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A Financial Plan Prioritizing Children

December 09, 2020

I’ve had several conversations with physician families who wanted to make sure their children’s needs came first in their financial planning considerations. This is the case so much that the desire to create a savings platform for the kids was a priority over their own savings arrangements. For the parent wanting to make certain their kids’ needs and financial future is measured, what do you do?

In some of the conversations I’ve had with physician families needing to know they were doing every possible task to secure the future of their kids, we almost always reduced the conversation down to the fundamentals of the planning decisions. The single most important thing a parent can do for their kids, financially speaking, is take care of their own finances. Financially sound parents can provide for their kids in a much more robust manner than those who have been negligent to their own financial planning. Financially sound, in this case, doesn’t necessarily relate to elevated incomes or accumulated savings; rather, it’s being more focused on being prepared and deliberate. When a financial plan is truly prioritizing the children involved in the plan, the participants/parents in the plan look beyond themselves. Prior to establishing custodial accounts, 529 plans, or another kind of account that might irrevocably separate funds for a child’s future use, here are a few financial planning considerations to think about.

1. Purchase a term life insurance policy. I’ve met with families wanting to do great things for their kids by setting aside money for their kids to go to college and use when they get older. It seems one thing is often overlooked, and that’s the fact that the parents might not survive to see their children go to college. If we die sooner than expected, and without enough insurance, we had better have enough money saved up to support our dependents. It’s rarely the case that anyone has all the money they’ll ever need when their children are first born, so a term life insurance policy fills in this gap. A term life insurance policy is similar to renting a life insurance policy for a number of years, and this structure makes it affordable for young and healthy parents. A life insurance policy can provide a lump sum for a family in case of an early death, which can be used to replace income, pay off debts, fund college, or anything the family needs. A life insurance policy is almost like a love letter to the family stating, “I considered my passing already, and I want you to live on.”

2. Complete some general estate planning. This might start out by completing a simple will to formally and legally assign guardianship if the parents die while the children are still minors. It’s tragic when parents pass away early, but it gets worse if there’s not some basic estate planning in place. In some cases the children can even be split up and cared for by foster families while the court system decides who the caretakers will be. This process can be lengthy if there are an abundance of assets in the estate. For physicians, this should be a major influence to get an estate plan completed. If it’s possible that any relatives would fight or dispute rulings to be involved in the “inheritance” of the estate, this could delay the court from releasing the children to proper home for care. If at all possible, it would be excellent to consider a complete estate plan with an estate planning team. In fact, a complete estate plan is often the only and most efficient way to make sure life insurance proceeds, retirement funds, real estate, and savings accounts stay with minor children of the estate. A complete estate plan is not always feasible, especially during medical training, so I typically recommend a basic will until training is complete to “triage” the estate plan. In my opinion, the sooner an estate plan is completed, the better. Oftentimes, if an estate plan is complete before the estate gets too complicated, it can be cheaper to implement. The estate plan, if completed and communicated properly, can lift significant burdens from the children. Like life insurance, a solid estate plan is another love letter to your family. This letter says, “Relax, I took care of everything already.”

3. Make sure the parents save for their own future first. Like I said earlier, kids are the primary beneficiary of financially sound parents. Parents who have their own finances on track are much less likely to rely on their kids in the future. I have talked with many physicians who were actively planning to take care of their parents. I understand that we all want to take care of our family, and that’s a great thing; however, it can be burdensome to have to consider planning for the future of several family members. Looking out for your kids also entails looking out for yourself. As an added bonus, if parents are financially sound, they make great teachers for their children on how to produce the same results.

As parents who want to plan for their children’s future, it’s important to make sure some of the fundamental financial planning objectives are complete for the parents, as these objectives also carry equal or greater benefits for the children themselves. While custodial accounts, and accounts that benefit only minors can positively affect the future for the children, I often suggest focusing the planning efforts on the parents’ benefit as being beneficial to the children. Once sufficient fundamental planning operations are fulfilled, some of the ancillary accounts can be a great option to further the future and opportunities of the children.