Louis Barajas walks through four financial mistakes parents make: naming minor children as beneficiaries instead of using a trust, putting college savings in UTMA/UGMA accounts where kids gain full control at 18 or 21, choosing those accounts over 529 plans which let parents keep control and reduce FAFSA impact by about 6%, and forgetting to name a guardian in a will.
Questions this video answers
When the child turns 18 or 21.
About 6% per year (the transcript states FAFSA looks at taking about 6%).
Chapters
Well, Luis Baragas is back with us this morning, and Louis is the author of My Street Money. And this morning, we're talking about big money mistakes parents make. We want to welcome you back to the show. So we want to start talking about life insurance. And, you know, you advise your clients to get life insurance, but there's a big question about who to name as the beneficiary.
Absolutely. So every parent should have some kind of life insurance.
Right.
The problem is that we just had somebody who just passed away, a single mother who named her children as beneficiaries. And the problem is an insurance company is not going to give children the amount of money, the proceeds. So the problem is that money's going to go into probate and going to go into the court system. So until they name a legal guardian for these kids. So what you want to do is you want to make sure that you really pay attention to who you name as beneficiary. You want to have, as an adult, or better, a trust.
Oh, okay. So I guess on that stance, should we open up a savings or investment account in the name of the children?
Well, a lot of people do that. They're telling me, hey, Louis, you know what? The grandparents gave us the money. So I went into the bank and I opened up an account for my children. I'm using their Social Security number, but I put myself as a kind of a joint account. The problem is, you really created what's called an irrevocable trust. It's an UTMA account, Uniform Transfer to Minors act, or UGMA account. Most people don't know this, so when your child turns 18 or 21, they have full access and full rights to the money. And the problem is, I've been doing this for so long that you realize not all kids are really that responsible at 18. Instead of using that money for college, they're using it to go buy a car or. Or for other worse things than that.
Okay, so just having your name on that account with them does not.
No, no. Because you have access to that, so you want to have control. And if you want to give the kids their money, that's fine. But just know that if you're going to use it for more important things like college, try to keep control of it. And the best thing to do is put it into a Section 529 plan in which you can name them as beneficiaries, but you always have control.
Okay. And you mentioned that a lot of parents have not created a will or a trust yet.
Right. And that's again, if you've got minor children, that's so important. And not only that, because, again, we never think we're going to pass away. But, you know, over the last few years, I've had several clients pass away with minor children and naming a will, doing a nomination of guardian, who is going to take care of your children after you pass away, it's so important, otherwise you're leaving it up to the state to determine who gets your children.
Okay. And then a lot of folks are thinking about saving up for college and college tuition. What are some of the other expenses that, you know, parents really should be thinking about that they're forgetting? Right.
Well, it's not even that. It's more the planning long term. Right. So we're talking about parent mistakes that we're making now, or we're actually doing some stuff now, but there will be mistakes down the road. And so when you apply for the college tuition, you fill out every year called the fafsa, the Free Application for Financial Student Aid. What will happen if you have the money in the kid's name? The government will want to take most of the money towards tuition. If you have it in your name, like in the 529 plan, they're only looking at taking about 6% a year. And so it allows you to use more money towards other children because most people don't have more than one child. So what you want to do, that's more planning long term. So be careful when you're starting to set up a lot of the accounts for the kids now.
Okay, so one advice may be open up an account, knowing it's for them, but keeping it in your name.
Absolutely, absolutely want them in control of it. And then you can name them, you know, beneficiary. But again, do it under a trust. And that way if something happens to you, the money's going to go to them.
Okay. A lot of things to remember for those little people.
Absolutely.
Thank you so much, Lewis. We appreciate your insight.
