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Our two children each have savings I JUST WANT TO MAKE SURE you appreciate all
accounts that are a couple thousand that you are saving by not having a mortgage. A tax
dollars strong. Do you have any sugges- deduction simply reduces what you owe; the reality
tions how parents should help kids manage is that even after factoring in the deduction you are
their own money? Should we put strict still paying plenty.
guidelines on what it can be used for? Or is For example, if you were in the 28 percent tax
part of the lesson dealing with the repercus- bracket, your mortgage interest deduction meant
sions of bad decisions? that every dollar you paid in mortgage interest was
—Debi, via e-mail reduced by 28 cents. That means you were still on the
hook for 72 cents of every dollar in interest. Getting
DEBI, YOU SEEM TO THINK you must choose rid of that obligation—and having the security that
between the two options: control the money you own the house outright—is a bigger gain.
for them, or let the kids control the money. How As for cutting your tax bill, let’s focus on your
about a bit of both? Devise a game plan where you investments. Given your income level, you might
and they have a say in how the money is handled. be able to contribute the maximum to your 401(k)
If your kids are at least 10, let them control a por- or 403(b) or other retirement plans. The money you
tion of the money so they can learn from real- invest is pretax, meaning it will reduce your taxable
world experience. income. Because you are both under 50, you can
You have a huge responsibility in this—not each invest $15,000 a year in your retirement
to control the money, but to teach your children account. (Individuals over 50 years old can con-
how to manage it. It’s up to parents to teach tribute $20,000.) That willsharplyreduce yourtax-
their children about money. Those bad decisions able income.
you refer to are often the result of parents failing If you have money to invest outside of your
to show and encourage their kids to make the retirementaccounts,takealookatmunicipalbonds.
right choices. The interest you earn is free of federal tax. I recom-
Sit down with your children and agree on goals mend looking at municipal bonds that mature in
for the money. Do you expect your kids to con- five to seven years.
tribute to their college costs? If so, frame the sav-
ings account within that context, and work with I have noticed that many people choose to
them to devise an investing game plan that will hold their real property in a trust rather than
help them reach that goal. in their personal name. What are the advan-
Stock index funds are a smart choice, but once tages of this? If my husband and I decided to
your children are within a few years of college, start create a trust for our home, would we have
shifting the money to lower-risk investments such to refinance?
as CDs or money market accounts. Parents who —Gina Davis, via e-mail
want to start a college fund with their kids, but
have limited money to start out with, should check I AM A HUGE ADVOCATE of owning a home in
out the T. Rowe Price fund group (
www.troweprice. a trust, and, no, you will not need to refinance to put
com; toll-free 1-800-638-5660). You can open an the home in a trust. You simply need to work
account for as little as $50 if you agree to make with an estate lawyer who will draw up a revocable
periodic investments of at least $50. living trust for you, and then you will transfer the
And please make sure you truly teach. Simply home into the trust.
saying “Because I say so” is disrespectful to children. While you’re at it, you should change the name
Explain why you want them to save for college, or on your home’s title insurance to the name of the
why you expect them to pay for their movies and trust. That way, if you ever want to refinance in the
pizza out of their savings account. Guidelines are future, it will be an easy process.
good, but they have to come with clear explanations The main advantage of holding your property
and reasoning. That’s how you raise a financially in a trust is how its ownership will transfer when
responsible child. you die. When your assets are placed within a trust,
the inheritance process is extremely straightforward:
I am 42 and my wife is 36. Between us we The beneficiaries you have named in the trust will
make about $175,000 a year. We took receive the asset without anyone having to go to
your long-standing advice and paid off our court. Wills have to go through probate court to be
mortgage. What can we do now to reduce validated before any of your beneficiaries will
our taxes? receive the assets. The probate process can be time-
—Deepak Chandrasekhar, via e-mail consuming and costly. C
Teaching your children
about dollars and sense