The royal baby may have hit the headlines recently but how can an advisor help their clients prepare for the extensive costs of raising a child
The financial plan for Master Archie Mountbatten-Windsor shouldn’t provide too many headaches for his parents given the British royal family’s estate.
But while Prince Harry and Meghan Markle won’t be left hyperventilating at child-care costs or how they access tax benefits, the average new parent can be overwhelmed by the expenses a newborn brings.
According to a study conducted by Moneysense, the average cost of raising a child from birth until the age of 18 can surpass $250,000 – and that doesn’t include university or college tuition.
Christine Van Cauwenberghe, VP, tax and estate planning at IG Wealth Management, tells her advisors to break it down into bite-sized chunks for clients given all the various considerations and permutations.
Where to start is the first challenge and she told WP about the most important three areas new parents should address. While it’s a hard sell, Cauwenberghe recommended they start with worst-case scenarios.
1, Who will act as guardian?
It’s a sensitive topic but parents are urged to make sure their will is up-to-date and they choose a guardian. Crucially, conversations need to be had with this alternate. Are they willing to do it? Do they understand the parents’ philosophy?
Cauwenberghe said: “You want to make sure you have spoken to the proposed guardian in advance and that they are willing to accept the position because it’s a huge ask; a huge honour but a big ask.
“Talk to your guardian about what your expectations are. Can you use estate assets to pay for specific extra-curricular activities? Are you motivated to have your child go to private school or have music lessons? Everyone has different philosophies and it may involve different religions, for example.”
Cauwenberghe warned against appointing a sibling and their spouse as guardian. Just appoint the sibling, she said, because you never know if the spouse will still be their spouse later on.
She added: “[Appointing a guardian] is an important conversation and people try to avoid it as long as possible.”
2, Get insurance
There is no more important time to make sure you are adequately insured than when you become a parent, especially if you are worried about how far your savings will go, especially if your child has special needs.
Cauwenberghe warned that this is a decision with potentially higher consequences than guardianship. “If you haven’t sorted out guardianship, someone will step forward but if you don’t put insurance in place, how do you fix that?”
3, Start planning their education
The obvious solution is to set up an RESP but if you think post-secondary education isn’t on the cards – maybe they are convinced the child will set up a business or go into the arts – make sure TFSAs are maxed out.
RESPs, of course, offer grants and bonds matched to income and feature government incentives that are “effectively free money”. And even if your child doesn’t go to university and the money goes back to the government, those contributions, grants, bonds and any interest accumulated will grow on a tax-deferred basis.
Cauwenberghe added: “Assuming your child goes to post-secondary education and assuming the money is paid to them when they go to school, even though that income and growth is taxable to the child, if they are in a low tax bracket, then effectively very little tax will be paid.
“RESPs are a huge tax benefit to families. Make sure you contribute enough to maximise the grants and bonds, and work with your planners to understand how much you need to contribute each year to do it properly.”
What not to do
When a smiling, or crying, baby enters the world, it’s an emotional occasion but often grandparent get caught up in the romance and designate their grandchild as the direct beneficiary of a large insurance policy or even a TFSA. Big mistake.
“If you pass away, that money won’t go to the child and the parents won’t have any ability to manage those assets,” Cauwenberghe said. “It will go to government authorities, the public trustee or the children’s lawyer depending on what jurisdiction you are in.
“It’s a problem designating to one grandchild and then more are born later and don’t get anything. It can lead to families arguing. I personally find gifts to grandchildren to be just a huge cause of dissension among families – people don’t think things through.”