As children move towards adulthood, helping them become financially stable is a priority. It is important not to overlook key financial planning issues and strategies as your loved ones take their next important steps.
Power of Attorney
If your young adult children are over the age of 18 and leaving home for school or work, a power of attorney is a must. Entities such as a university or hospital may limit the information they share with you unless this documentation is in place. In the unfortunate event of a medical emergency or the inability to reach your child, power of attorney makes it easier for these entities to disclose information you need while also enabling you to facilitate financial and medical instructions.
Our team suggests establishing a durable power of attorney that takes effect once it is signed by both you and your child. A medical power of attorney signed by both parties is also important, as it gives you as the parent automatic access to your child’s medical records. The combination of durable and medical powers of attorney gives you the legal leverage you need in case of an emergency.
Since many of the regulations and restrictions around power of attorney differ at the state level, Caring Connections offers a state-by-state database of forms and requirements that will help you assess your options and determine next steps. We also recommend reaching out your estate planning attorney to help you take the necessary steps to help prepare for an emergency.
Beneficiary Designations
Establishing beneficiary designations on retirement accounts can be helpful for college and grad students who take advantage of a part time co-op or internship where the employer sets up a mandatory 401(k) plan. A powerful gifting strategy is setting up a Roth IRA that can be funded up to $5,500, as long as they have that amount of earned income. It is important to make sure your child has listed parents or siblings as beneficiaries.
Credit Cards
Once your child turns 18, he or she should open a credit card in his or her name to help establish a credit rating. You may want to help your child compare options and choose a credit card service with amenable interest rates and a clear, uncomplicated billing policy.
Once set up, it is critical for your child to use the credit card, and make sure that the card is totally paid off at the end of the month. Carrying a balance accrues fees and interest, and may also hurt his or her credit rating. However, your child must not refrain from using the card—inactivity can result in it being closed out!
Building credit is easy, and the common mistakes are not difficult to avoid if you correctly prepare your child. He or she should use the card for small purchases, pay it off regularly, and have some sort of income, be it from an internship or another form of employment, to keep the payments flowing.
Later in life, when your child decides to purchase a car, apply for a mortgage, or start a business, having an good, established line of credit will greatly facilitate these processes.
Joint Brokerage Accounts
We suggest refraining from setting up a brokerage account for an adult child in the joint name of you or your spouse. The first challenge is a gifting issue. A parent may give a child a maximum of $14,000 per year. If securities bought in that account or transferred into that account exceed that limit, a gift tax return should be filed.
You must also be mindful of cost basis or acquisition price. When you give securities instead of cash, you pass on your cost basis to the recipient. When a security is inherited, there is a full step up in the cost basis. If your child outlives you, determining the cost basis for the stock becomes more complex.