United States: Checklist For Protecting Your Child's Financial Future

Congratulations on your family's new addition! The birth or adoption of a child is cause for celebration, but it also carries heavy responsibilities. In addition to protecting your child's physical well-being, you need to ensure he or she will be financially secure. Here is what to do right now:

Make (or revise) your will. A will provides instructions on how your assets should be distributed and names a guardian for your child in the event that both you and your spouse die prematurely.  This is also a good time to establish a durable power of attorney, which allows your designee to make medical and financial decisions if you are incapacitated.  Also consider who you wish to take custody of your child, as they should be included in this process.

Buy life insurance. Even if your employer provides life insurance, it probably is not enough. According to many sources, raising a child born in 2015 to the age of 18 costs at least a quarter of a million dollars. Then, there is the cost of college, your home's mortgage and your spouse's living expenses. Remember that current stay-at-home parents may need life insurance to cover the possible cost of a full-time caregiver.  Per life insurance recommendations think DIME: Debt+Income+Mortgage+Education.

Update beneficiaries. The disposition of retirement plans upon death, such as 401(k) plans and IRAs, is guided by beneficiary designation forms rather than a will or trust agreement. Although you should not name your child as a beneficiary (minors cannot legally inherit assets), consider establishing a trust and naming a trustee to ensure your child's financial needs will be met.

Apply for a Social Security number. You will need your child's Social Security number to take advantage of tax benefits for parents with dependent children. Social Security numbers also are required to open a bank or investment account for your child.

Set up an education account. According to the College Board, a child born in 2015 can expect to spend as much as $324,000 just to attend a four-year college. As formidable as that might sound, 529 college savings plans can help parents and children reach their education goals.* Earnings on 529 plan contributions grow tax-deferred for federal income tax purposes and withdrawals used to pay for qualified higher education expenses (such as tuition and fees and, generally, room and board) avoid federal income tax, making the tax deferral permanent. Although there is no federal tax deduction, Illinois offers a deduction of up to $10,000 per taxpayer per year for contributions to certain IL plans.  Contributions to a 529 plan may be subject to gift tax, so consult with your CPA on laws.  Contributions to an education plan should be considered after you plan and save for your retirement.  Retirement saving comes first!  There are multiple ways to finance college; however, you are solely responsible for financing your retirement.

Establish an emergency fund. If you do not already have a "rainy day fund," establish one. Aim to save at least three to six months' worth of living expenses so that, if you lose your job or your child needs something you had not anticipated, the money will be there.  This money should be maintained in a cash account that is easily accessible and not subject to investment risk.

Prior to making investment or insurance decisions speak with your CPA, or other qualified advisor.

* There is no guarantee that the plan will grow to cover college expenses. Depending on the laws of your home state or on your designated beneficiary, favorable state tax treatment or other benefits offered by your home state for investing in 529 college savings plans may be available only if you invest in the home state's 529 college savings plan. Any state-based benefit offered with respect to a particular 529 college savings plan should be one of many factors considered in making an investment decision. Consult with your financial, tax or other advisor to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state or any other state to learn about the features, benefits and limitations of that state's 529 college savings plan.

Please consider the investment objectives, risks and charges and expenses associated with municipal fund securities, including 529 plans, before investing. This and more information is available in the issuer's official statement. Please ask the issuer for an official statement and read it carefully prior to investing. You should consult with a tax advisor regarding the state tax consequences of any investment in a 529 plan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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