Coping with the Death of a Loved One

When tragedy strikes the last thing anyone wants to be bothered with are financial obligations surrounding the event. Let us share this burden with you, here are some guides to get you started.

Financial Guides

The death of a spouse or loved one is a difficult time. Yet, during this period, important financial arrangements must be made. This Financial Guide will help you handle the many financial details which must be attended to on the death of a loved one.

Coping with the death of a spouse is difficult at best, but unfortunately, many decisions need to be made and actions must be taken in the first few months after the death occurs. This Financial Guide provides information that will help guide you through this difficult time.

Collecting the Papers

The first step is to collect the necessary paperwork so that you can finalize the estate and file for any benefits that you and your children are entitled to.

The Death Certificate

Many of the offices or agencies you contact will require you to provide a copy of the death certificate. You can buy certified copies of the death certificate through your funeral director or directly from the county health department for a small fee, typically a few dollars per certificate. It is worth paying the money for the certified copies, however, since many companies require it.

Tip: Whether you think you need them or not, try to get at least 10 certified copies of the death certificate.

Insurance Policies

You will probably find copies of life, health, home mortgage, accident, and other insurance policies in a safe deposit box or with your spouse’s personal belongings. Any or all of these insurance policies could be sources of possible benefits to you and your children.

Social Security Numbers

You’ll need the Social Security numbers of your spouse and any dependent children.

Tip: Your spouse’s Social Security number can be found on the death certificate.

Military Discharge Papers

You will need a copy of a certificate of honorable (or other than dishonorable) discharge if your spouse was a veteran. If you cannot find a copy of the discharge, write to:

The Department of Defense
National Personnel Record Center
9700 Page Avenue
St. Louis, MO 63138
(314) 801-0800
website: www.archives.gov

Marriage Certificate

If you are going to apply for benefits based on your marital relationship, you will need copies of your marriage certificate. Copies are available at the office of the County Clerk where the marriage license was issued.

Children’s Birth Certificates

You will need copies of birth certificates for dependent children. Copies are available at either the state or county public health offices where the child was born.

The Will

You will need a copy of the will. Your spouse’s lawyer may have the will or it may be in a safe, a safe deposit box, or with your spouse’s personal belongings.

List of Assets

A complete list of all of your spouse’s property, including real estate, stocks, bonds, savings accounts, and personal property will be needed. Land titles, stocks certificates, and other financial papers may be stored in a safe deposit box or another secure place.

Survivor Benefits

The next step is to determine whether you are eligible for any benefits.

Insurance

Contact any insurers that may have issued policies to your spouse. Your spouse may have had several types of insurance policies, including the following:

  • Life insurance,
  • Mortgage or loan insurance,
  • Accident insurance,
  • Auto insurance,
  • Credit card insurance, and
  • Various types of insurance provided by your spouse’s employer.

The proceeds from an insurance policy can generally be paid directly to the named beneficiary. These claims can be processed quickly and are an important source of income for the survivors during this difficult time.

Tip: File claims for insurance policies as soon as possible, especially if finances are a concern.

You may be required to decide you want the payments made. Options might include taking the money in a lump-sum, or having the insurance company make fixed payments over a period of time. Which payment option to choose depends on your financial situation. You may, for example, want smaller fixed payments in order to have a steady income. Or you may want the full amount immediately to pay bills or to invest.

It is highly recommended that you consult with a financial advisor about this decision. Do not succumb to pressure from an insurer to accept one plan or another. Take your time and make the right decision for you and your family.

Social Security

Your spouse is considered covered by Social Security if he or she paid into Social Security for at least 40 quarters. If you’re not sure or need more information, contact your local Social Security Administration office or call 800-772-1213 to determine if he or she was eligible. To find the location of your local Social Security Office, visit the Social Security Administration Office Locator.

Tip: If the deceased was already receiving benefits, do not deposit any checks received after death before checking with Social Security.

If your spouse was eligible, there are two additional types of possible benefits: (1) a death benefit and (2) survivor’s benefits.

  • One-Time Death Benefit. Social Security pays a one-time death benefit toward burial expenses. Complete the necessary form at your local Social Security office or ask the funeral director to complete the application and apply the payment directly to the funeral bill. This payment is made only to eligible spouses or to a child entitled to survivor’s benefits.
  • Survivor’s Benefits for a Spouse or Children. If you are age 60 or older, you may be eligible for survivor’s benefits. The amount of any benefits for which you will be eligible before age 65 will be less than any benefits due at age 65 or over. If you are under age 60, you may also be eligible for benefits if you are a disabled widow, age 50 or older and you care for dependent children under age 16 or disabled children.

Note: Children who are under age 18 or are disabled may also be entitled to benefits.

Tip: When applying for Social Security benefits, have available your spouse’s birth and death certificates, your marriage certificate, birth certificates of any dependent children, Social Security numbers, and copies of your spouse’s most recent federal income tax return.

Veterans’ Benefits

If your spouse was a veteran who received a discharge other than dishonorable, you may be eligible to receive a non-service related death benefit. For non-service-related deaths on or after October 1, 2011, VA will pay up to $700 toward burial and funeral expenses (if hospitalized by VA at time of death), or $300 toward burial and funeral expenses (if not hospitalized by VA at time of death), and a $700.00 plot-interment allowance (if not buried in a national cemetery).

For deaths on or after December 1, 2001, but before October 1, 2011, VA will pay up to $300 toward burial and funeral expenses and a $300 plot-interment allowance. The plot-interment allowance is $150 for deaths prior to December 1, 2001. If the death happened while the Veteran was in a VA hospital or under VA contracted nursing home care, some or all of the costs for transporting the Veteran’s remains may be reimbursed. Starting in fiscal year 2013, an annual increase in burial and plot allowances for deaths occurring after October 1, 2011, and is based on the Consumer Price Index for the preceding 12-month period.

Burial in a national cemetery is free to a veteran, his or her spouse, and dependent children. Veterans are also eligible for a headstone or grave marker at no charge. The funeral director can help you apply for these benefits or you can contact the regional Department of Veterans’ Affairs (VA) office.

If your spouse was receiving disability benefits, you and any dependent children may also be entitled to monthly payments. Check with your regional VA office.

Employee Benefits

If your spouse was employed at the time of death, ask his or her employer about any survivors’ benefits. Your spouse may also be due a paycheck for vacation or sick leave. If the employer provided life, health, or accident insurance, you may be entitled to receive payments under these policies. If your spouse belonged to a union or professional organization, find out if this organization offers death benefits for members. If the death was work-related, you may be entitled to worker’s compensation benefits.

You should also contact all past employers, including federal, state, or local governments, to determine whether you are entitled to any payments from a pension plan.

If your spouse was already retired and was receiving a pension, check with the employer to determine if you will continue to receive a pension payment, and in what amount. You should get professional guidance as to when and how to take any retirement plan distributions due your spouse or you.

The Will

If your spouse had a valid will, try to find a copy of it. Check with your lawyer, family and anyone who might know where the will is kept. It may be stored in a safe deposit box, which is sealed at the time of death in some states.

Caution: Wills should not be stored in safe deposit boxes.

If your spouse did not have a will, his or her estate will be distributed according to state intestacy law. However, the state intestacy law will not apply to property where the title is in the name of the deceased and another person who has a right of survivorship. This property automatically passes to the co-owner.

Probate

Probate is the legal process of paying the deceased’s debts and distributing the estate to the rightful heirs. This process usually entails:

  • The appointment of an individual by the court to act as personal representative or executor of the estate; this person is often named in the will. If there is no will, the court appoints a personal representative, usually the spouse.
  • Proving that the will is valid.
  • Informing creditors, heirs, and beneficiaries that the will is to be probated.
  • Disposing of the estate by the personal representative in accordance with the will or state law.

The personal representative named in the will must file a petition with the court after the death. There is a fee for the probate process. Depending on the size and complexity of the probable assets, probating a will may require legal assistance.

Assets jointly owned by the deceased and someone else are not subject to probate. Proceeds from a life insurance policy or Individual Retirement Account (IRA) that are paid directly to a beneficiary are also not subject to probate.

Taxes

There are various taxes that will have to be paid. Here is a summary:

  • Federal Estate Tax. Estate tax is generally only due on estates exceeding the unified credit exemption equivalent, which for 2016 is $5,450,000 ($5,430,000 in 2015). It was $5,340,000 in 2014. In 2013 it was $5,250,000 and in 2012 it was $5,120,000. In 2011, the exemption amount was $5,000,000 and in 2010, there was no exemption amount. Starting with tax year 2013, estates over the threshold amount (e.g. $5,450,000 in 2016) are subject to 40 percent tax.
  • State Death Taxes. State laws vary, but generally, any estate which pays a federal estate tax must also file a state estate or death tax form and pay the state death tax. This amount is paid by the estate to the state in which the deceased lived.
  • State Inheritance Taxes. Again, state requirements vary. Most states charge no inheritance tax.
  • Federal and State Income Taxes. The federal and state income taxes of the deceased are due for the year of death. The taxes are due on the normal filing date of the following year unless an extension is requested.

Tip: Professional guidance is strongly recommended in preparing the tax returns because the filing rules are quite complicated and many tax-saving opportunities might be overlooked by an unqualified preparer.

Changing Ownership or Title

You may need to transfer ownership or change the title of property or revise documents after a death. Here are some items that should be checked:

Insurance Policies

If you hold any insurance policies, you may have to change beneficiaries. You may decide that you no longer need to have the same coverage if you do not have dependents, especially in the case of life insurance policies. Auto insurance and home insurance may also need revision.

Your spouse may have medical insurance coverage through work. Under a federal law called COBRA, you and any dependent children may be entitled to continue under your spouse’s work-related medical insurance plan for up to 36 months, provided you pay the premiums. On the other hand, you may need to purchase your own medical.

Tip: Check with the employer to see if you can continue with its group health insurance plan, which may be less expensive. Contact the company issuing the policy to make any changes or for more information.

Automobiles

The title of the car owned by your spouse may need to be changed. Contact your state’s Department of Motor Vehicles.

Will

If your will provides for property to pass to your spouse, it should be updated. You may want to contact your estate planner for assistance.

Bank Accounts, Stocks, Bonds

If you had a joint bank account with your spouse, it will automatically pass to you. Check with the bank about changing the title and signature card on the account. To change stocks or bond titles, check with your stockbroker.

If a bank account was held only in the name of your spouse, those assets will have to go through probate. An exception to this would be trust accounts.

Safe Deposit Box

In most states, if the box was rented only in the name of your spouse, it will require a court order to open the box. Only the will or any other materials pertaining to the death can be removed before the will has been probated.

Credit Cards

Credit cards held exclusively in the name of your spouse should be canceled. Any payments due on these credit cards should be paid by the estate.

Your spouse may have used credit cards in both your names or used cards listed only in your name. If so, make the payments due on these cards to keep your own good credit rating. Notify the credit card companies that your spouse is deceased and that the card should list your name only. Some people, particularly widows, may experience difficulties in getting a new card if they do not have their own credit rating.

Tip: When applying for a card, inform the lender about credit cards you shared with your spouse, even if your name was not listed.

General Finances

Debts owed by your spouse will be the responsibility of the estate and should be forwarded to the personal representative or executor who is settling the estate. However, you should pay debts that are jointly owed, particularly mortgage payments and utility or phone bills, in order to keep a good credit rating.

Caution: Do not immediately make permanent significant financial decisions, such as selling your home, moving or changing jobs. You will need some time to consider your situation before you can make these decisions responsibly. If at all possible, do not rush into a decision you might later regret.

Each year, Americans arrange more than 2 million funerals, often costing $10,000 or more. What are your options? What is required by law? What information are you entitled to? This Guide provides the answers to these and other questions.

Most decisions about purchasing funeral goods and services are made by people who are grieving and under time constraints. Thinking ahead may help you make informed and thoughtful decisions about funeral arrangements. Moreover, it will relieve some of the stress. If you plan ahead, you can carefully choose the specific items you want and need and can compare prices offered by one or more funeral providers.

There are federal regulations aimed at protecting purchase vs. funeral arrangements and services. This Financial Guide explains how to take advantage of these regulations to arrange for a funeral in the most cost-effective way.

Arranging a Funeral

When the time comes to make funeral arrangements, first decide how much you want to spend for the funeral. Funerals generally range from $4,000 to $6,000, and often much more, depending on location and style. Knowing how much you want to spend will help you to plan the funeral, and to keep costs within reason.

Tip: A cost-saving alternative for some people is a memorial society (click here for a list of memorial societies). Members of these non-profit groups, located in 40 states, have access to less expensive funeral alternatives, and may save you hundreds or even thousands of dollars on funeral arrangements.

If you decide to make plans about funeral arrangements in advance, either for yourself or a loved one, you’ll have choices of several types of dispositions and ceremonies. Unless a deceased person has indicated his or her desires, you will have to choose how the remains will be disposed of: burial, entombment, or cremation. You may wish to consult with your religious leader. The type of disposition you choose will affect the cost.

Tip: To help ensure that your own wishes are carried out, you may want to write down your preferences. It also may be helpful to tell relatives and other responsible persons what you have decided.

When pre-planning funeral arrangements, here are some of the services and options you should consider:

Tip: Bring a friend or relative with you, someone who is not emotionally involved, when making funeral arrangements, whether or not you are pre-planning them. This can help you keep the proper perspective on costs and elaborateness.

  • Filing of the death certificate and provision of copies
  • Moving the deceased’s remains to the funeral home
  • Embalming
  • Preparing the body
  • Whether the service is to be indoors, at graveside, or both
  • Location of the service-at funeral home or at church or temple
  • Content of the service, who will conduct it, and other speakers
  • Music
  • Flowers
  • Pallbearers
  • The hearse to be used and limousines for family members
  • Transportation of the body to the cemetery
  • Whether casket will be open or closed
  • Viewing the body
  • Chairs and tents for guests at the cemetery
  • Guest book to be signed
  • Headstone
  • Obituaries

How the Funeral Rule Protects You

The Funeral Rule is the FTC’s trade regulation rule concerning funeral industry practices and has been in effect since April 30, 1984. This rule, which is a trade regulation rule for the funeral industry, enables you to get cost and other information about funeral arrangements both over the telephone and in person. It makes it easier for you to select only those goods and services you want or need and to pay for only those you select.

The Funeral Rule requires that the funeral provider gives you a Statement of Funerals and Services Selected after you select the funeral goods and services you would like. The statement shows the prices of the individual items you are considering for purchase, as well as the total price. It also requires providers to give you the cost of individual items over the telephone or, if when you inquire in person about funeral arrangements, the funeral home will give you a written price list of the goods and services available.

When arranging a funeral, you can purchase individual items or buy an entire package of goods and services. If you want to purchase a casket and/or vault, the funeral provider will supply lists that describe all the available selections and their prices. As described in greater detail in the following section, the Funeral Rule helps you obtain information about the cost and availability of individual funeral goods and services.

Telephone Inquiries

When you call a funeral provider and ask them about terms, conditions, or prices of funeral goods and services, the funeral provider will:

  • Give you prices and any other information from the price lists to reasonably answer your questions.
  • Give you any other information about prices or offerings that are readily available and reasonably answers your questions.

Tip: By using the telephone, you can compare prices among funeral providers. Getting price information over the telephone may help you select a funeral home and the arrangements you want.

In-Person Inquiries

If you inquire in person about funeral arrangements, the funeral provider will give you a general price list. This list, which you can keep, contains the cost of each individual funeral item and service offered. It also discloses important legal rights and requirements regarding funeral arrangements. It must include information about embalming, caskets for cremation, and required purchases.

Tip: Use this information to help select the funeral provider and funeral items you want, need, and are able to afford.

Embalming Information

The Funeral Rule requires funeral providers to give you information about embalming that may help you decide whether to purchase this service. Under the Rule, a funeral provider:

  • May not falsely state that embalming is required by law.
  • Must disclose in writing that, except in certain special cases, embalming is not required by law.
  • May not charge a fee for unauthorized embalming unless it is required by state law.
  • Will disclose in writing that you usually have the right to choose a disposition such as a direct cremation or immediate burial if you do not want embalming.
  • Will disclose to you in writing that certain funeral arrangements, such as a funeral with viewing, may make embalming a practical necessity and, there would be a required purchase.

Cash Advance Sales

The Funeral Rule requires providers to disclose to you in writing if they charge a fee for buying cash advance items. Cash advance items are goods or services that are paid for by the funeral provider on your behalf. Some examples of cash advance items are flowers, obituary notices, pallbearers, and clergy honoraria. Some funeral providers charge you their cost for these items. Others add a service fee to their cost.

The Funeral Rule requires the funeral provider to inform you when a service fee is added to the price of cash advance items or if the provider gets a refund, discount, or rebate from the supplier of any cash advance item.

Direct Cremations

Some people may want to select direct cremation, which is cremation of the deceased without a viewing or other ceremony at which the body is present. If you choose a direct cremation, the funeral provider will offer you either an inexpensive alternative container or an unfinished wood box. An alternative container is a non-metal enclosure used to hold the deceased. These containers may be of pressboard, cardboard, or canvas.

Tip: Because any container you buy will be destroyed during the cremation, you may wish to use an alternative container or an unfinished wood box for a direct cremation. These could lower your funeral costs since they are less expensive than traditional burial caskets.

Under the Funeral Rule, funeral directors who offer direct cremations:

  • May not tell you that state or local law requires a casket for direct cremations.
  • Must disclose in writing your right to buy an unfinished wood box (a type of casket) or an alternative container for a direct cremation
  • Must make an unfinished wood box or alternative container available for direct cremation.

Required Purchases

You do not have to purchase unwanted goods or services or pay any fees as a condition of obtaining those products and services you do want, other than one permitted fee for services of the funeral director and staff and fees for other goods and services selected by you or required by state law. Under the Funeral Rule:

  • You have the right to choose only the funeral goods and services you want, with some exceptions.
  • The funeral provider must disclose this right in writing on the general price list.
  • The funeral provider must disclose on your itemized statement of goods and services selected the specific state law that requires you to purchase any particular item.
  • The funeral provider may not refuse, or charge a fee, to handle a casket you purchased elsewhere.

Preservative and Protective Claims

Under the Funeral Rule, funeral providers are prohibited from telling you a particular funeral item or service can indefinitely preserve the body of the deceased in the grave. The information gathered during the FTC’s investigation indicated these claims are not true. For example, funeral providers may not claim embalming or a particular type of casket will indefinitely preserve the deceased’s body.

The Rule also prohibits funeral providers from making claims that funeral goods, such as caskets or vaults, will keep out water, dirt, or other gravesite substances when it is not true.

Statement of Funeral Goods and Services Selected

The funeral provider will give you an itemized statement of the total cost of the funeral goods and services you select.

Tip: This statement also will disclose any legal, cemetery, or crematory requirements that require you to purchase any specific funeral goods or services.

The funeral provider must give you this statement after you select the funeral goods and services that you would like. The statement combines in one place the prices of the individual items you are considering for purchase, as well as the total price. You can decide whether to add or subtract items to get what you want. If the cost of cash advance items is not known at this time, the funeral provider must write down a good faith estimate of their cost.

Tip: The Funeral Rule does not require any specific form for this information. Therefore, this information might be included in any document they give you at the end of your discussion about funeral arrangements.

How to Make a Complaint

If you have a problem concerning funeral matters, you should, of course, first attempt to resolve it with your funeral director. If you are dissatisfied, contact your federal, state, or local consumer protection agencies, or one of the organizations in the “Useful Resources” section below.

While the Federal Trade Commission does not resolve individual consumer disputes, information about your experience may show a pattern of conduct or practices that the Commission may investigate to determine if any action is warranted.

Benefits for Widows/Widowers

Many people do not realize that widows and widowers can begin receiving Social Security benefits at age 60 (or age 50 if disabled) on the deceased spouse’s account. If you are receiving widows/widowers (including divorced widows/widowers) benefits, you can switch to your own retirement benefits (assuming you are eligible and your retirement rate is higher than your widow/widower’s rate) as early as age 62.

In many cases, a widow or widower can begin receiving one benefit at a reduced rate and then switch to the other benefit at an unreduced rate at age 65. Since the rules vary depending on the situation, talk to a Social Security representative about the options available to you.

Useful Resources

    • Most states have a licensing board that regulates the funeral industry. You may contact the licensing board in your state for information or help.
The International Conference of Funeral Service Examining Boards
1885 Shelby Lane
Fayetteville, Arkansas 72704
479-442-7076
  • AARP publishes Funeral Goods and Services and Pre-Paying for Your Funeral, as well as other helpful pamphlets and free guides.
American Association of Retired Persons (AARP)
AARP Fulfillment
601 E Street, N.W.
Washington, D.C. 20049
Funeral Consumers Alliance
33 Patchen Road
South Burlington, VT 05403
Tel. 802-865-8300
  • The Cremation Association of North America (CANA)is an association of crematories, cemeteries, and funeral homes that offer cremation. More than 750 members own and operate crematories and encourage advance planning.
Cremation Association of North America
499 Northgate Parkway
Wheeling, Illinois 60090
312-245-1077
  • The International Order of the Golden Rule is an international association of independent funeral homes in which membership is by invitation only. Approximately 1,500 funeral homes are members of OGR.

International Order of the Golden Rule
3520 Executive Center Drive, Suite 300
Austin, TX 78731
800-637-8030

  • The National Funeral Directors Association is the largest educational and professional association of funeral directors. Established in 1882, it has 14,000 members throughout the United States.
National Funeral Directors Association
13625 Bishop’s Drive
Brookfield, WI 53005
800-228-6332
  • The National Funeral Directors and Morticians Association is a national association of funeral firms in which membership is by invitation only and is conditioned upon the commitment of each firm to comply with the association’s Code of Good Funeral Practice. Consumers may request a variety of publications through NSM’s affiliate, the Consumer Information Bureau, Inc.
National Funeral Directors and Morticians Association
6290 Shannon Parkway
Union City, GA 30291
800-434-0958
  • If you have a complaint or question about funeral arrangements or funeral home practices:

Selected Independent Funeral Homes
500 Lake Cook Road, Suite 205
Deerfield, IL 60015
800-323-4219

The post-mortem letter, a simple and practical estate planning tool you can put together yourself, can protect your estate, maximize the amount available to heirs and save your spouse and executors a lot of trouble. This important letter tells your executor and survivors where to locate everything they need to carry out your instructions.

Does anyone other than yourself know where your tax records and supporting tax documents are located? How about deeds, titles, wills, insurance papers? Does anyone know who your accountant is? Your lawyer? Your broker? Your financial planner? Your insurance agent? If you pass away without leaving your heirs this information, it will cause a lot of headaches. Worse than that, part of your estate may have to be spent in needless taxes, claims, or expenses because the information is missing.

The post-mortem letter is an often overlooked estate planning tool. Tell your executors and survivors what they need to know to maximize your estate the location of assets, records, and contacts. Without the post-mortem letter, you risk losing part of your estate’s assets because necessary assets and documentation cannot be located.

What the Post-Mortem Letter Does

A post-mortem letter provides executors and survivors with the location of assets, the identity of professionals consulted by you during life, and the location of important records. And while its inclusion in your estate plan is optional, it is often a very helpful document to have during an especially stressful time.

To represent you after your death, your executor must know almost everything you know. He or she must have all of the facts, figures, and proof that you have at your fingertips. This is where the post-mortem letter is most helpful. Only with the aid of this information can the executor carry out your desires.

The post-mortem letter also serves to inform your loved ones of things you would like done in the event of your death and guidance as to how you would like certain items handled. This includes many things which may not be appropriate to include in your will or which need to be handled immediately after death and prior to a reading of your will.

What the Post-Mortem Letter Does Not Do

The post-mortem letter cannot be used in place of a properly executed will and does not have the legal force of a will. Similarly, it does not take the place of a living will. The post-mortem letter is designed to convey instructions after your death, as opposed to after a life-threatening injury. It is vital to have both a will and a living will in addition to a post-mortem letter.

How To Get the Post-Mortem Letter to Your Executors

Write the post-mortem letter now. Leave several copies of the letter in places where it is certain to be found after your death–for example, attached to your will, in your desk, with your spouse, with your attorney, with your executor, and/or in a safe deposit box.

If you do not want the information in the letter revealed before your death, leave the letter sealed.

Do not leave the only copy of your post-mortem letter in your safe deposit box. It may never be found or may be inaccessible after death.

Caution: It is extremely important that instructions be left with the survivors that none of your papers are to be thrown away until the matter is discussed with your attorney, accountant, or executor. Otherwise, your efforts to provide information helpful to your estate may be thwarted.

Tip: It is critical to update the letter periodically to account for changes that occur after you write it.

What The Post-Mortem Letter Should Contain

The following items should be included in the post-mortem letter.

To-Do List

  • Notify your employer (remember to include phone numbers).
  • Notify certain friends and relatives (provide a list with phone numbers).
  • If you have volunteered as an organ donor, provide the information necessary for your family to act on your wishes.
  • Notify the Social Security Administration (include your social security number for convenience).
  • List of names and contact numbers for an accountant, attorney, financial planner, and insurance agents.
  • List of club memberships.
  • Any instructions on the care of pets.

Location of Your Will

The location of your final executed will should be mentioned, along with any copies.

Caution: Do not leave a will in a safe deposit box. Safe deposit boxes are sealed on the death of the decedent in many states; this will cause headaches and delay.

Guardians of Children

The names and addresses of guardians for minor children in case they are orphaned should be mentioned in your will. These should also be included in the letter.

Funeral Arrangements and Cemetery Plot

If you have made arrangements for funeral services or have established a pre-need funeral trust, provide details in the letter. The location of your cemetery plot and the location of the deed or certificate relating to the burial plot should be mentioned. Any specific instructions for the executor relating to burial should be mentioned in the letter.

Tip: For the reasons mentioned above under “Location of Will,” do not leave the cemetery plot deed or certificate in a safe deposit box.

Safe Deposit Boxes

The location of safe deposit boxes, the contents, along with the location of keys, passwords, and combinations, should be mentioned. The letter should indicate whether anyone else has access to the boxes.

Tip: If other people have access, ask the executor to take inventory of the box before anyone else is allowed to take items out of the box.

If you have rented a post office box, include the number, location of the box and location of the key.

Bank, Checking, and Credit Card Accounts

All checking and savings accounts and their account numbers should be mentioned. Instruct the executor whether a stop should be placed on withdrawals from these accounts, and whether anyone else has the right to withdraw from them, whether as a co-depositor or under a power of attorney.

Describe where your current and past checkbooks and canceled checks can be found. These may save the estate from having to pay a claim or expense that has already been paid, and can establish the cost of an asset.

Tip: Be sure to mention any accounts that are not in your name, such as deposits in a Swiss numbered account. Otherwise, these accounts may be lost because no one knows about them.

Tip: Keep savings accounts active by periodically sending a request for the balance in writing, or by making deposits. Inactive accounts that are left for a certain period may revert to the state.

A list of credit card accounts and numbers should be included. The executor should be instructed to cancel credit card accounts immediately, and to change joint accounts to single accounts.

Loans

Provide information on any outstanding debts. Some loans such as student loans and home mortgages may have an insurance feature which cancels the debt in the event of your death. In the case of student loans, this was often paid for in the form of a fee at the amount the loan was disbursed and many people are unaware of this feature. Examine your loan documents for any such features and detail them in your letter.

Tax-Related Matters

The location of copies of your income-tax returns going back as far as possible should be mentioned.

The location of copies of any gift-tax returns filed at any time should also be mentioned. If copies cannot be located, your memory of when and where the gift tax returns were filed, and the gift to which they related, should be mentioned. If there are any refund claims pending, or if you feel a refund should be filed for, mention these as well.

Attorneys and Other Professionals

Mention the names and addresses of any professionals associated with your affairs, or who could be of assistance to the executor. Include accountants, attorneys, insurance agents, financial advisors, bank officers, realtors, and brokers. If you relied heavily on these people, they could save your estate plenty of money and trouble just by answering a few of the executor’s questions.

Tip: Also mention your physician, since your executor may need help in proving you were mentally competent.

Insurance-Related Matters

Mention all life insurance policies owned, with the policy numbers. Give the location of the policies. Do not neglect to mention employer-provided group insurance.

All property, liability, malpractice, business continuation and other types of insurance policies should be mentioned. These policies may save the estate from having to pay a claim, and may also contain the location and description of properties. Further, access to these policies may allow the estate to obtain reimbursement for expenses incurred immediately prior to death.

Tip: Mention policies that have lapsed, since they may still have some value.

Property Owned

List all assets you own and give the location of deeds and titles. Include personal and real property.

Tip: If you know of a market for some of your assets that might otherwise be difficult to sell (e.g., a special collection or unique asset), tell the executor about it.

Don’t neglect to mention property that will not be easy to locate, e.g., property you have loaned out or sold on consignment.

Tip: If there is any reason why the executor should value a piece of property at less than its fair market value, explain why.

Investments

List all brokerage accounts and other investment vehicles, such as limited partnerships or interests in real estate.

Give the location of brokers’ confirmation slips for purchases of securities going back as far as possible, in order to establish the cost of securities. The cost is your tax basis, which will affect the amount of tax you pay on a sale for securities you may have sold prior to death. The basis of securities held at the time of death will be determined with reference to their current value. If you cannot locate confirmation slips, then, at least, make a note of transfer dates shown on stock certificates and registered bonds. These dates will allow you to look up the price of the stock.

Provide information on all retirement accounts, including IRAs. Indicate your designated beneficiary and describe where statements are located. In the case of IRAs, provide information on the tax status of the account. In particular, if non-deductible contributions were made a portion of the account may not be taxed to the beneficiary.

Employment

Provide a list of all prior employers, no matter how long ago you worked for them. You may be entitled to pension benefits or death benefits.

Tell the executor where to find a description of any pension benefits you are entitled to.

Provide the executor with a record of any governmental employment, past or present. For the armed services, include the branch of service, serial number, and approximate dates. You may be entitled to veterans’ benefits or survivors’ benefits.

Personal Papers

Mention the location of your passport and your birth certificate, which may be needed for Social Security benefits and employee retirement plans and specify the location of your marriage certificate, which may be needed in connection with the marital deduction, joint gifts, and statutory spousal rights. A divorce decree will also be necessary, and should be mentioned.

Inheritances

If you received an inheritance from someone, include the name of that person and the date of death. The executor may be able to claim a state or federal estate tax credit for transfers within ten years of your death. Note the location of any letters from the person’s executor, if any.

If you have any future rights in someone else’s property, whether by will or by trust, include those details.

Trusts

If you have ever set up a trust or been named as a trust beneficiary, where the trust instrument is located and when the trust was set up.

Money Owed to You

Mention debts owed to you by others and any proof that the debt exists.

Government and Non-Profit Agencies

  • To obtain the free brochure, “Pre-paying Your Funeral” (#D13188) contact the AARP:
  • To order free educational materials visit the Federal Trade Commission
  • Funeral Consumers Alliance
    A nonprofit organization dedicated to protecting a consumer’s right to choose a meaningful, dignified, affordable funeral.
  • Army and Air Force Mutual Aid Association
    An organization that provides information on officers’ benefits and estate planning
    Tel. 800-336-4538
  • Navy Mutual Aid Association
    This veterans’ benefit organization provides information for Navy, Marine Corps, Coast Guard, Public Health, and NOAA personnel
    Tel. 800-628-6011
  • These publications contain estate planning tips for military personnel:
    • National Guard Almanac
    • Reserve Forces Almanac
    • Retired Military Almanac
    • Uniformed Services Almanac (Active Duty)
How much life insurance do you need? What type is appropriate? You should review your life insurance needs each time you have a major life event.

Life Insurance Guide

Frequently Asked Questions

How much will it cost me to raise a child?

We can’t tell you exactly what your child will cost, but we can provide you with estimates. Knowing what to expect will allow you to plan for the future. Here is a breakdown of the items you’ll need, and an estimate of their costs.

Note: These estimates are for a first child. Bear in mind that second or third children will cost less than the first since you will already have purchased many of the items you need. Typically parents with 3 or more children spend 22 percent less per child than those with just two children.

Government estimates say that a middle-income family in 2013, defined as having an annual income between $61,530 and $106,540, will spend a total of $245,340 to raise a child to age 17. This figure represents a 1.7 percent increase from 2012 and does not include expenses incurred beyond the age of 18. If you include the cost of college, whether public or private, that cost goes up significantly. And, families that earn more generally can expect to spend more on their children.

According to the USDA report, Expenditures on Children by Families, 2013, annual child-rearing expenses per child for a middle-income, two-parent family ranged from $12,800 to $14,970. The age of the child accounted for the annual variations. For example, child care expenses are greater in the first 6 years of a child’s life, but transportation costs are likely to be higher when a child hits her teen years.

About 30 percent of the amount spent in the government estimates goes to cover housing expenses relating to the new member of your household. Child care and education expenses account for the second highest percent. Other costs taken into account include transportation, food, clothing, health care, and miscellaneous expenses.

Families in the urban Northeast can expect their expenses to be higher than the rest of the country, but the urban West coast does not lag far behind. However, families living in the urban South and in rural areas experience the lowest expenses.

What costs can I expect during the first year?

Here are the costs you can expect up to birth and during the first year.

  • Hospital Costs. According to the Transforming Maternity Care Partnership, in 2011, an uneventful hospital delivery, on average, in the United States cost between $10,657 (vaginal birth, no complications) and $23,923 (cesarean section birth with complications). The actual costs you pay, of course, vary depending on your health care coverage.
  • Layette. Before you bring the baby home, you’ll buy a crib, a changing table, and a swing or bouncy seat. The moderately priced versions of these three things will cost you about $1,200. You’ll also need at least one stroller that you can expect to pay about $400 for. A full-size infant car seat will cost you about $150-$200, and a full-size high chair will cost $150. Finally, you will spend several hundred dollars on washcloths, sheets, blankets, towels, undershirts, onesies, and other baby clothes. Also, think about whether you plan to use a diaper service, cloth diapers, or use disposable ones.
  • Feeding. The American Academy of Pediatrics recommends exclusively breastfeeding your baby for at least 6 months. Many women, of course, choose to breastfeed longer than that. Nursing mothers will have to invest in several good nursing bras and nursing pads (about $50) as well as a nursing pillow (about $25). If you plant to return to work after 3 months, consider investing in a hospital grade breast pump, which will run you about $400.In comparison, a year’s worth of ready-mix powder formula costs about $1,350. If you buy the ready-to-serve type of formula, the cost is, even more, running well over $2,000. You’ll also need a year’s supply of bottles, at about $90, and you’ll have to add another $40 to replace the nipples at least twice in a year.When your baby is ready for solid foods, you will also need to account for the cost of rice cereal and baby food.
  • Diapers and Gear. Diapers are another expense you need to consider. Cloth diapers are the least expensive option. Disposable diaper costs for the first year run about $850, and a diaper genie costs about $40.
  • Child Care. Child care in a day care center costs much less than a live-in nanny. A mid-priced day care center charges on average $975 per month for your infant’s care, or close to $12,000 per year.
  • Health Care. Your infant will visit the doctor about six times during his or her first year, including well-baby check-ups as well as the inevitable colds and fevers of infancy. How much you will spend for doctor visits during the first year depends on your health insurance.
  • Toys and Clothes. You’ll spend about $500 on toys and clothing during the first year.
  • Total for the First Year. Your total expenses for the first year run about $15,000-$18,000. The biggest variable is the cost of health care.

How much will I spend on my child during ages one through six?

During these years, you’ll spend about $1,000 on toys and clothes, and about $2,200 a year on food. If your child attends daycare or pre-school, add in the cost of these services. Daycare will cost you an average of $12,000 per year, while pre-school costs vary widely. Again, health care costs depend on your health coverage.

How much will I spend on my child during ages six through twelve?

This is the time when the overall expenses of child-rearing drop and families can save more. During these years, your child care expenses will drop drastically. Health care costs generally stabilize unless of course, your child begins orthodontia during this stage. Then, you’ll have to pay more.

You are likely to spend more than in the previous stage on clothing, toys, and entertainment, but your kids won’t be demanding the high-ticket clothing and other items of adolescence. The bill for food will be just slightly more than what it was in the previous stage.

On the negative side, now that your kids are in school, you’ll want to pay for all those extras that middle-class kids have: dancing and music lessons, sports participation, and so on. And, if you decide to send your kids to private school or to summer camp, these expenses will have to be added in.

How much will I spend on my child during ages thirteen through eighteen?

During this stage, you can expect your child’s food, clothing, and entertainment bill to greatly exceed what it was during the previous stage. For instance, food costs will increase as a result of growth spurts in your adolescent and clothing costs are likely to rise as well as your teen takes more of an interest in his or her appearance.

Once your teen starts driving, your auto insurance will go up. The extra cost could be anywhere from $300 to $1,000, depending on your state of residence and whether your child is a boy or girl. If you intend to buy your child a car, add this expense in as well.

How can I teach my kids good financial skills?

Once they reach school age, children should start learning rudimentary financial skills.

You might start to teach your kids in the following areas:

The Allowance. Giving your child an allowance is a good start. Whether you pay your child a quarter or one dollar to perform weekly household chores, you are instilling a work ethic and a giving them an opportunity to learn how to save and spend their money wisely. You can make suggestions to them about what they should do with it, but allow them the final say on what happens to the money. Let them see the consequences of both wise and foolish behavior with regard to money. A child who spends all of his money on the first day of the week is more likely to learn budgeting if he is not provided with extras to tide him over.

Savings and Investment. Beyond the basics of budgeting and saving, you’ll want to get your child involved in saving and investing. The easiest way to do this is to have the child open his or her own savings account. If you want your child to become familiar with investing, there are a number of child-friendly mutual funds and individual stocks available.

Taxes. Many teens today have part-time jobs. Although they might not make enough to need to file a tax return, encouraging them to fill out a practice tax form is a good way to have them participate in the process–and get them used to the idea of submitting yearly tax forms.

What kinds of household workers are covered by nanny tax rules?

Household workers include anyone who does work in or around your home such as babysitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. In addition, the worker must be your employee, which means you can control not only what work is done, but how it is done.

It does not matter whether the work is full-time or part time, or that you hired the worker through an agency. On the other hand, if only the worker can control how the work is done, the worker is not your employee, but is self-employed.

What must I do if I think my worker or worker-to-be isn’t a U.S. citizen?

It is unlawful for you to knowingly hire or continue to employ an alien who cannot legally work in the United States.

When you hire a household employee to work for you on a regular basis, he or she must complete the employee part of the Immigration and Naturalization Service (INS) Form I-9, Employment Eligibility Verification. You must verify that the employee is either a U.S. citizen or an alien who can legally work here and then complete the employer part of the form. Keep the completed form for your records.

What are my tax duties if I have a household employee?

You may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or you may need to do both.

  • If you pay cash wages of $1,900 or more per year to any one household employee, withhold and pay Social Security and Medicare taxes.
  • If you pay total cash wages of $1,000 or more in any calendar quarter to household employees, you must pay unemployment tax.

If I hire teenagers as babysitters or for yard work, must I withhold and pay tax for them?

When figuring whether you paid an employee $1,900 or more in 2016 to babysitters or others, you generally don’t count wages paid to an employee who is under age 18 at any time during the year.

If the employee is a student, providing household services is not considered his or her principal occupation. However, you should count these wages if providing household services is the employee’s principal occupation.

Are there ways to pay my household employee that minimize the employment tax?

Wages subject to employment tax do not include the value of food, lodging, clothing, and other non-cash items you give your household employee. However, cash you give your employee in place of these items is included in wages.

If you reimburse the amount your employee pays to commute to your home by public transit (bus, train, etc.), do not count the reimbursement (up to $255 per month in 2016) as wages.

Further, if you reimburse your employee for the cost of parking at or near a location from which your employee commutes to your home, do not count the reimbursement (up to $255 a month in 2016) as wages.

I’m not sure yet whether I’ll pay enough this year to require withholding. What should I do?

You should withhold the employee’s share of Social Security and Medicare taxes if you expect to pay your household employee Social Security and Medicare wages of $1,900 or more in 2016.

If you withhold the taxes but then actually pay the employee less than $1,900 in Social Security and Medicare wages for the year, you should repay the employee.

Okay, I’ve withheld tax on the employee and I owe the employer’s share. How do I pay these amounts?

You pay withheld taxes as part of your regular income tax obligation. You don’t deposit them periodically. If you make an error by withholding too little, you should withhold additional taxes from a later payment. If you withhold too much, you should repay the employee.

Do I have to reduce the worker’s take-home pay by the tax on that pay?

If you prefer to pay your employee’s Social Security and Medicare taxes from your own funds, you do not have to withhold them from your employee’s wages. The Social Security and Medicare taxes you pay to cover your employee’s share must be included in the employee’s wages for income tax purposes. However, they are not counted as Social Security and Medicare wages or as federal unemployment (FUTA) wages.

In what cases do I owe unemployment tax?

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. You may owe only the FUTA tax or only the state unemployment tax, or both. To find out whether you will owe state unemployment tax, contact your state’s unemployment tax agency.

If you pay cash wages to household employees totaling $1,000 or more in any calendar quarter of 2015 or 2016, the first $7,000 of cash wages you pay to each household employee in 2016 is FUTA wages. If you pay less than $1,000 cash wages in each calendar quarter of 2016, but you had a household employee in 2015, the cash wages you pay in 2016 may still be FUTA wages. They are FUTA wages if the cash wages you paid to household employees in any calendar quarter of 2015 or 2016 totaled $1,000 or more.

Do not withhold the FUTA tax from your employee’s wages. You must pay it from your own funds.

Do I need to withhold federal income tax?

You are not required to withhold federal income tax from wages you pay a household employee. You should withhold federal income tax only if your household employee asks you to withhold it and you agree. The employee must give you a completed Form W-4, Employee’s Withholding Allowance Certificate. If you agree to withhold federal income tax, you are responsible for paying it to the IRS.

You figure federal income tax withholding on both cash and non-cash wages you pay. Measure non-cash wages by the value of the non-cash item. Do not count as wages any of the following items:

  • Meals provided at your home for your convenience.
  • Lodging provided at your home for your convenience and as a condition of employment.
  • Up to $255 a month in 2016 for bus or train tokens (passes) you give your employee, or in some cases for cash reimbursement you make for the amount your employee pays to commute to your home by public transit.
  • Up to $255 a month in 2016 to reimburse your employee for the cost of parking at or near your home or at or near a location from which your employee commutes to your home.

Any income tax you pay for your employee without withholding it from the employee’s wages must be included in the employee’s wages for federal income tax purposes. It is also counted as Social Security, Medicare and FUTA wages.

What about Earned Income Credit (EIC)? What must I do?

Certain workers can take the earned income credit (EIC) on their federal income tax return. This credit reduces their tax or allows them to receive a payment from the IRS if they do not owe tax. You must give your household employee a notice about the EIC if you agree to withhold federal income tax from the employee’s wages and the income tax withholding tables show that no tax should be withheld. Even if not required, you are encouraged to give the employee a notice about the EIC if his or her 2016 wages are less than $47,955 ($53,505 if married filing jointly).

The employee’s copy (Copy B) of the IRS 2016 Form W-2, Wage and Tax Statement has a statement about the EIC on the back. If you give your employee that copy by January 31 (as discussed under Form W-2), you do not have to give the employee any other notice about the EIC.

What federal tax forms must I file if I have a household employee?

Form W-2 and Schedule H of Form 1040. Specifically:

  • A separate Form W-2, Wage and Tax Statement, must be filed for each household employee to whom you pay Social Security and Medicare wages, or wages from which you withhold federal income tax. Give Copies B, C, and 2 to your employee by January 31, 2017, and send Copy A of Form W-2 with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration by January 31, 2017.
  • Use Schedule H (Form 1040), Household Employment Taxes, to report the federal employment taxes for your household employee if you pay the employee Social Security and Medicare wages, FUTA wages, or wages from which you withhold federal income tax.
  • File Schedule H with your federal income tax return. If you are not required to file a tax return, file Schedule H by itself.

When should I start saving for my child’s education?

This depends on how much you think your children’s education will cost. The best way is to start saving before they are born. The sooner you begin the less money you will have to put away each year.

Example: Suppose you have one child, age six months, and you estimate that you’ll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you’ll need to save $3,500 per year for 18 years (assuming an after-tax return of 7 percent). On the other hand, if you put off saving until the child is six years old, you’ll have to save almost double that amount every year for twelve years.

Another advantage of starting early is that you’ll have more flexibility when it comes to the type of investment you’ll use. You’ll be able to put at least part of your money in equities, which, although riskier in the short-run, are better able to outpace inflation than other investments in the long-run.

How much will my child’s college education cost?

It depends on whether your child attends a private or state school. According to the College Board, average published tuition and fees for full-time in-state students at public four-year colleges and universities increased 2.9% before adjusting for inflation, rising from $9,145 in 2014-15 to $9,410 in 2015-16. Average published tuition and fees at private nonprofit four-year institutions increased 3.6% before adjusting for inflation, rising from $31,283 in 2014-15 to $32,405 in 2015-16. Undergraduates received an average of $14,210 in financial aid in 2014-15, including $8,170 in grants from all sources, $4,800 in federal loans, $1,170 in education tax credits and deductions, and $70 in Federal Work-Study.

How should I invest my child’s college fund?

As with any investment, you should choose those that will provide you with a good return and that meet your level of risk tolerance. The ones you choose should depend on when you start your savings plan-the mix of investments if you start when your child is a toddler should be different, from those used if you start when your child is age 12.

The following are often recommended as investments for education funds:

    • Series EE bonds: These are extremely safe investments. They should be held in the parents’ names. If the adjusted gross income of you and your spouse at the time of redemption is at or under the amount set by the tax law, the interest on bonds bought after January 1, 1990, is tax-free as long as it is used for tuition or other qualified education costs. If your adjusted gross income is above the threshold amount, the tax break is phased out. In 2016, the exclusion ($76,000 indexed for inflation) begins phasing out at $77,200 modified adjusted gross income and is eliminated for adjusted gross incomes of more than $92,200. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $115,750 modified adjusted gross income and is eliminated for adjusted gross incomes of more than $145,750. The exclusion is unavailable to married filing separately.
    • U.S. Government bonds: These are also investments that offer a relatively higher return than CDs or Series EE bonds. If you use zero-coupon bonds, you can time the receipt of the proceeds to fall in the year when you need the money. A drawback of such bonds is that a sale before their maturity date could result in a loss on the investment. Further, the accrued interest is taxable even though you don’t receive it until maturity.
    • Certificates of deposit: These are safe, but usually provide a lower return than the rate of inflation. The interest is taxable. These should generally only be used by the most risk averse investors and for relatively short investment horizons.
    • Municipal bonds: Assuming the bonds are highly rated, the tax-free interest on them can provide an acceptable return if you’re in the higher income tax brackets. Zero-coupon municipals can be timed to fall due when you need the funds and are useful if you begin saving later in the child’s life.

Tip: Be sure to convert the tax-free return quoted by sellers of such bonds into an equivalent taxable return. Otherwise, the quoted return may be misleading. The formula for converting tax-free returns into taxable returns is as follows:

Divide the tax-free return by 1.00 minus your top tax rate to determine the taxable return equivalent. For example, if the return on municipal bonds is 5 percent and you are in the 30 percent tax bracket, the equivalent taxable return is 7.1 percent (5 percent divided by 70 percent).

  • Stocks: An appropriate mutual fund or portfolio containing stocks can provide you with a higher yield than bonds at an acceptable risk level. Stock mutual funds can provide superior returns over the long term. Income and balanced funds can meet the investment needs of those who begin saving when the child is older.

What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit (AOC) was made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH). The maximum credit, available only for the first four years of post-secondary education, is $2,500. You can claim the credit for each eligible student you have for which the credit requirements are met.

Income limits. To claim the American Opportunity Credit, your modified adjusted gross income (MAGI) must not exceed $90,000 ($180,000 for joint filers). To claim the Lifetime Learning Credit, MAGI must not exceed $60,000 ($120,000 for joint filers). “Modified AGI” generally means your adjusted gross income. The “modifications” only come into play if you have income earned abroad.

Amount of credit. For most taxpayers, 40 percent of the AOC is a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes.

Which costs are eligible? Qualifying tuition and related expenses refer to tuition and fees, and course materials required for enrollment or attendance at an eligible education institution. They now include books, supplies, and equipment needed for a course of study whether or not the materials must be purchased from the educational institution as a condition of enrollment or attendance.

“Related” expenses do not include room and board, student activities, athletics (other than courses that are part of a degree program), insurance, equipment, transportation, or any personal, living, or family expenses. Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. For expenses paid with borrowed funds, count the expenses when they are paid, not when borrowings are repaid.

Tip: The tax law says that you can’t claim both a credit and a deduction for the same higher education costs. It also says that if you pay education costs with a tax-free scholarship, Pell grant, or employer-provided educational assistance, you cannot claim a credit for those amounts.

What is the “kiddie tax?”

In the past, parents would invest in the child’s name in order to shift income to the lower-bracket child. However, the addition of the “kiddie tax” mostly put an end to that strategy.

For taxable years beginning in 2016, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax” is $1,050 (same as 2015). The same $1,050 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax.” For example, one of the requirements for the parental election is that a child’s gross income for 2016 must be more than $1,050 but less than $10,500.

For 2016, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $2,100 (same as 2015).

Note: These rules apply to unearned income. If a child has earned income, this amount is always taxed at the child’s rate.

What is a Coverdell Education Savings Account – Section 530 Program (formerly Education IRA) and who is eligible for one?

In 2016, you can contribute up to $2,000 each year to a Coverdell education savings account (Section 530 program) for a child under 18. These contributions are not deductible, but they grow tax-free until withdrawn. Contributions for any year (say 2016) can be made through the (unextended) due date for the return for that year (April 18, 2017).

Note: For the $2,000 contribution limit, there is no adjustment for inflation and therefore, the limit is expected to remain at $2,000 for 2013 and beyond.

Only cash can be contributed to a Section 530 account and you cannot contribute to the account after the child reaches his or her 18th birthday.

Anyone can establish and contribute to a Section 530 account, including the child, and you may establish 530s for as many children as you wish. The child need not be a dependent. In fact, he or she need not be related to you, but the amount contributed during the year to each account cannot exceed $2,000. In 2016, the maximum contribution amount for each child is phased out for modified AGI between $190,000 and $220,000 (joint filers) and $95,000 and $110,000 (single filers).

If you have insufficient savings for your child’s education when he is close to entering college, what should you do?

Many families find themselves in the same boat. Fortunately, there are ways to generate additional funds both now and when your child is about to enter school:

  • You can start saving as much as possible during the remaining years. However, unless your income level is high enough to support an extremely stringent savings plan, you will probably fall short of the amount you need.
  • You can take on a part-time job. However, this will raise your income for purposes of determining whether you are eligible for certain types of student aid. In addition, your child may be able to take on part-time or summer jobs.
  • You can tap your assets by taking out a home equity loan or a personal loan, selling assets or borrowing from a 401(k) plan.
  • You (or your child) can apply for various types of student aid and education loans.

What types of grants are available for college?

Grants-the best type of financial aid because they do not have to be paid back — are amounts awarded by governments, schools, and other organizations. Some grants are need-based and others are not.

    • The Federal Pell Grant Program offers federal aid based on need.

Tip: Don’t assume that middle class families are ineligible for needs-based aid or loans. The assessment of whether a family qualifies as “in need” depends on the cost of the college and the size of the family.

  • State education departments may make grants available. Inquiries should be made of the state agency.
  • Employers may provide subsidies.
  • Private organizations may provide scholarships. Inquiries should be made at schools.
  • Most schools provide aid and scholarships, both needs-based and non-needs-based.
  • Military scholarships are available to those who enlist in the Reserves, National Guard, or Reserve Officers Training Corps. Inquiries should be made at the branch of service.

Tip: Try negotiating with your preferred college for additional financial aid, especially if it offers less than a comparable college.

What types of grants are available for college?

There are various student loan programs available. Some are need-based, and others are not. Here is a summary of loans:

  • Stafford loans (formerly guaranteed student loans) are federally guaranteed and subsidized low-interest loans made by local lenders and the federal government. They are needs-based for subsidized loans; however an unsubsidized version is also available.
  • Perkins loans are provided by the federal government and administered by schools. They are needs-based. Inquiries should be made at school aid offices.
  • Parent loans for undergraduate students (PLUS) and supplemental loans for students are federally guaranteed loans by local lenders to parents, not students. Inquiries should be made at college aid offices.
  • Schools themselves may provide student loans. Inquiries should be made at the school.

How can I increase the amount of financial aid my child is entitled to?

Here are some strategies that may increase the amount of aid for which your family is eligible:

    • Try to avoid putting assets in your child’s name. As a general rule, education funds should be kept in the parents’ names, since investments in a child’s name can impact negatively on aid eligibility. For example, the rules for determining financial aid decrease the amount of aid for which a child is eligible by 35 percent of assets the child owns and by 50 percent of the child’s income.

Example: If your child owns $1,000 worth of stock, the amount of aid for which he or she is eligible for is reduced by $350. On the other hand, the amount of aid is reduced by (effectively) only 5.6 percent of your assets and from 22 to 47 percent of your income.

  • Reduce your income. Income for financial aid purposes is generally determined based upon your previous year’s income tax situation. Therefore, in the years immediately prior to and during college, try to reduce your taxable income. Some ways to do this include:
    1. Defer capital gains.
    2. Sell losing investments.
    3. Reduce the income from your business. If you are the owner of your own business, you may be able to reduce your taxable income by taking a lower salary, deferring bonuses, etc.
    4. Avoid distributions from retirement plans or IRAs in these years.
    5. Pay your federal and state taxes during the year in the form of estimated payments rather than waiting until April 15 of the following year.
    6. Since a portion of discretionary assets is included in the family’s expected contribution from income, reduce discretionary assets by paying off credit cards and other consumer loans.
    7. Take advantage of vehicles which defer income, such as 401(k) plans, other retirement plans or annuities.
  • Detail any financial hardships. If you have any financial hardships, let the deciding authorities know (via the statement of financial need) exactly what they are if they are not clear from the application. The financial aid officer may be able to assist you in explaining hardships.
  • Have your child become independent. In this case, your income is not considered in determining how much aid your child will be eligible for. Students are considered independent if they:
    1. Are at least 24 years old by the end of the year for which they are applying for aid
    2. Are veterans
    3. Have dependents other than their spouse
    4. Are wards of the court or both parents are deceased
    5. Are graduate or professional students
    6. Are married and are not claimed as dependents on their parents’ returns

How can I save taxes on college savings?

If you decide to invest in your child’s name, here are some tax strategies to consider:

  • You can shift just enough assets to create $2,100 in 2016 (same as 2015) taxable income to an under-19 child.
  • You can buy U.S. Savings Bonds (in the child’s name) scheduled to mature after your child reaches age 18.
  • You can invest in equities that pay small dividends but have a lot of potential for appreciation. The dividend income earned when your child is under the age of 19 will be minimal with tax relief, and the growth in the stocks will occur over the long term.
  • If you own a family business, you can employ your child in the business. Earned income is not subject to the “kiddie tax,” and is deductible by the business if the child is performing a legitimate function. Additionally, if your business is a sole proprietorship and your child is younger than 19 years old, then he or she will not pay social security taxes on the income.
See our Frequently Asked Questions about Life Insurance:

Life Insurance Frequently Asked Questions

Financial Calculators