by Nate Putnam, CFP®
Vice President
Portfolio and Wealth Management West Bearing Investments
With the addition of a new family member, we are often asked what further steps should be taken, and what should be done to prepare. In the same way you prepare the nursery or child’s room, there are financial considerations worthy of attention.
Gifting and Education Planning
If gifting to children or grandchildren is important and part of your planning, it’s important to know that individuals can give a certain amount of money each year to as many individuals as they would like without estate or gift tax implications. In 2023, that limit is $17,000 per person, and spouses can combine their limits and give $34,000.
When gifting to the next generation, you should consider whether you want them to access the funds only for specific purposes, such as education, or more broadly for other life goals, such as a first-time home purchase or wedding.
For education savings, a 529 plan is a tax-efficient vehicle that can provide tax-free growth, and if used for a qualifying expense, tax-free distributions. Additionally, a special rule allows individuals to give five times the annual gift limit in a single year to a 529 plan. In 2023, five times $17,000, or $85,000, can be gifted to “superfund” a 529 college savings account. A couple can double that and give up to $170,000 in a single year to a 529 account using this strategy.
On the other hand, if your goal is for the child to access the funds for general use, a Uniform Transfer to Minors Act (UTMA) account or a Uniform Gift to Minors Act (UGMA) account may be a good choice. With such accounts, a custodian is named to oversee the assets while the child is a minor. Once they reach the age of majority, the child is then given control of the account and can spend the funds how they see fit.
A trust is a more complex arrangement, but, if needed, can be used to create a structure that has more customization around not only when funds can be used, but also what they can be used towards. Trusts require the oversight of a trustee to manage the assets and distributions for the benefit of the child.
Legal Documents
With a little one to provide for, it is imperative to put the appropriate legal documentation in place. The process of updating, creating, or reviewing your current will and trust planning should include naming a potential future guardian for your child in the event of the parent(s) passing. When deciding who is the best choice to name as guardian, some questions to consider are:
Who might be physically capable as a guardian?
Is the potential guardian prepared to make financial decisions?
Does the potential guardian already have children?
Would your child be moving to a new location or part of the country / world?
Dependent Care Flexible Spending Accounts (FSA)
A dependent care FSA can be a helpful way to reduce taxes for you and your family. A dependent care FSA is an employer-sponsored account where you deposit pre-tax dollars from your paycheck to pay for dependent care expenses. This in turn lowers your taxable income. You can then use the money in the FSA to pay for qualified expenses such as daycare.
Expand Insurance Coverage
How you get insurance coverage for your newborn baby can depend on a variety of circumstances. If you don’t currently have health insurance, the birth of your baby qualifies you for a special enrollment period. During this time, you can enroll or change marketplace coverage. If you have marketplace coverage already in place at the time of the baby’s birth, you can add your baby to your current plan, depending on the plan’s limitations. Typically, you have 60 days from the birth of the baby to make these changes. We suggest you reach out to your benefits department or health insurance provider prior to birth (or adoption), to review your specific plan and next steps.
It's also often appropriate to add life insurance and disability insurance at this time, to ensure your loved ones are taken care of if something happens to you. Both parents and grandparents may want to review current life insurance and disability coverage to ensure you have an adequate amount of coverage in case something happens.
Social Security Number Registration
It is important to request the new baby’s social security number once they are here. One way to accomplish this is via the birth registration form, often provided by the hospital or birthing center. You will need to have the parent(s) social security number(s) to complete the form. If you don’t give birth in a hospital or birthing center, forget to fill out the form, or if you adopt a child, you should visit the social security website for further instructions on how to obtain a social security number for your baby or child.
Bringing a new child into your family is an exciting time! If you are welcoming a new baby, our team is thrilled and happy to help you plan for their financial future. We encourage you to reach out to your portfolio manager if you have any questions or would like assistance with the planning process.
Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. We believe the information provided is from reliable sources but should not be assumed accurate or complete. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.