Financial Decisions Affecting Your Children
Caught up in the day-to-day routine of raising your children, it's easy to forget to take care of other financial decisions involving them, including: naming a guardian for your children; insurance coverage; saving for college; and more.
• Naming a guardian for your minor children. If you and your spouse both die without naming a guardian in your will, the courts will appoint one and will supervise your children's property. You may want to consider naming two guardians -- one to take physical care of your children and one to manage their assets. As your children grow, review your guardian choice every couple of years.
• Purchasing sufficient insurance. You should obtain enough life insurance to provide for your children until they are adults. Determine how much is needed for living expenses, hobbies, medical expenses, and college. Consider other items as well. For instance, will your guardian's home comfortably accommodate your children, or should you leave funds for an addition to the house? Include a financial cushion so there is plenty of money for unanticipated expenses. Also ensure you have adequate disability income insurance, so your family's lifestyle won't be disrupted if you have an injury or illness.
• Saving for college. Determine how much you need to save for your children's college education. You may have difficulty saving the amount needed to fully fund a college education. However, there are other sources to help fund those costs, such as borrowing and financial aid. Thus, your goal may be to accumulate 30%, 50%, or some other percentage of the total cost of college. Take a look at education savings accounts and Section 529 plans, both of which offer significant tax advantages.
• Teaching money basics to your children. In a society that has difficulty managing money, teaching your children good money skills is a lesson that will benefit them for a lifetime. As you teach these lessons to your children, keep in mind that how you treat money is probably the most significant influence on your children's views about financial matters. If you make large purchases only after careful research and price comparisons, your children will learn to be careful before making a purchase. If you use credit cards cautiously and explain how to select a card, what items to charge, and how to pay off the balance every month, your children will learn not to abuse credit cards.
• Saving for your retirement. Don't feel guilty thinking about your own retirement when your children still need your help. One of the best gifts you can give your children is the knowledge that you will be financially independent during retirement.
• Gifting assets to your children. If you plan to leave assets to your children after your death, you may want to start making annual gifts, up to $12,000 in 2008 ($24,000 if the gift is split with your spouse), to any number of individuals without paying federal gift taxes. You can then teach your children how to handle those gifts and share in their joy from the gifts.