Turning 18 is a significant milestone that marks the transition from adolescence to adulthood. It comes with new responsibilities, freedoms, and opportunities. As parents, it’s essential to guide your child through these changes to help them navigate this phase successfully. The Wealth Planning Team at Freestone has compiled a detailed guide on the essential steps to take when your child turns 18, covering key areas like estate planning, financial planning, tax planning, and insurance planning.
Estate Planning
Powers of Attorney for Finance and Health
Once your child reaches 18, they are legally considered adults, which means you no longer have automatic access to their financial and medical information. As a result, it’s important to set up Powers of Attorney for both finance and health. The financial power of attorney allows you to manage your child’s finances if they are unable to do so, ensuring you can assist with their financial responsibilities like credit card payments, filing income tax returns, and managing student loans. A health care proxy or medical directive is equally important, as it grants you the ability to make medical decisions on your child’s behalf and access medical records, complying with HIPAA regulations.
Custodial Accounts and Irrevocable Trusts
If you have set up custodial accounts under the Uniform Transfers/Gifts to Minors Act for your child, review the terms as they may now gain control over these assets. The designated age of termination varies by account, but once reached, the assets are fully accessible to the child. If you feel they aren’t ready to manage these funds, you can encourage them to establish a revocable trust, allowing continued management of the assets until they reach a more suitable age. If your child is a beneficiary of an irrevocable trust, communicate with the trustee to clarify any required distributions that your child will receive and what information your child is entitled to concerning the trust.
Financial Planning
Personal Finance and Budgeting
As your child embarks on their college journey or enters the workforce, it’s a crucial time to teach them about personal finance. Discuss the importance of budgeting and managing expenses. If they are using credit or debit cards for the first time, ensure they understand the differences and responsibilities associated with each. We believe setting up a Roth IRA is also a smart move if your child has earned income, as it allows them to start building retirement savings with tax-free growth potential.
Adjusting Your Financial Plan
With your child reaching adulthood, you may need to revisit your family’s financial plan. College expenses, including tuition, books, and housing, can significantly impact your budget. It’s a good idea to consult with your Freestone Client Advisor to reassess your financial goals and make necessary adjustments, ensuring your long-term objectives remain on track.
Tax Planning
Claiming Your Child as a Dependent
Even though your child is now legally an adult, you may still claim them as a dependent on your tax return if they meet the following criteria: they must be under 19 (or 24 if a full-time student), live with you for more than half the year (temporary absences for college count as living with you), and not provide more than half of their own financial support. Claiming the child as a dependent may provide you with additional tax savings because of the Child Tax Credit and/or the Earned Income Tax Credit. Always consult with a tax professional to understand the implications.
Filing Income Tax Returns
Your child may be required to file their own tax return, depending on their income level, marital status, and other factors. It’s important to confirm their filing requirements to avoid penalties and ensure compliance with tax laws.
Insurance Planning
Homeowners & Automobile Insurance
As your child moves away for college, review your homeowners and auto insurance policies. If they’re living in a dorm, your homeowner’s policy may provide some coverage for their belongings. However, if they’re living off-campus, you may need to list their new residence on your policy or obtain a separate renter’s insurance policy. Additionally, keep your child on your auto insurance policy even if they don’t frequently drive, as it provides essential coverage for various situations, including driving a friend’s car or protection as a pedestrian.
Health Insurance
Under the Affordable Care Act, your child can remain on your health insurance plan until they turn 26. If they are attending college in another state, check if your plan covers medical services in that area or consider other options like school-provided health plans or individual insurance through the Health Insurance Marketplace. This is especially important to ensure they have adequate healthcare coverage during their studies.
Conclusion
Preparing your child for adulthood is a multi-faceted process that requires careful planning and consideration. By focusing on estate planning, financial planning, tax planning, and insurance planning, you can help your child transition smoothly into this new phase of life. The team at Freestone is here to support you and your child through this important time, providing personalized advice and guidance to help achieve a successful and secure future.
Important Disclosures: Nothing in this article is intended to provide, and you should not rely upon it for, accounting, legal, tax or investment advice or recommendations. We are not making any specific recommendations regarding any financial planning or tax planning strategy, and you should not make any financial planning or tax planning decisions based on the information in this article. The intention of this article is educational, and it is intended only to discuss a few limited aspects of complex legislation or complex planning strategies. This article is not a comprehensive or complete summary of considerations regarding its subject matter. Each individual is different and the options in this article are not appropriate for everyone. Please consult your Freestone client advisor, a professional tax advisor, or an attorney (as applicable) regarding your specific needs.