As you continue to get your finances in order, you may also want to help your kids. Perhaps you plan to pay for their college education or assist them financially in some other manner. Here are 5 ways you can pass money (and wealth) to your kids.
1. Teach them good money habits. The first way to pass wealth to your kids is to teach them good money management skills. You can do that by modeling good financial habits yourself and by helping them learn how to handle money from an early age. Life can be unpredictable. Unexpected events or expenses can occur that may deplete your cash flow or alter your finances. Teaching your kids how to manage money, build wealth, and invest in efficient ways will help them create an endless number of resources and cashflow that could last years if not generations to come. However, you also have to commit to be a good example yourself.
Modeling good financial habits in front of your kids is vital because it will provide them with an example of how to handle money. This will help solidify the financial lessons you want them to learn. Kids may not always listen to what you say, but many of them copy what you do. Teaching important skills and modeling good financial habits is key.
2. Put money into a Custodial (UGMA/UTMA) account. Another way to pass wealth to your kids is to invest money on their behalf by opening a custodial account. Technically, there are two main types of custodial accounts: a Uniform Gift to Minors Act (UGMA) account and a Uniform Transfer to Minors Act (UTMA) account. Both of these accounts allow you to invest money on behalf of your child as the “custodian” or person in charge of the account. You contribute as much money as often as you like in the account and invest it however you choose. Once your child reaches the legal age of maturity (which can range from 18-25 depending on the state), he or she will get all of the money and assets in the account.
The perk of using a UGMA or UTMA custodial account is that your child can spend the money in this account on whatever they want. If they decide to go to college, they can use it for college. If they want to start a business, they can use it to start a business. If they want to use part of it to pay for a wedding, a down payment on a home, or travel abroad they can use it for those things as well.
3. Invest money in a 529 account. Another way to pass wealth to your child is to help them avoid debt. Although children aren’t born owing money, many teenagers acquire a substantial amount of debt from one key event in their lives: college. If you can prevent your kids from having to take out student loans for their education, then you will have saved them thousands if not hundreds of thousands of dollars in debt. Without debt, your kids will have more money to invest, start a business and pursue their dreams.
One of the ways to prevent them from taking out debt is to pay for their college education. Since the price of a college education is so high, you should plan for this event in advance and invest money for it early. One of the best ways to do that is to open a 529 college savings account. Through this account, you can invest money for your kids’ education in a tax-efficient manner. The money grows each year and accumulates over time. When your kids go to college you then have a substantial sum of money with which to pay for it.
4. Open a Roth IRA. Another way to pass wealth to your kids is to invest money in a Roth IRA. Through a Roth IRA your kid can start building wealth and investing for their own retirement at an early age. Starting as a child allows them to use the power of compound interest to their advantage which can have drastic effects on their net worth as they age. Investing $10,000 from age 15 to age 16 in index mutual funds through a Roth IRA (assuming an average interest rate of 10% per year) will grow to over $1.1 million by the time your kid turns 65. This means their retirement would be fully funded from an investment they made as a teenager!
Helping them make this investment in a Roth IRA as a teenager not only helps them build wealth but it also gives them the freedom to take more risks in their lives. They can start a business, try other investments, and have the ability to live the life as they want. However, in order to make this investment in a Roth IRA, your child has to have "earned income" in which they are paid as an employee or contractor for work. In order for your child to get this "earned income," you can either have them work a summer job or you simply hire them for your own business. For example, you can start a business and hire your kid or launch a website with some family photos and pay your kid as a model. There are several ways you can help your child earn income to invest in a Roth IRA.
5. Start a Trust. Another way to pass wealth to your kids is to talk to an estate planner/lawyer to open a trust. Technically, there are two types of trusts: revocable trusts (in which you can set up the trust for someone but take money in and out of it at any time if you need to) and an irrevocable trust (in which money placed in the trust is permanently there and cannot be withdrawn by you at a later time).
There are various reasons people may choose one type of trust over the other. However, both types allow you to give money and assets to your kids as you see fit. For example, you can place $10,000 in the trust for them to get at age 25. Put $100,000 for them to get after you die. Or, you can place $20,000 in the trust for them to get in increments of $5,000 every 5 years once they turn 18. With a trust, you can make up the rules and have them implemented however you want.
What do you think? Do you plan to pass wealth to your kids using one of the methods above?