the way you would want, Padberg says. (Learn more about the role a guardian plays.)
2. Consider creating a trust
A trust can give you ongoing control over how and when your assets will be managed and distributed to your child. This can be especially helpful if you and your spouse die before the child becomes an adult. “If you don’t have a trust and you leave your assets outright to your minor children, then generally everything gets turned over to them at the age of majority, age 18 in most states,” Padberg says. A trust gives you the option to parcel out the inheritance on the timetable and in amounts you select so your child will be older and hopefully better-positioned to receive full access to those assets.
You should also: Choose someone who is money savvy to serve as trustee and manage the trust, Padberg says (it can be someone other than your child’s caretaker). Then, work with a knowledgeable estate lawyer to customize the trust based on your objectives for your child or children.
3. Buy or review life insurance
You should explore taking out a policy on each parent, even if one is not earning income, Padberg says. The nonearning spouse may be providing childcare and doing other tasks that would have to be covered if he or she died. Grandparents should also consider increasing their life insurance if they are primary childcare providers.
You should also: Consider disability insurance, Padberg says. It covers income-earning individuals if they become sick or injured and cannot work.
4. Meet with a tax advisor
Having a child can dramatically, and positively, change your tax situation, Padberg says. A tax advisor can help you determine if you are eligible for the Child Tax Credit, the Child & Dependent Care Credit, or other credits and deductions. Once you know your projected tax liability, you should review your withholding and update your W-4, if needed.
You should also: Consider tax-advantaged accounts your employer offers, such as a Dependent Care Flexible Spending Account. It’s tax-advantaged, and you can use it to pay for eligible dependent childcare services such as preschool, summer day camp, or school programs.
5. Start saving for education
Even if college is almost two decades from now, the sooner you start saving, the more time the money will have to potentially grow and compound. A 529 plan is a good option, Padberg says, because it gives your savings the possibility to grow tax-deferred and the money comes out tax-free, as long as you spend it on qualified education expenses. “You don’t have to put in thousands of dollars every month to start,” Padberg says. “Put in what you can so you get in the habit of saving consistently.” For more details, see “Changes to 529 Plans and Other Tax Reforms for Education Savings.”
You should also: Keep in mind you can spend the money in a 529 plan on private K–12 school tuition, too, which can be great motivation to save.