Financial Planning for Empty Nesters
Congratulations are in order! You planned ahead, saved money for education expenses, and now your child is off to college. But as you settle in to your “empty nest,” you might be wondering, now what? It’s time to figure out how to adapt to your child’s new independence, while keeping your family on a steady course financially.
Here, we’ll focus on some common financial planning issues encountered by empty nesters (or those soon to be!). From finding new ways to save to considering powers of attorney, learn how to navigate this exciting transition while planning for the next phase of life.
Are College Students Kids or Adults? It’s Complicated
The rules governing financial matters for young adults are, in a word, complicated. College-age students do gain financial responsibilities and can often begin independent investing. But, in many cases, a child’s financial status doesn’t change immediately when he or she turns 18.
The “kiddie tax” applies for many full-time students who are age 23 and younger. And college students younger than age 26 can be included on their parents’ health care coverage. On the other hand, while many states provide that UTMA accounts do not terminate until age 21, most states give 18-year-olds the legal status to open new accounts on their own. And if a child plans to work part-time during school or the summer, he or she will have earned income and could begin contributing to a Roth IRA.
Health Care and Financial Powers of Attorney
You’ve no doubt filled out a litany of emergency contact forms and reviewed emergency preparedness plans in connection with your child’s on-campus housing. Now, it’s time to consider the value of health care and financial powers of attorney for your college student.
Generally, powers of attorney provide broad authority to a named agent to manage all aspects of that person’s finances and important health care decisions, especially in times of need or incapacity. Many states offer statutory forms, which are readily available through the state’s bar association or local probate courts. But working with an attorney to craft your desired powers and restrictions is encouraged so that the overall impact of executing such a document is understood.
Properly executed documents in the student’s home state are typically accepted across state lines. If your student attends school out of state, however, it’s worthwhile to consult an estate planning attorney. You may want to work directly with an attorney in the school’s state to ensure that the documents will be effective if needed. Typically, health care directives are state specific, so you will benefit if your documents are familiar to health professionals in the state where the student will reside.
Financial powers of attorney, through the Revised Uniform Fiduciary Access to Digital Assets Act, are a useful tool for managing our ever-growing digital presence. If something were to happen once your child is a legal adult, you may not be able to access information in his or her email or social media accounts. In addition, mobile apps such as Venmo, PayPal, or DraftKings might contain monetary value.
Similarly, if your children are older than 18, you might not have access to important health information in the case of an emergency. That’s why it’s so important to understand the advantages of health care powers of attorney and living wills. Having these types of directives in place can provide you with peace of mind, while also clarifying your child’s wishes on issues such as organ donation and palliative care.
Time to Switch Gears
Over the years, you’ve likely been focused on saving, saving, saving. Now that your child is off to college, it may be time to switch gears. It’s likely that your college funds will have been accumulating through different savings vehicles, with each one governed by a complex set of regulations. It’s important to spend these funds wisely.
#529 plans. When it comes to 529 plans, everyone tends to remember that these funds should be spent on something called “qualified” expenses. But where does the IRS draw the line on what’s qualified and what’s not? Generally, qualified expenses cover all tuition and fees, room and board, and supplies directly related to the student’s education, including computers and software primarily used for school. Keep in mind, though, that travel costs, extracurricular activity fees, health insurance, and student loans are not qualified expenses.
UTMA accounts. How to pay for those expenses 529 plans don’t cover? For things like travel to and from campus and the can’t-be-missed trips over winter and spring breaks, a child’s UTMA account can fill in the gaps. Because minors typically become old enough to receive legal control of UTMA accounts during their college years (as discussed above), these funds give students a good way to pay their extra expenses. Keep in mind that suddenly having control over their own finances is a big transition for students. As such, take some time to help your children understand the importance of expense management and saving.
Tuition payment. If funds from a 529 plan won’t cover the entire amount necessary for tuition, room and board, and school supplies, you might want to consider direct payment of tuition. If you take this option, the rules on gifting come into play. Tuition expenses paid directly to the qualifying educational organization are exempt from counting toward the annual gift exclusion amount of $15,000 per person, per year, for 2019.
The overall rules are complex, however, so you’ll need to carefully monitor all other payments made to or on behalf of the student to ensure that you don’t exceed the annual exclusion limit. It’s also important to consider other regular gifts associated with your estate plan. For instance, you might factor Crummey contributions into the $15,000 exclusion you anticipate using to provide extra funds to your children.
Small Ways to Save Big
And now back to a familiar topic: saving! Finding new ways to save money is an essential part of financial planning for empty nesters. Perhaps you’re thinking ahead to how your housing needs will change when your children go off on their own. Or, if you’re planning for retirement, you might be considering moving to a retirement-friendly state. In either case, downsizing is just around the corner. But even before that time comes, you might be able to save in small ways that could add up over the years. Here are three simple tips to get you started:
1) Auto insurance discount. Many of the major auto insurers offer a “student away at school” discount to policyholders. With Liberty Mutual Insurance, for example, eligible drivers are those with less than 10 years of licensure who are not the named insured and reside at a school located more than 100 road miles from the policyholder’s residential address. In addition, the student must not have regular access to a vehicle. According to a Liberty representative, the discount could be as high as 22 percent.
2) Home energy assessment. Are rooms in your home going unused now that your kids and their friends aren’t around all the time? It might be worthwhile to seek the input of your energy providers. Most utilities around the country now offer free home energy assessments. In addition to money-saving advice, these programs often offer discounts for further improvements and upgrades.
3) Subscriptions review. What about all those subscriptions you have amassed over the years? Whether for magazines, gym memberships, music streaming, photo or file storage, or video streaming services, these subscriptions might not be necessary anymore. Canceling unused subscriptions or coordinating services with the college student’s roommates could possibly save hundreds of dollars a year.
Blue Skies Ahead
Understandably, becoming an empty nester can be a time of uncertainty for many. But armed with the right strategies, you and your children will successfully navigate this leg of your family’s financial journey.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. © Copyright 2020 Commonwealth Financial Network®. Presented by Dan Romaine. Dan Romaine is a financial advisor at Blue Hills Wealth Management. BHWM is located at 300 Crown Colony Drive, Quincy MA. Dan can be reached at 617-471-6800 or firstname.lastname@example.org. Securities and advisory services offered through Commonwealth Financial Network, Member, FINRA/SIPC a registered investment advisor. Fixed insurance products and services and College Planning services offered by Blue Hills Wealth Management and College Funding Solutions are separate and unrelated to Commonwealth.