Whether you're a parent, soon-to-be parent, or grandparent, planning for your family's financial future is crucial. Here, we explore some effective strategies for funding education and passing on wealth to the next generation.
Funding College Education
For many families, 2nd to retirement planning is preparing for the costs of higher education. While some social media “gurus” will have you believing that purchasing real estate with the intention to fund education through refinancing can be an option, it involves significant risks and responsibilities, such as managing properties and navigating fluctuating real estate markets.
A more straightforward and less burdensome method is setting up a 529 College Savings Plan.
These plans offer numerous benefits:
Tax Advantages: Many states offer tax deductions or credits for contributions to a 529 plan.
Flexibility: The beneficiary of the plan can be changed if, for example, one child decides not to go to college, allowing another family member to benefit. Funds can also be used for a wide range of educational expenses beyond tuition, such as room and board, books, and other educational materials.
Investment Growth: The power of compounding interest in a 529 plan means that even modest regular contributions can grow significantly over time. For instance, investing just $500 a month from birth at an average annual return of 10% can yield approximately $286,474 by the time the child turns 18.
Generational Skipping
For grandparents, particularly those with adult children who are financially secure, generational skipping is a strategic way to contribute to the financial stability of grandchildren.
This approach can help:
Minimize Estate Taxes: By skipping a generation, you can reduce the size of your taxable estate, potentially avoiding significant estate taxes that would apply if the assets were transferred directly to your children first.
Preserve Wealth for Future Generations: Directly transferring assets to grandchildren can ensure that your legacy extends through multiple generations, supporting educational endeavors, first homes, and other significant life milestones.
Employing Children in Your Business
If you own a business, employing your children can be beneficial for both tax savings and skill development:
Tax Efficiency: Children can earn up to the standard deduction amount ($13,850 in 2023 and $14,600 in 2024) without owing federal income tax. This provides them with income and reduces your taxable business income.
Skill Development: Working in your business teaches children valuable professional skills and work ethics that are beneficial throughout their lives.
Compliance: It's important to ensure that employment is legitimate. Children should perform real work suitable for their age, be paid a reasonable wage for their duties (No, you can’t pay them $100/hour to clean your office), and all employment paperwork should be properly filed and maintained.
Planning for your children or grandchildren's financial future involves a mix of strategies that cater to both immediate educational needs and long-term wealth preservation. At Fox Hill Wealth Management, we guide our clients through choosing the right plans that align with their financial goals and family values.
For more insights or to start planning today, contact us to ensure your loved ones are positioned for financial success, no matter what the future holds.
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