My son, Noah, is nearly two years old. It has been an absolute joy to watch him grow up. It’s amazing to see where he is now developmentally compared to just a few months ago. Watching him change since birth is unlike anything I’ve ever experienced. I knew having a child would be special, but I wasn’t prepared for how profoundly the experience would affect me. And if what I’ve been told is true, I expect it will only get better as the months and years pass. However, looking back, there are three steps I would have taken to prepare financially for the birth of my son and my new life as a father.
Whether you are an expectant parent, thinking about having a child in the next few years or already have a young child, think through these three items and take action.
1. Buy Life Insurance and Make Sure Your Beneficiaries Are in Order
Sorting through the different insurance options available in the marketplace (universal life, whole life, variable life, etc.) can be a bewildering process. In my opinion, purchasing insurance, much like investing, should be simple and easy to understand. As I’ve written before everyone’s personal situation is unique but I believe that term life insurance is an excellent option.
But purchasing life insurance is only half the battle. An often overlooked aspect of life insurance is making sure your beneficiaries are accurately noted. For instance, most people list their spouse as the primary beneficiary and child (or children) as the contingent beneficiary (or beneficiaries) on their life insurance policy. Where this becomes problematic is in the event that you and your spouse die before your contingent beneficiary (e.g. your child or children) reach the age of majority, which is either 18 or 21 years of age, depending upon your state of residence. Until the age of majority, your child is considered a minor and cannot receive the insurance proceeds. If your child needs the money, he or she may have to go through probate, which is an expensive, time-consuming process where an estate guardian will have to be court-appointed to oversee the insurance proceeds until the child reaches the age of majority. (For related reading, see: Who Should Be Your Life Insurance Beneficiary?)
To avoid this unnecessary complication, you can designate that the insurance proceeds be paid to an adult custodian for the benefit of the minor child to be held in a Uniform Transfers to Minors Act (UTMA) account. By creating a UTMA account and listing it as the contingent beneficiary on your insurance policy, you place a trusted relative (or friend) in charge of the insurance proceeds. Please be aware, however, that a UTMA is not customizable like a trust, meaning that once your child obtains the age of majority the insurance proceeds are his or hers to manage. Some parents might not feel their child is capable of responsibly managing the financial windfall an insurance policy provides at such a young age. They may therefore opt to establish a trust which, along with being able to be extended beyond the age of majority, provides the opportunity to engage in more detailed planning. It is important to note, however, that a trust, while providing more flexibility than a UTMA, can be costly to establish, whereas a UTMA is more cost-effective and easier to create.
2. Designate Customized Beneficiaries on Your Retirement Accounts
If you have individual retirement account (IRA), you’ve most likely placed your spouse as the primary beneficiary and child as the contingent beneficiary. Similarly to life insurance proceeds, a minor cannot inherit an IRA in his or her name. It is therefore important to take an additional step and arrange for an adult to manage the money in the event that you and your spouse pass away while your child is under the age of majority. In order to do so, contact your financial institution and ask to establish a trusted relative or friend as a custodian on your IRA accounts.
Your financial institution may require you to complete a beneficiary designation form, and it is a good idea to be as specific as possible in your instructions (e.g. list the custodian’s Social Security number, first, middle and last names, as well as date of birth), to obtain written acknowledgement of your designation from your financial institution, and to keep a copy of the acknowledgement with your will. If you and your spouse die without setting up clear instructions about the custodianship, your IRA will most likely go to probate and will be at the mercy of a judge who will try and interpret what he thought you meant. If your financial institution won’t cooperate, you should move your account elsewhere. (For related reading, see: Designating a Minor as an IRA Beneficiary.)
3. Revisit Your Investment Accounts
Finally, either before or soon after your child is born, it is a great idea to sit down with a financial advisor and evaluate where you stand. Revisit where you currently are and where you would like to be. For instance, have you set up a college savings plan? Do you need to adjust contributions to your 401(k) plan? How about paying for childcare? Have you put enough money aside to buy a house if you’d like to? Discussing these questions is critical to making sure you have a plan to reach your goals.
This is a lot. I know. And if you are feeling overwhelmed, that is completely normal. Taking care of one of these items is a huge accomplishment. Much like preparing for a family or raising a child, it is the incremental progress that matters.
(For more from this author, see: Financial Planning: Preparing for the Unexpected.)
Disclosure: Securities and Advisory Services offered through Commonwealth Financial Network, Member FINRA/SIPC. Clearfront Advisory LLC. 157 Columbus Ave., Suite 436 New York, NY 10023. 646-779-9811.This communication is strictly intended for individual residing in the states of GA, IN, NJ and NY. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.