By: Kyle C. McInnis, Shareholder
Cook, Yancey, King & Galloway, APLC - Shreveport, Louisiana

New parents have to make many adjustments to their lives. From dealing with diaper rash to sleep deprivation, they have a lot to deal with. As an adviser to new parents, it is important to remind them that they have some financial planning chores, too. Here is a brief list of some of the most important financial planning that you should suggest to every new parent.

1) Adjust Income Tax Withholdings. The easiest and quickest way to get some extra cash into your client's hands is to adjust their income tax withholdings. The IRS grants taxpayers a dependency exemption under Internal Revenue Code ("IRC") § 151 and a child tax credit of $1,000 under IRC § 24. The dependency exemption and the possible child tax credit should work to reduce a client's required withholdings from their paychecks. If properly accounted for in your estimates for withholdings, these tax items should reduce income tax withheld and increase your client's take home pay.

2) Review or Create an Estate Plan. Most new parents don't have an estate plan because they've never thought they needed one. In a sense they are right. Louisiana law generally provides a spouse substantial rights in the community property of a decedent. But, when children arrive, a will is a must.

Clients usually want to leave all of their property to their spouse first, but what happens if both parents die unexpectedly? In this case, someone will need to care for the client's property until their child can use it responsibly. Parents usually want their property, no matter the amount, to be used for their children's benefit, but not necessarily in the child's hands until they are mature enough to use it wisely. Thus, many clients will find a contingent trust to be a good solution to their newfound estate planning concerns. Such a trust allows a child the benefit of their inheritance, but installs a trustee to stand between the child and the inheritance. The trustee acts a fiduciary over the property, but typically has the ability to make payments for the child's general welfare, education or medical needs. This allows a child the benefit of an inheritance, without granting unfettered access. A will also does other useful things, such as naming the executor of the client's estate and designating who will care for the children if both parents die.

3) Assess Life Insurance Needs. Almost all parents will need some form of life insurance. If a parent were to die, the surviving spouse may be left with drastically increased expenses, especially for child care, and reduced household income. Life insurance is the typical means to guard against those risks. Additionally, because term life insurance is particularly inexpensive, many new parents can get enough coverage to alleviate significant financial pressures on their surviving spouse by paying off a mortgage, funding a child's college education, or paying off personal debts, such as student loans.

4) Review Beneficiary Designations. If your client has existing life insurance policies or retirement savings vehicles, like a 401(k) plan or individual retirement account, the birth of a new child is a good time to review beneficiary designations.

5) Start Saving for College. Almost all parents want to send their children to college someday, but only the select few will be able to afford it. With proper financial planning, however, any parent has the opportunity to pay for a significant portion, if not all, of the tuition bills on a tax-advantaged basis. Savings plans under IRC § 529, appropriately called "529 plans," allow a parent to set up a state sponsored fund to save for their child's education on a tax-free basis. Income earned in the plan will not be subject to income tax so long as the fund is eventually spent for the child's higher education expenses. Further, a parent, or anyone else, can contribute to a 529 plan with five years of accelerated annual gift tax exclusions. This allows a parent of means to contribute $65,000 this year to an income tax advantaged account for a child's college education without federal transfer tax consequences. Louisiana taxpayers also receive two added benefits with a Louisiana sponsored 529 plan: a state income tax deduction and a matching contribution from the state government.

Additionally, a parent can save for tuition to private grade school or high school with a Coverdell educational account under IRC § 530. These accounts offer the same tax advantages of a 529 plan, but one can only contribute $2,000 per year into the account. With that cap, it's difficult to buy much private elementary or secondary education, but every little bit of tax savings helps.

New parents can look forward to the rewards of parenthood and its attending responsibilities. As their advisors, you can help them plan for those responsibilities wisely.