As a parent, you’ve made sure your kids have had a safe, secure foundation for growth throughout their lives. You’ve made it possible for them to become the people they are and realize their full potential. And, while finances aren’t the only piece of the puzzle, they are an important one.
If you’ve thought about legacy planning at all, you may have considered it something you could put off for a while. It’s a task you might have intended to tackle after the endless rounds of meals, laundry, and carpooling have settled down.
But the fact is legacy planning is much more than a way to pass your wealth onto your children after you’re gone. It’s a way to equip your loved ones with the support they need at every phase of their lives. The sooner you start, the more flexibility you’ll have and the more time you’ll have to see your children enjoy and benefit from the resources you’ve provided.
From the first time you held them, you’ve had hopes and dreams about your children’s future. You want to give them tools for success, tools that you yourself may not have had. Creating a financial strategy for your children’s future that works for your family’s finances can be a great way to ensure they have resources for education, milestones, emergencies, and life goals. Here are nine steps to consider when establishing a financial strategy to set them up for life.
Step 1: Get a head start
It may not seem like you have a lot of extra time when your kids are little, but in investment terms, you have a lot. By starting early, you can benefit from the power of compound interest over 10 or even 20 years while your children grow.
Consider what happens when you make even a modest investment of $3,000 when your child is born. You make a commitment to add $100 per month to this account, and you earn 6% returns every year. By the time your child turns 20 years old, you’ll have amassed nearly $54,000, and you will have contributed only $27,000. That’s right, nearly half of your final total comes from compounded interest.
[Example comes from the Compound Interest Calculator at www.investor.gov.]
Step 2: Set clear goals
What do you want to do for your children? Common aspirations include making sure they can attend the college of their choice, helping with the downpayment on a first home, or even providing seed capital for a business. Having clearly defined goals can help you stay focused and motivated as you continue to save or invest.
Step 3: Contribute monthly
The amount you’ll need to reach your goals may seem daunting at first, but you can get there if you contribute even relatively small amounts every month. Just be sure to be realistic. Your financial strategy should align with your family's overall financial situation. Determine how much you can comfortably save without jeopardizing your own current financial security and stick to it. You can set up automatic investments so you won’t have to remember to set money aside. If you have several children, or several goals to reach for them, you may want to establish separate buckets or accounts to invest in.
Step 4: Teach your kids financial literacy
When you give your kids money, you want to make sure they can use it wisely. That’s why it's important to pass on not only wealth but also values and financial responsibility. Teach your children the importance of philanthropy, budgeting, and responsible money management.
As your children grow and become more financially aware, review the plan and account statements with them. Teach them about budgeting, saving, and investing in ways that empower them to make informed financial decisions.
Step 5: Understand legal and tax implications
When you’re transferring wealth to the next generation, the last thing you want to leave your children is a big tax bill. Talk to your financial advisor, attorney, or tax professional to make sure you are appropriately managing your estate tax exposure so your assets go to your loved ones and not the government. If you have a large estate with potential estate tax liability, ask about tools like lifetime gifts, charitable trusts, and other strategies for maximizing tax efficiency.
Step 6: Consider financial tools
There are a number of financial tools and vehicles you can use to plan a legacy for your children. Ask your financial advisor about:
529 college savings plans: These plans allow you to save for college expenses on a tax-deferred basis. You don’t get a tax deduction when you contribute, but the investment earnings compound tax free as long as you hold them. When your child is ready for college, they can use the money for tuition, room, board, and other expenses without paying taxes on it. One advantage of these accounts is you retain ownership of the assets, and you can change beneficiaries at any time. So if one child gets a full-ride scholarship, you can reallocate the funds to another child.
Custodial accounts: Uniform Gift to Minors (UGMA) and Uniform Transfers to Minors (UTMA) accounts are financial accounts set up by adults for minor children. When you set up one of these accounts, you control the assets until the minor reaches adulthood, at age 18 or 21 depending on your state. You can establish a custodial account at any bank, brokerage, or fund company and contribute as much as you like, regardless of your income or wealth. Because the minor is considered the owner of the account, there are some tax benefits. For 2022, the first $1,150 of unearned income is tax-free, and the next $1,150 is taxed at 10%. Income of more than $2,300 is taxed at the parent's rate.
Whole life insurance cash value: In addition to a death benefit, a whole life policy builds cash value as long as the policy stays in force. Families can borrow against the accumulated cash value to pay for a major expense like funding your child’s college education. This is called a policy loan. Whether or not you use the cash-value account portion of your whole life policy to pay for your child’s education, it can add a valuable layer of security and stability to your family’s overall financial picture. Your insurance professional can help you and your family explore life insurance options that may work for you.
Educational savings accounts (ESAs): Saving for college is one thing, but what about private elementary or secondary school? ESAs offer an alternative. ESAs allow parents who withdraw their children from public or charter schools to receive a deposit of funds into government-authorized savings accounts. Parents can use these accounts to pay private school tuition, tutoring fees, community college costs, and other customized learning services. Currently, 13 US states offer ESAs.
Roth IRAs: These tax-advantaged investment accounts are funded with after-tax dollars, but all investment earnings compound tax-free, and there is no tax liability upon withdrawal. Roth IRAs have another advantage in that unlike traditional IRAs: there are no required minimum withdrawals. That means you can leave money in the account indefinitely and even pass it on to your heirs tax-free.
Mutual funds and investment accounts: Even ordinary mutual funds and investment accounts have some benefits when planning your legacy. When you die, the tax basis of your accounts will be stepped up to their current value at the time of your death. Your heirs can sell them without realizing any capital gains, no matter how long you’ve held them or how much they’ve appreciated.
Step 7: Regular reviews
Keep a watchful eye on your accounts and adjust your strategy as needed to stay on pace toward your financial goals. Meet regularly with your team of advisors, including financial, tax and legal professionals, to make sure that your plan remains on track.
Step 8: Plan for the unexpected
Life is full of surprises. Make sure your legacy plan provides for unexpected circumstances such as disability, medical emergencies, or changes in your children's education or career path.
Step 9: Consider a trust
Want an additional layer of control over the assets you’re transferring? Trusts can spell out exactly how, when, and under what conditions your assets are distributed to your children. They can also provide protection from creditors, divorced spouses, and other legal disputes.
Care for your children now and in the future
As a parent, you want to make sure your children have everything they need to thrive, from their first set of training wheels to the final college tuition payment. Legacy planning can help you provide your kids with the advantages you want them to have, offering a roadmap that will get you from wherever you are now to all you’ve dreamed of for your children. Ask your financial advisor how you can get started.
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
SMRU #6137366 exp. 1/8/2026