Saving for a child's education?
Start early and contribute often

There are more expenses to having a baby than diapers and cribs. Do not forget saving for college.

The couple factored day care costs. They have considered the big things- cribs, strollers, and the like. They even have a term life insurance policy in case something should happen to either of them while Daisy is still a child.

However, they are surprised to learn about the ongoing costs of the little things, like diapers. In addition, another thing they have not discussed are a college savings plan.

The couple plan to discuss their finances with a financial planner.

They have particular questions about the best college savings plans and exactly how much money they need to set aside for a rainy day.

The best time to begin a college savings plan for a child is right away. The earlier the money is in, the fewer burdens it becomes if they are planning to pay for their child's education. Money accruing tax-free in a 529 college savings plan, Coverdell educational savings plan, or a Roth IRA grows faster and larger the more time it has to compound.

Each savings vehicle has different characteristics.

The 529 plan allows parents to contribute up to $55,000 individually and $110,000 as a couple without having to pay a gift tax. The money grows tax-free and if it is used for paying for higher education costs, the money can be taken out tax-free. It was not meant, however, to be used for private school K-12 education.

That is where the Coverdell account comes in.

Parents can contribute up to $2,000 a year per child to the tax-deferred account and take out the money tax-free for their children's education at any level, as long as the money is used before the child turns 30.

These days, many financial planners are recommending that parents set aside college funds in a Roth IRA, which can be used, for many purposes, in addition to retirement.

The Roth allows parents annually to set aside up to $6,000 post-tax.

The money grows tax-free and can be withdrawn tax-free if used for the educational expenses of any family member, first time home buying, as well as retirement.

To take care of two birds with one stone, put money aside in an interest-bearing Roth IRA, which offers parents more flexibility than Coverdell or 529 plans.

If a child wins a scholarship or other life circumstances, interfere with college plans, the money in a Roth IRA account can be used for other qualified expenses.

While each family's financial circumstances are different, as a general rule we suggest that parents strive to have between three to six months of income set aside in case of emergencies, create or update their estate planning documents such as their wills and power of attorney papers.

In addition, we suggest that parents obtain term life insurance for coverage of both parents while the child is still growing. It is a more affordable option over full permanent life insurance.

Finally, financial planners say one of the biggest roles they play when helping couples plan, is an independent, objective financial observer.

In many cases, parents have different ideas about what their financial priorities are, what amount of debt is acceptable, and how much money is enough to save for college.

There are a whole lot of dynamics to having kids, I find that people's ideas of financial planning are tied to what they experienced as they were growing up. In addition, everybody grows up differently.

Having a full and open discussion about your finances as a couple – the debts, assets, expectations, and childhood baggage – before having children can go a long way in creating family financial harmony.

Anti-Tax-Shelter Efforts

A Feb. 19 Treasury Dept. release highlights what it describes as the Bush Administration's "aggressive actions" to address the abusive tax shelter problem. The 16-page release reviews actions taken by Treasury to curb shelters. It also summarizes the Administration's legislative proposals to shut down specific abusive tax shelters including:

• Sharply limiting benefits from abusive leasing transactions with tax-indifferent parties ("SILO" transactions use to "acquire" significant tax benefits from a tax-indifferent party, such as a municipal transit authority or foreign government, in exchange for a modest fee).
• Denying foreign tax credits for foreign withholding taxes imposed on income if the underlying property generating the income was not held for a specified minimum period of time, and providing Treasury with regulatory authority to prevent transactions that inappropriately separate foreign taxes from the related foreign income to take advantage of the foreign tax credit rules where there is no real risk of double taxation.
• Treating an income-separation transaction as a secured borrowing, not a separation of ownership.
• Preventing taxpayers from misusing the rules for tax-exempt casualty insurance companies to improperly accumulate investment income tax-free.
• Tightening the deduction limitation for related party interest to curb the opportunities available under current law to inappropriately reduce taxes on U.S. operations through the use of foreign related party debt.
• Imposing additional appraisal requirements on charitable contributions to curb inflated deductions, and, in the case of patents and certain other intellectual property, limiting the amount that can be deducted.
• Preventing the use of Section 529 college savings plans to avoid transfer taxes.
• Imposing a new civil penalty for the failure to disclose foreign financial accounts.
• Eliminating the statutory practitioner-client privilege with respect to tax shelters and confirming that the identity of any person that a promoter is required to identify to IRS is not privileged.

WHY ESTATE PLANNING MATTERS

It is not just a topic for the rich to worry about. If you have more than a very simple estate, you need to plan. These documents can help with the following:

1. You can designate who gets what when you are gone, instead of leaving it to a formula or reducing assets to cash.
2. You can designate guardians for your minor children.
3. You can specify exactly who you want to be in charge of distributing your assets.
4. It can help you minimize court costs and taxes maximizing what you leave to your loved ones.
5. It can help you distribute your wealth meeting your concerns about the maturity of their dealing with a windfall.
6. It can help structure your affairs so that a business continues. It is not a substitute for a succession plan, but it can spell out some ideas.

If you think that estate planning might be useful, you are correct. These are some reasons why you should not ignore estate planning.