Between life insurance, wills and other financial tools, many parents of more meager means can also take steps to make sure their kids will be okay financially after they’re gone. And as much as families despise talking about money, the measures don’t always require a lot of work.
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 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. Many parents will be OK with estate taxes by naming their children as the beneficiaries of the policy, since the federal estate tax exemption is $5.34 million per taxpayer for 2014. On the other hand, those who are also leaving a separate estate approaching this $5.34 million limit for their children might save on federal estate taxes by 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. 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).
Create a trust. Parents and grandparents with substantial assets may consider a trust. Some families may create a revocable living trust, which wouldn’t have to go through probate and could be changed or canceled at any time. Assets are owned by the trust, which is controlled by the creator until he or she died or becomes incapacitated. The trust would subsequently pass to a successor trustee—like a child or other loved one—who then can oversee the trust and use the funds to pay bills and later to disburse the money to family members or others.
Simplify. If your family members are all “singing from the same songbook” as far as saving and finances, consider designating one child to be responsible for dividing assets among the family. Another way to do this is to set up a joint tenancy with one child—he or she can use the money to cover bills while their parent is still alive and then would be tasked with splitting up the assets after the parent passes. This approach has many pitfalls and should only be used in unique circumstances and only after a full discussion with an estate planning attorney. On the other hand, an estate planning attorney may counsel you to consider what is called “a transfer on death deed”—this passes real estate to one child when the last surviving parent dies. This transfer leaves the parents in full control until both of their deaths. But it’s important to remember that both of these arrangements can put just one individual in control of the estate after the parent dies. This can be a potential powder keg and could cause fireworks in the family if that person decides not to share what’s inherited with the others, or has creditor problems, marital problems or dies before making things right. Some parents try to avoid this by naming all of their children in the tenancy or in the transfer of death deed, however, all of the kids would have to agree on how to treat the assets. If it’s likely there might be issues, one should put detailed instructions in a will or trust.
Your estate planning attorney can answer these questions and plot a strategy that works best for you and your family.
Reference: Washington Post (November 3, 2014) "How to pass money on to your children"