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How to pass money on to your children


You don’t need to have millions to be able to leave something for your children after you die.

Between life insurance, wills and other financial tools, many parents of more meager means can also take steps to make sure their kids will be okay financially after they’re gone. And as much as families despise talking about money, the measures don’t always require a lot of work.

“Regardless of how much wealth you have,” says Gregory Popera, a private wealth adviser with Bank of America Merrill Lynch, “having some type of estate plan and financial power of attorney are sort of the financial building blocks to make sure your assets go where you want them to go.”

Start with a will. 

The document, best drafted with the help of an attorney, should lay out plans for how assets such as a home, investments and family heirlooms should be divided among children, other relatives and charitable organizations, Popera says. Directions for other items, such as furniture, clothing and photographs, can be explained in a separate letter, he says. Wills can be used to name an executor, or the person responsible for paying final bills and dividing up the estate.

Wills have to go through probate, a court process in which debtors and other creditors are given a chance to make claims for debts owed to them by the person who died, before assets can be divided. The entire process can take six months to a year depending on the state. Many states will offer simple procedures for estates that are smaller than $100,000, says Dan Prebish, a manager on the estate planning team for Wells Fargo Advisors.

Leave them your retirement accounts.

The easiest way to ensure that your children will receive your retirement savings is to name them as the beneficiaries to your accounts such as a 401(k), IRA and a Roth IRA, Popera says. Make sure beneficiary forms are kept up to date, since those designations would trump whatever’s in the will, financial advisers say. People inheriting IRAs will also have to take minimum required distributions, based on their age and life expectancy. And like the original owner, they’ll owe taxes on the money when they take distributions. Beneficiaries inheriting a Roth IRA, which is funded with after-tax dollars, do not have to pay taxes on the savings as long as the account has been open for at least five years.

Buy life insurance.

The point of life insurance is to make sure the people who rely on you financially will be okay. But many parents don’t do the proper math when they buy policies, setting themselves up for a scenario in which the money may run out sooner than they expect. Instead, couples should factor in mortgage payments, college costs, food and other expenses and estimate how much their children would need to cover those expenses until they reach adulthood.

Many parents will be fine in terms of taxes by simply naming their children as the beneficiaries of the policy. But parents who are also leaving a separate estate for their children might save on taxes by putting the life insurance policy into what’s called an “irrevocable life insurance trust,” says Jason Katz, a managing director with UBS. Then, the proceeds of the insurance would go into the trust and would not be counted as part of the parent’s estate, he says. If the child is named a co-trustee after reaching a certain age, that money would also be protected from creditors and wouldn’t have to be shared with a spouse if the beneficiary gets divorced.

Open a 529 account. 

A 529 account, in which money can grow tax free until it is used to pay for qualifying college expenses, can be a way to leave money for your children and maybe even your children’s children, Katz says. Parents or grandparents can contribute up to $14,000 a year for each child (or $28,000 a year for a couple) before having to pay gift taxes. The accounts have an exception that lets people front-load up to five years’ worth of contributions at once as long as they don’t make any more contributions for the next five years, Katz says. Of course, some kids may not have much left after paying for their own college costs, but they can also choose to pass on funds to pay for higher education costs for their own children, Katz says.

Related: A father of eight explains why he hasn’t saved a penny for his kids’ college education

Create a trust.

Parents and grandparents leaving more substantial assets may want to consider creating a trust. For instance, some families may create a revocable living trust, which wouldn’t have to go through probate and could be changed or canceled at any time, Prebish of Wells Fargo Advisors says. With this arrangement, assets would be owned by the trust, which would be controlled by the person who created it until they die or become incapacitated. The trust would then be handed over to a successor trustee, such as a child or other relative, who can control it and use the funds to pay bills and later to divide the assets among family members and other groups, he says. Because they are more complicated and expensive than a will, such trusts are more commonly recommended for people with more than $500,000 in assets, Prebish says. (Though some people passing on less may still find it to be a good strategy for them, he adds.)

Simpler ways. 

When family members are on the same page, some parents may be fine with designating one child to divide assets up among the family. For example, some people may choose to establish a joint tenancy with one child, who can use assets and money to cover bills while their parent is still alive and who would then be responsible for splitting up the assets after the parent dies, Prebish says. A transfer on death deed, which passes an estate on to an executor after a parent dies, would leave the parent in full control until after he or she died, Prebish says.

However, both arrangements might leave a single person in full legal control of the estate after the parent dies, which could cause problems within the family if he or she chooses not to share what’s inherited with other siblings or grandchildren, he says. Some parents can try to avoid this by naming all of their children in the tenancy or in the transfer of death deed, but then all of them would have to agree on how to treat the assets. If disagreements are likely, it might be best to leave detailed instructions in a will or trust, he says.

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