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Time was, when grandparents' most significant economic role in their grandchildren's lives was to buy presents and other similar indulgences. They could "spoil" them like they never did their own kids and then return home, free of the anxiety and financial responsibility that go along with raising a family.
For an increasing number of grandparents that is no longer the case. Today many grandparents are playing a larger role in providing financial support, and in many instances, parental guidance to their grandchildren.
According to the 2000 U.S. Census, more than six million children under 18 across the United States are living in households headed by grandparents or other relatives. More than 2.4 million of these grandparents have the primary responsibility of meeting the basic needs of these children. The majority of these grandparents are under 65 years old and employed.
The number of grandparent caregivers has grown steadily over the years. In the 1970 census, the number of children under 18 living in grandparent headed households was only 2.2 million. The trend touches all socioeconomic groups, geographic areas, and ethnicities. These relationships can be formal, with the grandparents having legal custody and acting as parents, or informal where, for a variety of reasons, the parents are not the primary caregivers but retain custody and the grandparents have no legal rights to make decisions about the child's upbringing.
In addition, there is substantial anecdotal evidence to suggest that another segment of grandparents, those with no guardian responsibilities, but abundant resources, is stepping up to provide financial support for their grandchildren to cover lifestyle expenses such as child care, private school or college tuition, and vacations, giving their grandchildren benefits they could not otherwise afford. It is, according to a July 14, 2005 New York Times article, the start of a new trend that has money flowing downward from older generations.
Raising a New Generation
The changing role for grandparents can be traced to a number of factors ranging from an understandable need for financial assistance, to tragic stories of untimely death or illness, to tales of "parental failure" that include substance abuse, family violence, abandonment, and other issues. All this means a growing number of today's grandparents have more financial responsibilities than ever before. Instead of focusing on retirement, they must be concerned with providing the financial security and, sometimes, emotional support necessary to raise a child.
In this new and often unexpected role, grandparents need to review their legal rights and financial obligations to ensure they can take of themselves and their new responsibilities. Below are some tips for grandparents who are either raising their grandchildren or providing financial assistance to a new generation.
1. Check with an attorney to clarify legal status of guardianship. Many grandparents are raising their grandchildren as legal guardians, with the ability to make all decisions regarding a child's upbringing. For many others, however, the relationship is less clear. Many grandparents are raising their grandchildren, but the parents, who may or may not be involved in their children's lives on a daily basis, retain legal custody. According to Generations United, a national support group for intergenerational strategies, the majority of relative caregivers are caring for children without a formal legal relationship. Because of this informal relationship, grandparents often face barriers enrolling children in school, getting access to medical care, and obtaining health insurance.
There are three primary forms of custody: adoption, legal guardian, and foster care. Each has its positive and negative aspects, as laws and support programs for each vary from state to state. An attorney well versed in custody laws and programs can help grandparents sort through and decide which is best for their situation.
2. Consult a Financial Professional. Most grandparents were not planning on raising a second generation, with all the attendant expenses. To make sure they are prepared as possible now, and in the future, grandparents should review their wills and other important financial documents, such as life insurance and retirement plans. Additional life insurance, for example, can be used to provide a grandchild's living expenses if the grandparents die prematurely or perhaps to fund a child's college education or help with the purchase of a first home. Grandparents may want to consider naming their grandchildren as their beneficiaries on all their life insurance policies, retirement accounts, and other financial assets, particularly if they don't want assets going to parents.
Grandparents who have legal custody may also want to consider revising their will to name a guardian and a conservator for their minor grandchildren. A guardian is responsible for making parental decisions. The conservator provides for the management and distribution of property and money left to children until they are 18 or 21. One person can perform both functions. Again, consult with your attorney to reach the best decision for your family.
To ensure the proceeds from their estate are managed properly, grandparents can modify their wills to establish either a Uniform Transfers to Minors Act (UTMA) custodianship or a living trust. Both specify that a conservator will manage the assets until the children reach a certain age, usually 18 or 21. Generally, the UTMA custodianship is the most attractive option unless a large amount of life insurance is involved and the children will need a property manger past the age of 21. Grandparents should consult with their financial planner or insurance agent to explore the options.
If a will is not in place, the court will appoint a guardian and conservator, which opens up the possibility of other people getting involved, people who may or may not follow the grandparent wishes.
3. Get health insurance. One for the biggest issues grandparents face is finding health insurance for their grandchildren. In most states, unless working grandparents are legal custodians they can't add their grandchildren to their employer's benefits plan or qualify for other employer-sponsored benefits, such as child care leave. If they are retired, health insurance cost is usually prohibitive. Two options are Medicaid and Children's Health Insurance Program(CHIP), which are available in every state. Most states do not consider grandparents' income for either program so grandchildren usually qualify. CHIP pays for checkups, eyeglasses, shots, medicine, and hospital stays. Most states cover children until they are 19 years old. To find the location of a local CHIP program, call 1 877-543-7669
4. Take Advantage of Tax Breaks. Grandparents raising grandchildren under the age of 17 usually qualify for a tax credit of $1,000 per child unless their income is too high. In addition, lower-income grandparents may qualify for the Earned Income Tax Credit, Child and Dependent Care Credit, and various state tax credits. Grandparents should check with an accountant to take advantage of all available tax breaks.
5. Don't Neglect the Retirement Plan. The Financial Planning Association recommends that parents do not sacrifice saving for their retirement to pay for a child's education. The same principle applies equally, if not more, for grandparents who typically have a much smaller window to accumulate retirement savings. If possible, they should keep contributing to their 401k and IRAs and other retirement vehicles. Children can always work and apply for financial aid. As the FPA points out, financial aid is available for college, not for retirement.
If Resources are Available, Establish an Education Fund. For wealthy grandparents, tuition payments can be a good estate planning device and a good way to help their grandchildren. Using a Section 529 plan a grandparent can contribute as much as $11,000 per year ($22,000 if filing jointly), or a one time payment of $55,0000 ($110,000 if filing jointly) covering five years, without paying a gift tax#. The money in a 529 plan has the potential to grow federal tax free and distributions are also federal tax free, provided they are used to pay for tuition and other education related expenses at any accredited college or university. All 50 states have 529 plans in place. Typically $250,000 is the maximum allowed in a 529 plan##. Also, for younger children, private school tuition paid directly to the school does not count as a gift. Wealthy grandparents, too, have the option of setting up trusts for their grandchildren.
#However, if the account owner makes the special gift election and dies within 5 years of making the gift, only a pro-rata portion is excluded from their estate. Certain restrictions apply and the limits may increase with inflation from time to time. Once you make the maximum gift, however you cannot make any other tax-exempt gifts to that beneficiary for 5 years.
##Potential investor of 529 may get more favorable tax benefits from 529 plans sponsored by their state. Consult your tax advisor for how 529 treatment would apply to your particular situation.
The tax legislation exempting earnings on qualified withdrawals from federal income tax expires on 12/31/2010, unless extended by Congress.
All assets, including earnings, under all 529 plan accounts established for the benefit of a particular beneficiary must be aggregated when applying the limit. New contributions will not be allowed once this limit is reached. Earnings, however will continue to accrue. Maximum contribution limits are adjusted periodically.
For withdrawals not used for qualified higher education expenses, earnings are subject to income taxes at the distributor's rate plus a 10% federal tax penalty.
Please keep in mind that there are fees, charges and tax ramifications associated with a 529 plan and the underlying investment options are subjected to market risk and will fluctuate in value.
Please contact your financial professional for more information on 529 plans and/or obtain the appropriate disclosure statements and the applicable prospectuses for the underlying investments of the 529 Plans we have available. Investors are asked to consider the investment objectives, risks, charges and expenses of a portfolio carefully before investing or sending money. The disclosure statements and prospectuses contain this and other information about the investment options and their underlying investments. Please read this material carefully before investing or sending money.
6. Take Advantage of Support Groups. As the number of grandparents raising grandchildren continues to rise so do the number of support groups. Among the largest are the AARP Grandparent Information Center (www.aarp.org); Generations United (www.gu.org), which provides support group listings; The Foundation for Grandparenting, which promotes all aspects of grandparenting. (www.grandparenting.org).
In addition, a NYLIFE Securities Registered representative will be happy to discuss both life insurance and retirement accumulation needs detail during a no obligation interview. To consult with a NYLIFE Securities Registered representative near you, click here.
Neither New York Life, its affiliates nor any of its financial professionals are in the business of offering tax advice. You should consult with your professional advisors to examine tax aspects of any topics presented.
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