Parents work hard to provide for their children while they are in the home ... and help them from time to time eveb after they are all grown up. It is just what parents do.
The Washington Post recently discussed practical strategies for such financial security in an article titled "How to pass money on to your children."
Here are pointers offered up by The Post:
Buy life insurance. Life insurance is designed to ensure that your family will be okay, even when you are not. However, some parents fail to properly calculate the appropriate death benefit amount needed when they apply for their policies. Consequently, their families can have a rough time with mortgage payments, college costs, food, and other expenses if they shoot too low.
When applying for life insurance you should estimate how much your children would need to cover essential expenses until they reach adulthood. Many parents will be OK with estate taxes by owning their policies directly, even though the death benefits are counted as part of their estates. Why? 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 their life insurance policies into irrevocable life insurance trusts (also known as an ILITs). This is a legal arrangement whereby the insurance proceeds are held in a specially-created and operated trust agreement that is NOT counted as part of a parent's estate.
While you are at it, consider designating each child as a “co-trustee” over their own inheritance (if held in a properly designed trust) after reaching a certain age . Doing so can place the inheritance beyond the reach of their own creditors. For example, their inheritance would not be in jeopardy were they to have future marital problems.
Open a 529 account. This type of special savings account for educational purposes allows money to grow 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 are 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 is all you can contribute to it or gift otherwise to the donee 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 will not have to go through probate and can be changed or canceled at any time. Assets are owned by the trust, which is controlled by the creator of the trust until he or she dies or becomes incapacitated. At that point the trust management passes to a successor trustee—like a child or other loved one—who then can oversee the trust and use the trust assets to pay bills and later disburse the assets 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. Although subject to forseeable and unforseeable risks, some parents set up their assets in a joint tenancy arrangement with one child who can use the money to cover bills while at least one parent is alive and then later can divide up the assets when the last parent passes. Joint tenancy has many risks 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. As with joint tenancy, it is 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 he or she inherits 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 is 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.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: Washington Post (November 3, 2014) "How to pass money on to your children"