Plan Financially for Raising a Grandchild

Physician's Money Digest, November 2005, Volume 12, Issue 15

The situation of grandparentsraising grandchildrenis on the rise. Accordingto figures compiled byAARP's Grandparents InformationCenter, 6.3% of the nation'schildren under the age of 18 live in agrandparent-headed household, a 30%increase from 1990 to 2000. The causesfor this situation are many, includingparents in prison, drug-addicted parents,divorced parents, death, neglect,abuse, joblessness, and illness. Grandparentsusually assume the responsibilityfor their grandchildren out of love,but that doesn't negate the financialburden that typically falls on them.Beyond the additional expenses associatedwith raising a child, grandparentsmay have to quit jobs to care forgrandchildren or come out of retirementto earn money.

The following are financial tips fromCertified Financial Planner™practitionersto minimize the financial impactof raising a grandchild:

•Plan ahead. You may not have theluxury of time, or you may not feel youhave a choice in the matter. But if it'spossible, know exactly what you're gettinginto financially before you take onthe responsibility. What are your financialoptions? Will the parent or parentscontribute support? Is the grandchild aproblem child who might create liabilityissues for the grandparent?

•Learn your legal options. If careof your grandchild will be long term orpermanent, you'll want to look at yourlegal options. The legal relationship toyour grandchild will affect a host offinancial concerns, including your abilityto obtain financial assistance from governmentagencies or certain services suchas medical care for your grandchild.

Options include foster care, adoption,and legal guardianship. Each hasits pros and cons, with laws varyingfrom state to state. For example, adoptionmay cause you to lose financialassistance from one program but gain itfrom another. Talk to your financialplanner and an attorney before makingany permanent decisions.

•Arrange for health insurance.Finding health care for a grandchild canbe challenging. If the grandparents arestill working, their employer likely won'tcover the grandchild unless they are officiallya dependent on the grandparents' tax return—and even then someemployers won't provide coverage. Agrandchild can't be covered underMedicare, either. If care is going to beshort term, an individual short-termmedical policy can be affordable. Morepermanent individual coverage will likelybe much more expensive, so you mayneed to consider government programsfor low-income households such asMedicaid or special state children'shealth insurance programs. With fewexceptions, most states don't consider agrandparent's income when determiningincome eligibility for these programs, soa grandchild usually qualifies.

•Where do you live? This is oftenanother major challenge that needs to bethought about before the grandparentscommit. Retirement centers, for example,may not allow children. Or thegrandparents may live in an apartmentor home that's too small to comfortablyhouse children. Building an addition to ahome can be very expensive.

•Take advantage of tax breaks.Most grandparents raising dependentgrandchildren under the age of 17 cantake the $1000 child tax credit perchild, unless the grandparents havehigh income. Working low-incomegrandparents may qualify for the federalearned-income tax credit. If youpay for childcare, don't forget thechildcare tax credit.

•Consider outside help. See iflocal agencies for the aged provide helpto grandparents who are caregivers.Low-income grandparents may qualifyfor the state-run Temporary Assistanceto Needy Families program.

•Revamp your will and otherfinancial documents. You may wantto revise your will and name yourgrandchildren as beneficiaries on insurancepolicies, retirement accounts, andother financial assets, particularly if youbecome permanently responsible forthem and you don't want assets goingto their parents. Consider the appropriatenessof trusts, such as special needstrusts or a living trust.

This article has been produced by the Financial Planning

Association (www.fpanet.org), the membership organization

for the financial planning community.