Things to Think About with a New Child or Grandchild

As I am writing this blog, I am in California waiting to meet our newest grandchild from Amber and Robert. You would not know that they are first-time parents since they seem relaxed about the birthing process. They are more prepared and feel confident in what to expect from the birthing process. I am not sure if the confidence comes from them working with a Midwife and Doula or their own research. It feels that they are more prepared and relaxed than I was when my first child was born. Given that information is at their fingertips just ask your favorite search engine and you can see a list of information about birth and raising children compared to when I was going through this phase of life.

The questions they are asking me go beyond: “What grandparent name do you want to go by?” Susan and I chose those names a few years ago with the birth of our first grandchild. My grandparent’s name is Grandfather while Susan goes by Joy. The questions they are asking me are around financial topics that deal with planning for their child’s future. They want to understand what they need to do now and what they should start doing to prepare for their child’s future. Their questions inspired this blog.

Today after the birth of a child, they receive a birth certificate and social security number either in the hospital or mailed shortly after the birth. Once you have this information you can start adding the child to your stuff. I use the word stuff since it’s different depending if you’re the parent or grandparent as Susan and I are in this case.

Parents

Parents have a longer list of things to update. The list is not too long, and I am listing them in priority of completion:

1. Health Insurance – you will need to add the child to your existing policy.
   • Waiting too long to add the new child may mean a loss of coverage by your health insurance provider.
2. Will – either adding the child or getting a new Will that lists who you want to take care of the child if something happens to the parents.
   • You can name one person or split the responsibilities between a caregiver and a financial caregiver depending on the dynamic of whom you choose.
   • This task typically takes some thought and time but should be started soon after birth.
3. Life Insurance – Adding the child as a contingent beneficiary to any life insurance will be extremely beneficial to protect the tax efficiency of Life Insurance death benefit.
   • Passing life insurance to your estate just adds to your estate tax.
4. Retirement accounts – 401(k), 403(b), SEP IRA, Simple IRA, Traditional IRA, Roth IRA– updating or adding a contingent beneficiary will make sure your retirement account(s) pass directly to the child which will save on taxes compared to if it was paid directly to your estate.
   • If a retirement account is paid to the estate, it is taxed twice. Once as part of your estate and then as income to your estate (except for Roth IRA). Estate Income Tax rates are typically higher than personal income tax rates.
   • If the child is named a contingent beneficiary in the retirement account. It would be transferred to them as a Beneficiary IRA for the child. They then have 10 years to distribute the balance of the account. In a taxable retirement account, it comes out as income to the child. A Roth IRA provides non-taxable income to the child if it was non-taxable to the original owner.
5. Digital Footprint – In our current digital world should you start considering preparing your child’s future digital life. I am adding this to the list as I have experienced some families getting emails and even websites set up for their children to use in the future. As we continue to expand technological integration into our lives will this become the norm rather than the exception for children of tomorrow?

Grandparents

The grandparents have a shorter list but just as important when you consider the impact on their estate plan. There are two main themes you need to be aware of. One make sure your child (the parent) of the new grandchild is listed as per stirpes every place the parent is listed. The second is to review your Will and estate plan to make sure you are comfortable with the amount of assets the grandchild would receive. If you are not comfortable with the grandchild receiving assets, do you need to create a trust to manage the assets for them?

1. Will – Review your Will to make sure the parents are listed in the Will as per stirpes.
   • This will protect your family line as the estate will pass first to your child then your grandchild bypassing your child’s spouse.
2. Life Insurance policies– Review them to make sure the parent of the grandchild is listed per stirpes.
3. Retirement account(s) – as listed above make sure you have the parent of the grandchild listed as per-stirpes.
   • Just like the rationale for the parent, it is the same for the grandparents as well.

Saving for their Future

With the birth of a baby whether it’s a child or grandchild begins the opportunity to save for the child’s future. Do you envision them going to college or a trade school? A new birth is a great time to start saving for their future. There are two basic ways to save for the child’s future either with a UGMA/UTMA or with a 529 Plan.

The UGMA/UTMA (Uniform Gifts To Minors/Uniform Transfers To Minors) is an account opened by an adult custodian in the child’s name. In the big picture, the account becomes the property of the child at age 21 in PA. The account could generate a 1099 yearly which could result in tax reporting. Paying tax depends on the taxable events that happen in the account each year.

a. UGMA/UTMA can operate as a brokerage account. This means you control the investment selection by buying individual securities. This could be stock, bonds, mutual funds, ETFs, or even CDs, the choice is yours.
b. This type of account would pay tax at the child’s rate until you reach a threshold then it is taxed at the parents’ rate.
c. Because the custodian controls the account it could be considered part of the custodian’s estate.
d. When the child reaches age 21 (for PA) the ownership of the account gets transferred to the child.
e. The custodian controls the account, so they control its distributions which are for the benefit of the child.
f. The account is included in the FASFA (Free Application for Federal Student Aid) calculation as an asset of the child. The effect on the loan size is based on the account value with 20% of the account value used to lower the amount of financial aid offered. Based on current FASFA information, it is best to review the rules as they have changed over time.

529 Plans are designed to save for education expenses. Big picture the adult custodian opens a 529 Plan and names a beneficiary. If it is used for accredited education expenses then the funds are distributed tax-free. If not used for an accredited education expense, a 10% tax is levied to the distribution. The investment grows tax-deferred until distribution. The distribution could be tax-free.

a. A 529 Plan is sponsored by a state and uses a mutual fund company as the provider.
b. In PA you receive a small state tax deduction for funding a 529 Plan.
c. The investment choices are limited to what’s offered by the plan. Typical investment options are age-based strategies or pick-your-own allocation.
d. The custodian can change the beneficiary based on the family line.
e. You can name a contingent custodian.
f. The tax efficiency of a 529 Plan is one of its strangest benefits.
g. If the 529 Plan custodian is the parent of the child, it could be considered in the FASFA (Free Application for Federal Student Aid) calculation. FASFA calculations have been evolving on how they look at assets for applicants applying for loans.
h. If the 529 Plan’s custodian is not the parent it is not included in the FASFA calculation currently.

As grandparents Susan and I are also planning now to create family opportunities for our grandchildren. One of the benefits of being a grandparent, not the parent, is you have a different vantage point. How do you become intentional in the lives of your grandchildren? One of the fondest memories I have of my grandpa was when he picked me up on Saturday mornings to take me fishing. I was around 5 or 6 at the time and I still think about how he invested his time with me. Susan and I are looking for our own way to have an intentional impact on all our grandkids. To those grandparents who have the opportunity to interact with the next generation, what will be your lasting message to them?

This is not an all-inclusive list of what to plan for, but it does give you a good starting point. If you would like to understand how to implement these topics in your own personal situation, please contact the author, John Simkins. John is currently accepting new client relationships.

Schedule an introductory phone call with John at this link: John Simkins – Introductory Phone Call

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