The arrival of a child is an exciting time for families. Focus on celebratory gatherings, home nursery preparation, and getting as much sleep as possible before the arrival of your newest family member, is encouraged. In the chaos and excitement of welcoming a child, ensuring that your family has an appropriate wealth plan in place is often overlooked. The expansion of your family brings with it new considerations that should prompt you to review and update your wealth plan to ensure that it remains appropriate for your growing family’s needs.
How Does Having a Child Affect Your Financial Plan?
Like many life events, having a child will certainly impact your expenses. This is a good time to review your current and anticipated cash-flow needs to help budget and determine if your “rainy day fund” is sufficient. One of the most significant expenses for new parents is childcare. For working parents, having conversations about your childcare needs upon returning to the workforce is important. Before the baby arrives, begin researching different childcare options to determine affordability and if they provide the type of care that you are seeking. If you’re using a grandparent or other family member for childcare, make sure there is an open discussion about everyone’s expectations.
Sometimes, a parent will decide not to return to the workforce and instead provide care for their child. It’s important to understand both the potential cost savings and the reduction to income and how that could impact longer-term goals such as retirement savings and Social Security. If you anticipate re-entering the workforce as children get older, it may be helpful to stay connected within your industry and keep job skills and knowledge up to date. Whether or not you or your partner decide to return to the workforce, it is important to have open conversations and understand the impact of your choices so that you can plan appropriately.
As humans, we tend to prioritize our short-term goals and needs because they are more imminent. This can cause longer-term goals, such as retirement planning, to be put on the back burner. As a new parent, it’s important that you continue to focus on your retirement savings. The earlier you begin saving for retirement and the more you can contribute, the better. Take the time to understand your employer’s retirement plan options. Does your employer offer a company match? Do their plan offerings include pre-tax and Roth savings options? Lastly, review your plan’s investment offerings and make sure that your asset allocation appropriately reflects your time horizon and risk tolerance.
What Are the Best Ways to Save for a Child’s Education?
One of the most significant child-related expenses that parents face is the cost of education. While obtaining an education is important, paying for a child’s education should not come at the expense of your retirement savings. Retirement goals should be on track for full funding before assets are diverted for a child’s education savings. Ultimately there will be more options to fund college, such as student loans, scholarships, and financial aid, than there will be to fund your own retirement.
If you can allocate some of your income to education savings, the following savings accounts should be evaluated based on your specific circumstances:
529 Accounts: Offer tax-free growth if the funds are utilized to pay for qualified education expenses. If a 529 account is an option that you are considering, funding the account earlier will give the funds a longer time horizon to hopefully benefit from tax-free growth. These accounts can now be utilized to fund private elementary and high school costs up to $20,000 per year, per child.
It is also important not to overfund these accounts, as there is generally a 10% penalty on earnings plus income taxes, if funds withdrawn are not utilized for qualified education expenses. For financial aid calculation purposes, a 529 account is considered a parental asset if a parent is the custodian. If a non-parent is the custodian, the 529 account is not included as an asset on the FAFSA.
Uniform Transfers to Minors Accounts (UTMA): Allow for a custodian to manage a child’s assets until they reach the UTMA termination age, which is age 21 in most states, including Massachusetts. For financial aid purposes, an UTMA is considered an asset of the child, which translates to it being included in the Student Aid Index (SAI) at a higher percentage. Another drawback of an UTMA is that the child will have full control of the assets at the UTMA termination date and can choose to use them for any purpose.
If a grandparent or family member is interested in funding education costs for a child, in addition to the above options, the following should be considered:
Pay Tuition Directly to the Institution: If a grandparent or family member has the means to pay tuition costs directly to the institution, there are wealth transfer benefits in doing so. Paying tuition directly is not considered a gift for gift tax purposes and allows you to transfer wealth without utilizing your lifetime exemption or even the gift tax annual exclusion amount.
Set up a Trust: If you’re seeking flexibility in the ultimate use of the gifted assets, creating a trust should be considered. By establishing a trust, the grantor sets the terms as they wish. This could dictate the type of access that the child will have to the funds and can set parameters for the types of expenses the trust can be utilized for, such as education, health expenses, a home purchase, or starting a business. Unlike an UTMA which becomes the child’s asset at the UTMA termination age, a trust can allow for longer-term management and avoid a premature distribution to the child.
Learn More: “Paying for College”
Should New Parents Buy a Home?
Your growing family may need more space. This is a time when many families begin to evaluate their living arrangements and decide to purchase their first home. There may be new considerations that will affect where you want to live. If you are hoping to utilize public schools, residing in a town with a good education system may be a high priority. If you’re hoping to utilize family members for childcare, moving closer to family may be necessary.
Put some thought into where you want to live and start to research different housing options so that you have a better understanding of what you can afford. In a booming housing market, it is important to not let emotions drive your purchasing and price point decisions. Determine an appropriate budget and stick to it. It may take time, and you may have to adjust your expectations, but do not let the activity of the market cause you to purchase a home that you cannot afford.
How Much Life Insurance Do New Parents Need?
The arrival of a child is a great time to review life insurance coverage. To protect your family in the event of a tragedy, you will want to understand your family’s needs, which will help determine the type and amount of coverage that is necessary. With young children, you may find that some of your needs will be temporary while others may be permanent.
Temporary needs include ensuring that there are sufficient assets for your children’s education, replacing what would have been your income prior to your children’s emancipation, and paying a mortgage. For these non-permanent needs, a term life insurance product is an attractive option to consider. With a term product, you will have coverage for as long as you continue to pay the agreed upon premium, with coverage potentially subject to a maximum duration.
With term insurance you are not building any cash value but are paying a comparatively lower premium for your temporary insurance need, with insurance proceeds only being received if there is a death during the term period. Most individuals will utilize a combination of both term and permanent life insurance policies to satisfy their various insurance needs.
What Employer Benefits Should New Parents Review?
Many employers also offer benefits that are important to evaluate if your family is expanding:
Health Insurance: The arrival of a child is a qualifying event that allows you to update your employer-provided health insurance coverage to include the child and possibly make other changes. In most cases, notification needs to be provided to your plan provider within 30 days of the qualifying event to update coverage outside of the open enrollment period.
Health Savings (HSA) & Flexible Spending Accounts (FSA): After having a child, you may want to further evaluate your employer health plan options to see what best meets you and your family’s needs. If you’re utilizing a high-deductible plan, funding an HSA is an effective way to allocate pre-tax dollars to pay for health-related costs. If you are not on a high-deductible health plan, health FSAs can be utilized to pay health related costs. If you are enrolled in both an HSA and a health FSA, the FSA funds are limited to dental and vision care costs.
Dependent Care FSA: This program allows employees to allocate pre-tax dollars up to a limit to use on eligible dependent care expenses. You are typically not allowed to rollover any unused funds into the next year, so it’s important not to overfund these accounts.
Disability Insurance: Both short-term and long-term disability plans are typically offered by employers. Research the terms of your firm’s disability plan so that you can understand what percentage of your salary is replaced in the event of a long-term or short-term disability. You will also want to understand if you or your employer pays the policy premiums, as that impacts the taxability of benefits received under the plan.
If you pay the policy premium with after-tax dollars, in the event of a disability, the benefits received under the plan will not be subject to income taxes. If the policy offered by your employer does not provide adequate coverage, you can work with an insurance agent to obtain a private disability policy to make up the shortfall.
When and How Should Parents Freeze Credit for Themselves and Their Children?
With identity theft on the rise, it is recommended to pull a credit report and carefully review for any suspicious activity. If you have not done so already, consider freezing your credit. You can take this action on the Equifax, Experian, and TransUnion websites directly.
Children can also be targets of identity theft. As the guardian of a minor child, you can freeze your child’s credit on their behalf. Each of the three major credit rating agencies has instructions on how to place a credit freeze on behalf of a minor child. If you freeze your credit, you will need to contact the agencies to temporarily lift the freeze before applying for additional credit.
Learn More: “Proactive Measures to Protect Your Identity”
What Estate Planning Updates Should New Parents Make?
If you do not have an estate plan in place, now is the time! One of the most important estate planning decisions when having a child is naming a guardian. This is important, as it allows you to choose the guardian of your child in the event of your and your spouse’s premature deaths. If you do not name a guardian, it is resolved in probate court, where the court will appoint a guardian for the child. Having a guardian named in your will can help alleviate stress and potential animosity amongst family members in what would be an already tragic situation. Most importantly, it ensures that your wishes are met in terms of whom you feel is best suited to care for your child.
In planning with minor children, it is common for a parent’s estate plan to utilize revocable trusts. Revocable trusts can be changed and amended during your lifetime as your situation and family’s needs evolve. In the event of a premature death, the trustee will manage the trust assets and make distributions to the beneficiaries as outlined in the trust terms. This allows for oversight of trust assets and prevents premature access by a child. Trusts offer flexibility, as the grantor establishes the terms of the trust, including when the child is allowed access to the funds. When it comes to naming a trustee, you should understand expected trustee duties and responsibilities, to ensure that your selection is able and willing to meet those demands. During your estate plan review, remember to evaluate and update your beneficiary designations, as they may no longer be reflective of your wishes.
Learn More: “Essentials and Advanced Estate Planning Guides”
Having a child is an exciting time. As parents, protecting our family and children is a top priority. The above considerations can be utilized to help identify your family’s goals and needs to ensure you have a proper wealth plan in place. If you have questions or would like to further evaluate the topics outlined in this article, please contact your Fiduciary Trust officer or Sid Queler at queler@fiduciary-trust.com.
Updated June 2026
