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5 Expensive Mistakes to Avoid Before and After a Liquidity Event
December 16, 2024
There’s nothing like imagining a bright future for your children or grandchildren. Whether it’s watching them graduate from college debt-free, helping them buy their first home or giving them the financial freedom to pursue their passions, these moments start with thoughtful planning. Beyond the gifts they’ll outgrow, consider giving something lasting, like financial support that can grow alongside them over time.
By taking proactive steps to invest in their future, you’re not just preparing them for milestones but empowering them to dream bigger. Growing assets for kids or grandkids requires a thoughtful approach that combines saving, investing and education. Here are five practical ways to help increase their assets, offering the potential for meaningful growth and tax-deferred benefits:
This is one of the most popular and effective ways to save for your child or grandchild’s future education expenses. Contributions to a 529 plan grow tax-deferred, and withdrawals are tax-free when used for qualified higher education expenses. Depending on current regulations, some plans may also cover tuition for kindergarten through 12th grade or allow withdrawals for student loan repayments. Plus, many states offer tax deductions or credits for contributions, making this a powerful tool for college savings.
Custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allow you to transfer assets to a minor, with you (the parent or grandparent) acting as the custodian until they reach the age of majority, (typically 18 or 21, depending on your state). Assets in these accounts grow tax-deferred, giving you control over their growth and empowering you in your financial planning.
While Roth IRAs are primarily intended for retirement savings, you can open a Roth IRA for a child or grandchild if they have earned income from working. Contributions grow tax-free, and withdrawals in retirement are also tax-free. For example, contributing $6,500 annually to a Roth IRA for a teenager could grow to nearly $1 million by age 60, assuming a 7% annual return. This demonstrates the power of starting early and letting compounding work overtime. The long-term benefits of tax-free withdrawals in retirement are promising.
Permanent life insurance, such as whole or universal life, can build cash value over time that grows tax deferred. This cash value can be accessed during the insured’s lifetime, providing funds for education, a first home, or other needs. Additionally, the death benefit can provide financial support and help create a lasting legacy for your family.
Depending on your goals and financial situation, you could establish a trust to hold assets for your children or grandchildren. A revocable trust allows you to maintain control over the assets during your lifetime, while an irrevocable trust provides tax advantages and greater protection from creditors. Trusts can be tailored to your unique needs, offering significant tax advantages and providing you with greater control over how and when your beneficiaries receive their inheritance. And don’t forget, you must choose a trustee to hold the assets on the trust’s behalf.
Each family’s situation is unique, and choosing the right strategies to grow assets requires careful planning. It’s crucial to seek the guidance of a financial advisor or tax professional to determine the best plan for your circumstances and to ensure compliance with relevant laws and regulations. Additionally, the death benefit can provide financial support and help create a lasting legacy for your family.
At Aspiriant, we guide families through these decisions, helping them create meaningful legacies that span generations. Whether you’re planning for college savings or building a trust, our team is here to help you every step of the way.
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