Episode 168 – What Parents Should Consider As Their Child Becomes Independent

Many people wonder how their own finances will change as their children become independent. Where do parents draw the line with their children? What level of involvement and/or support should the parents maintain with their children? What are some planning points that parents need to be aware of, and how can they make smart decisions that benefit themselves and their children? In this episode of The Agent of Wealth Podcast, host Marc Bautis provides guidance on what step you can take now, and in the future, to keep yourself on track for personal and financial success as your child becomes independent.

In this episode, you will learn:

• How parents can maintain access to their child’s important health, financial and academic information after their child becomes independent.
• How financial goals may change (or need to be revisited) once their child leaves the house and becomes independent.
• How parents can determine the extent to which their child will remain commingled with their finances as they become independent (taxes, health insurance, auto insurance, gifting, etc.).
• How parents can evaluate the level of risk/liability their child may pose to their own finances.
• And more!

Resources:

Download the Interactive Checklist | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call

Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. On today’s show, I’m going to talk about what to consider as your child becomes independent.

Independence means different things to different families. You might consider your child “independent” when:

• They turn 18-years-old, or
• They leave for college, or
• They’ve graduated from college and landed their first job, or
• They move out of the family home.

Whatever “independence” means to you, a lot of people wonder how their own finances will change at this point. Where do parents draw the line with their children? What level of involvement and/or support should the parents maintain with their children? What are some planning points that parents need to be aware of, and how can they make smart decisions that benefit both themselves and their children? 

In discussing today’s topic, we’ll cover:

• How parents can maintain access to their child’s important health, financial and academic information.
• How financial goals may change (or need to be revisited) once their child leaves the house and becomes independent.
• How parents can determine the extent to which their child will remain commingled with their finances as they become independent (taxes, health insurance, auto insurance, gifting, etc.).
• How parents can evaluate the level of risk/liability their child may pose to their own finances.

I’m making a checklist available that covers these key areas, plus many more items to consider.

So, let’s get started.

Does Your Child Have Any Taxable Investment Accounts?

(UTMA, UGMA, brokerage…)

If so, you may want to look at what age they become the owner of those accounts. You also want to see if those accounts are subject to kiddie tax. If they are, is there anything that can be done to mitigate that?

How Will Your Taxes Change Once Your Child Becomes Independent?

This may include the loss of any credits or deductions. You also want to look at whether it still makes sense to claim your child as a dependent on your tax return. If your income is too high, it may be appropriate to not claim your child as a dependent and have them claim credits that you are phased out of.

Remember to increase your tax withholdings or estimated payments if appropriate.

Should You Keep Your Child on Your Health Insurance Plan?

Or, should they get their own coverage? This decision should consider both coverage and cost. If your health insurance plan is HSA eligible and your child cannot stay on it, they may be able to open and fund their own HSA.

Related: How to Maximize Your Health Savings Account (HSA)

Is Your Child Attending a College (or Moving) Out of State?

If so, consider reviewing any in-state vs out-of-state residence requirements, and determine whether you have the appropriate documentation in place for both your state and your child’s state of residence (drivers licenses, insurance policies, important forms, etc.).

In Case of Emergency, Do You Have Access to Your Child’s Important Records?

(Health, academic, financial…) 

This goes for all children over the age of 18. You may want to consider having your child sign a HIPAA and Family Education Rights and Privacy waiver form for this reason. Or, potentially even a durable medical and financial power of attorney.

Are You Concerned About Your Child’s Actions or Behaviors Causing Future Liability Issues for You?

If so, you may want to consider prioritizing savings (or shifting assets) into accounts or structures that are protected from liability issues (like 401(k)s, IRAs, insurance products, home equity, etc.).

Are You Planning to Help Your Child With an Upcoming Expense?

(Wedding, vehicle, down payment on a home, apartment, starting a business, etc.)

If you are, consider the extent to which doing so will affect your own finances and goals. Remember to report any gifts in excess of the annual gift tax exclusion ($17,000).

Are You Thinking of Moving or Downsizing Your Home?

This is a common financial move parents make after their child becomes dependent. If you are, consider the extent to which downsizing and or moving could be beneficial to your situation (for example, elimination or reduction of mortgage, decreased living expenses, better location, etc.).

Are You Concerned that Your Child Will Request Monetary Support?

If so, you may want to consider making a family loan to your child (as opposed to a gift).

Do You Own a Business? 

If so, consider whether hiring your children could be beneficial to your situation and theirs. The first $13,500 (maximum standard deduction for dependents in 2023) your child earns is federally tax-free and potentially payroll tax-free (if under 18). With earned income, your child may be able to kick-start their Roth IRA savings early.

Related: Uses of a Roth IRA

Is Your Child Driving and Still Considered Your Dependent?

If so, consider whether it would be appropriate to have a separate auto insurance policy for your child as an additional layer of liability protection. Or, whether getting or increasing your umbrella policy coverage makes sense.

Be mindful of any limitations and potential gaps in coverage.

Does Your Child Have Any Serious Health Issues or Disabilities? 

If so, consider proactive steps you can take to protect your child before they leave the house (establishing a support system before they go away to college, having the appropriate paperwork in place, etc.).

Are You Concerned About Having Extra “Unused” Funds in a 529 plan? 

If so, you could consider changing the beneficiary to another child (if applicable) or utilizing the 529-to-Roth transfer feature (starting in 2024, subject to limitations).

Related: What Happens to a 529 If a Child Doesn’t Go to College

Today we talked about a variety of things parents should review when their child becomes independent. In the show notes, we’ll leave a link to download the checklist where you can review the full list of items. 

I recommend completing the checklist on your own time, and if you have any questions or want to review a specific topic, we offer free consultations.

Thank you everyone for tuning into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.