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Cradle to Save

For most families, the arrival of children marks the happiest stage of life, but unfortunately, the feelings of unadulterated bliss tend to be very short-lived. If diapers, late-night feedings, babysitters and countless trips to the doctor are not enough to bring a starry-eyed new parent down to earth, the realities of providing for a child's financial future are sure to do so and quickly. According

For most families, the arrival of children marks the happiest stage of life, but unfortunately, the feelings of unadulterated bliss tend to be very short-lived.

If diapers, late-night feedings, babysitters and countless trips to the doctor are not enough to bring a starry-eyed new parent down to earth, the realities of providing for a child's financial future are sure to do so — and quickly.

According to the U.S. Department of Agriculture, American parents spend in the neighborhood of a quarter of a million dollars to support a child through age 18. That figure doesn't even include the mother of all child-related expenses, a college education.

Of course, most families wish to give their children more than the basics when it comes to financial support, and that's where the financial advisor comes in. The aftermath of the birth afterglow is an excellent time for an advisor to sit down with parents and grandparents and explore both what they want to do for their descendants and what they need to do.

At Birth

Parents' Wills

It's the most urgent and least exciting aspect of financial planning for new parents, but talking with a couple about this demonstrates a seriousness about protecting their newborn's future. Referring them to a qualified attorney will expedite the process and increase the likelihood that the lawyer might refer clients back.

Legal Guardians

Parents should appoint them, and it's amazing how torturous many find the process of choosing. Help them by sharing personal experience with the process, or by sharing how other (nameless) clients overcame this obstacle.

Life Insurance

As a rule of thumb, parents of a newborn baby need to leave at least a million dollars to the child in a worst-case scenario (both parents dying). For most couples that number can be reached relatively inexpensively through the use of term life insurance, with coverage extending into the child's early twenties. Add a barrier of protection to the assets by having an attorney set up an irrevocable trust to own the policy.

Baby to Pre-teen

College Savings

Skyrocketing tuition expenses and a tight savings timeframe make this a top investment priority for many concerned families, but don't automatically begin funneling money into the college savings plans, especially for middle-income parents. Currently, the federal financial aid formula counts 529 plans as an asset of the parents and only reduces the college financial aid package by about 6 percent of the account balance. But that may change. Indeed, some schools already count 529 assets as part of students' money when calculating the expected family contribution, and this severely limits the amount of aid such students might secure from their colleges. Because there are lots of loans to pay for school but none to pay for retirement, no money should be invested for a child's college education before the parents' 401(k) and IRA plans are fully funded and properly invested.

Of course, talking with grandparents about investing for college is a whole ‘nother story. Their combination of wisdom, disposable wealth and affection for their grandchildren translates into a very receptive client. 529 plans are the ideal vehicle for grandparents to secure their legacy while making sure their wishes are met regardless of whether they are around to view the grandkids’ report cards.

Benefits of 529 accounts for grandparents should be presented in this order:

  1. Control — The money won't go to the grandchild if he doesn't attempt to obtain a higher education.

  2. Flexibility — The beneficiary can be changed from one sibling or cousin to another, with no mandatory account liquidation date.

  3. Tax-Deferral — No annoying tax forms to file until the money is withdrawn.

  4. Estate Planning — 529 deposits can be removed from taxable estates, without a loss of control over the money.

Variable Annuity

True, the child's retirement is five or six decades away, but that time just adds to the attractiveness of depositing a few thousand dollars in a low-cost annuity. In fact, $2,000 deposited at birth is equal to 40 annual $2,000 deposits made during adulthood, if the money grows at 10 percent annually. Plus, the account balances may not reduce financial aid when the child attends college and they could be protected against potential lawsuits and creditors (depending on the child's state of residence).


Roth IRA

When Junior gets his first summer job, the advisor should be right there suggesting his parents open a Roth IRA. Parents or grandparents can contribute their own money to the child's Roth account, and the beneficiary is free to spend his earnings as he wishes (although the advisor might want to suggest some type of parent contribution, “matching” the savings the child puts away on his own.)

Financial Aid Strategies

By the time the kid is accepted at a college, it's usually too late to maneuver income and assets in hopes of qualifying for the largest aid package possible. Planning should begin when the child is in the first years of high school. Special attention should be paid to avoid taking big capital gains and income during the years immediately preceeding college.

College Years

Tax Breaks

If your client has a child in college, and an income in the low-to-mid six-figures, pay special attention to any investment recommendations that could bump up the parents' adjusted gross income. Eligibility for the Hope Scholarship and Lifetime Learning Tax Credit are phased out for married joint filers with AGI between $85,000 and $105,000 for 2004. And there is an “above-the-line” deduction of up to $4,000 in tuition and fees paid by married joint filers, but that break is phased out for AGI between $130,000 and $160,000.

Skirting the Gift tax

Grandparents can reduce their taxable estate without the money being subject to the gift tax by paying a child's college expenses, as long as the checks are made payable directly to the school.

Early Adulthood

Child's 401(k)

This is a crucial point in a young adult's financial development. Contributing early, often and generously can quickly build a lifetime of security. But with a new car, apartment and social lives to support, many recent graduates don't put a big payroll deduction at the top of their wish lists. Offer to talk with the new hire for a few minutes, and run the “saving a little early versus saving a lot later” scenario.

The First Home

Clients with “conservative” investments, earning little or no interest in CDs or bonds can lend that money directly to their children for the purpose of buying a home. The IRS has an “applicable federal interest rate” that governs what can be charged on inter-family loans, without incurring the wrath of the gift tax. The loan must qualify as a “demand” loan, be fully documented, and be secured by the home so that the child can deduct the interest he pays on the loan.

Middle Age

Estate Planning

When the children become concerned with bald spots and Botox procedures, the parents should begin thinking about their transitions, too. Even older clients with six-figure portfolios should re-examine their wills, create durable powers of attorney and name an executor to their estates. Wealthier clients will want to consider accelerated gifting strategies, charitable intentions and any life insurance solutions to help reduce the damage estate tax liabilities may create for survivors. Adult children can even be encouraged to pay the life insurance premiums themselves, as the monthly cost will likely be miniscule, when compared to the potential estate tax bill.

Action Plan

The most effective method of finding out how to help the offspring of your clients is also the simplest. To each and every client and prospect, say, “Tell me about your children (or grandchildren).” Parents will give the backgrounds and current status of each child, and the grandparents will do the same (probably at even greater length).

Once you've gotten that information, the put the guide above to use. It can be one of the easiest, least painful ways to expand a practice.

Writer's BIO: Kevin McKinley is a CFP and vice president of investments at a regional brokerage and author of Make Your Kid a Millionaire — 11 Easy Ways Anyone Can Secure a Child's Financial Future.

Uh-Unh to UTMA

The cons of the Uniform Transfer to Minor Account outweigh the pros.


  1. Until age 14, the first $750 earned each year in an UTMA account is tax-free, and the next $750 is taxed at the child's (probably) low tax rate. After 14, all of the earnings are taxed at the child's rate.

  2. Money in an UTMA account might not be counted in the estate of a deceased parent, but only if the parent is not on the account as the custodian.


  1. UTMAs are irrevocable gifts to the child, and the kid can do whatever he wants with the money upon reaching adulthood. It is illegal for the parent to take the money back, and doing so may invite an IRS audit.

  2. Until age 14, annual earnings over $1,500 are taxed at the parent's highest marginal rate.

  3. Thirty-five percent of assets in UTMAs count toward a family's annual expected family contribution when the child attends college, while only about 5.6 percent of money in the parents' name is counted before financial aid kicks in.


It's best to use 529 plans, parents' Roth IRAs and tax-efficient mutual funds owned by the parents before considering UTMA accounts. Larger sums of money (at least $50,000) could be put in a trust that will give most of the benefits and none of the drawbacks of UTMA accounts.

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