Best Investments for Couples and Families

With love, marriage, and kids come new financial responsibilities. Creating a family wealth management strategy is important for creating short- and long-term security, as well as achieving specific goals with your money. Knowing where and how to invest as a couple, or as a family, is critical to making your wealth plan work for you.

Key Takeaways

COMMUNICATE OPENLY ABOUT YOUR INVESTING GOALS

A 2018 Policygenius survey found that 20% of couples don't manage their finances together.1 While you don't necessarily need to combine investment accounts, bank accounts, or other financial accounts, you should at least be able to talk about them.

CLARIFY YOUR EXPECTATIONS

You may be expecting to retire at age 50 with $2 million in the bank but if your spouse plans to work until age 65, that could lead to a clash over investing strategies. Getting clear on what your goals and expectations are where your money is concerned can help you determine together whether they're realistic and come up with a plan for achieving them.

DISCUSS YOUR APPETITE FOR RISK

Risk tolerance plays a big part in determining how you invest as a couple. If one of you is comfortable taking more risks but the other isn't, that will directly impact how you invest. For example, rather than pooling your investments together, you may opt to maintain separate portfolios instead. Having a discussion about risk can help you figure out what's going to work best for both of you.

Approaching Family Wealth Management as a Couple

Managing money and making investment decisions as a couple can sometimes be challenging if you have different financial goals and different ideas about how to achieve them. In a 2021 Fidelity Investments survey, for example, just under half of the couples disagreed about the age at which they should retire and 51% couldn't agree on how much they'd need to save for retirement to enjoy their desired lifestyle.2

Making family wealth management work as a couple requires a certain amount of giving and take.

Where and How to Invest as a Couple

Talking about investing as a couple is important but at some point, you actually have to begin investing if you want to put your family wealth management plan into action. The types of accounts you can use to grow your investments include:

• Your 401(k) or a similar workplace plan
• Traditional and Roth IRAs
• A spousal IRA if one of you doesn't work
• Health Savings Accounts if one or both of you is enrolled in a high deductible health plan
• Taxable brokerage accounts

When you're investing as a couple, consider what percentage of each of your incomes you can reasonably contribute to each of these accounts, starting with your 401(k). At a minimum, you should be contributing enough to get the full employer match if one is offered.

With an IRA, you also have to keep in mind that your combined income as a couple may determine whether you're able to deduct the full contribution to a traditional IRA or make contributions to a Roth IRA.4 Reviewing your income can give you an idea of which type of IRA is best.

For example, if you're both eligible for a Roth IRA and you anticipate being in a higher tax bracket later, you might choose this account to take advantage of tax-free distributions in retirement. But if you're both making a higher income now, you may want to choose a traditional IRA to take advantage of any deduction you're allowed for contributions.5

As far as what to invest in goes, the general rule is that the younger you are, the more risk you can afford to take. But you also have to keep diversification in mind as a couple to ensure that your portfolio (or portfolios) include the right mix of assets to meet your goals without exposing you to more risk than you're comfortable with. In general, the types of investments to consider include:

• Individual stocks
• Mutual funds
• Exchange-traded funds (ETFs)
• Bonds

Couples may also want to think about where alternative investments fit into their family wealth management plan. If you can work well together, flipping real estate may be something to consider.

Investing in a Real Estate Investment Trust (REIT) is another option, as are things such as cryptocurrency or precious metals. Remember, it all comes down to what you can agree on, what can help you meet your investment goals, and how much risk you want to take on.

Family Wealth Management Tips for Parents

Having kids can change your financial plans to a degree if you have to adjust your budget to accommodate new expenses or your income shifts because one parent is taking time away from work to care for young children. For instance, you may have to add daycare or a nanny to your spending and as kids grow older, you may be budgeting for sports or extracurricular activities. And you may want to increase the size of your emergency fund as your family grows to help cover unexpected expenses.

The investment tips offered earlier for couples can still apply to families with kids, but there's something else to add to the plan: college savings.

For the 2020-21 academic year, the average cost of tuition, fees, and room and board at a public, four-year university totaled $26,820 for in-state students and $43,280 for out-of-state students. The cost at private universities totaled $54,880.

Creating a plan for college savings as early as possible can help parents prepare without derailing their larger family wealth management plan. Opening a 529 college savings account is a good first step. These accounts allow parents to invest their savings (usually in mutual funds) with tax-free growth and tax-free distributions when the money is used for higher education expenses.

A Coverdell Education Savings Account operates similarly, although this account allows for a maximum contribution of $2,000 per year.

Other ways to save for college include opening a high-yield savings account or creating a CD ladder. When weighing the options, remember that savings accounts and CDs are usually the safest in terms of risk. With a 529 account or Coverdell ESA, your money is invested in the market. Review mutual fund options carefully to gauge whether they fit your investment needs and pay close attention to the fees so you know exactly what you're paying.

Together, these tips can help you create a solid family wealth management plan, but remember to check in with your plan regularly. Reviewing it on an annual or bi-annual basis can help you determine whether any adjustments need to be made to stay on the right course.

How Families Can Invest Together With an LLC

Pooling Money and Investments to Build Family Wealth

One of the best uses of a limited liability company (LLC) is to use it as a vehicle for families to pool their money together for investing. The benefits of a family pooling their money through a limited liability company come mostly from the power of an LLC operating agreement. The family LLC can invest in stocks, bonds, and real estate; or use their pooled resources for mutual funds and start-up businesses.

LLC Operating Agreement

An LLC operating agreement can be written with any number of provisions. For example, the operating agreement could forbid individual family members from selling their shares of the limited liability company without the permission of the other members.

This not only forces them to remain invested in the LLC but allows everyone else to not worry about suddenly finding out there is a stranger who has a say in their business.

The operating agreement could also require individual family members to make regular contributions of cash or other assets, such as having each grandchild contribute $50 per month to the LLC. Another provision of an LLC operating agreement could limit investments to certain types of assets, such as stocks with dividend yields over 5%, or rental properties in a certain zip code. You could even require the LLC only to build car washes in certain states.

Structure and Control of Family LLCs

A family may form an LLC and elect the parents or grandparents as the managers, giving them authority over day-to-day decisions. The other family members (children, cousins, siblings, grandchildren) own membership interests in the LLC. These can be from their own savings, where they buy their own investment in the firm or given as gifts from the older family members, who want to pass money on to the next generation.

If your goal is to have the family work as an integrated unit, you can have your LLC operating agreement written so that all investment decisions must be approved by every single shareholder or a certain percentage of the shareholders. That way, you can create a culture of collaboration.

You may also want to also give consideration to forming a Delaware LLC or a Nevada LLC. These states may offer advantages to some family groups. However, they may not be best suited for all groups.

Walton Enterprises as an Example

One of the most famous family LLCs is Walton Enterprises LLC, which is the vehicle through which the members of Sam Walton’s family own their shares of Walmart Stores, Inc. In effect, Walmart is controlled by Walton Enterprises LLC, which is controlled by the Walton family.

Each Christmas, the family meets at Helen Walton’s home, and the managers of Walmart make presentations to the LLC members. The members decide whether to pay dividends, reinvest in other operations such as the Arvest Bank, and listen to a host of other options.

It has been reported that the family LLC won’t make decisions unless everyone is in agreement, explaining how Walmart has experienced almost half a century of consistent control, culture, and growth.

Growing Your Family Investment LLC

Although you and your family may not have over $169 billion to put into your LLC like the Waltons, it is important to remember that they started with almost nothing and built it themselves from a tiny store in Arkansas. Disciplined investing over time can lead to great results, especially when protected by a family culture that values building wealth together.

Another famous family LLC is Cascade Investment LLC, the private holding company of Bill Gates. Cascade, which was funded by the systematic sale of Microsoft shares over many decades, now owns everything from luxury hotels to car dealerships, and railroad stakes to restaurants.

Frequently Asked Questions (FAQs)

How does a family LLC factor into estate planning?

Wealthy families who are looking to minimize the impact of the estate tax can use an LLC as a tax-savvy way to transfer over asset ownership to younger generations. The first step is to store your assets in the LLC. Then, transfer shares in that LLC to family members at a discounted value. This discount effectively reduces your exposure to taxation, and it allows you to retain control of the assets held in the LLC.

How do I put family members on an LLC's payroll?

The process of hiring family members is similar to hiring any other employee. You'll need them to file a W-4, for example, and you'll withhold taxes from their pay as needed. However, there are some unusual tax situations when it comes to some family employees. For example, one spouse who is employed by the other spouse will have Medicare and Social Security taxes withheld, but not FUTA taxes.