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[Prefer to listen? You can find a podcast version of this article here: E237: Navigating Your Child’s Transition to Independence – Key Considerations for Parents]

As your child approaches adulthood and starts the journey of becoming independent, it can be both a thrilling and overwhelming time.

There are numerous important financial, legal, and practical issues to consider that can impact both your child and your family's long-term plans. Whether your child is heading to college, entering the workforce, or simply stepping into adulthood, taking the time to prepare for this transition is essential.

Health, Privacy, and Legal Access

One of the first things you may need to address as your child turns 18 is your continued access to their important records. Under U.S. law, once a child turns 18, they are legally considered an adult, which means they have the sole authority to manage their own health, academic, and financial information. If you still want access to this information in emergencies, there are specific steps you must take:

• Health Records (HIPAA): Medical records are protected under the Health Insurance Portability and Accountability Act (HIPAA), so you may need to ask your child to sign a HIPAA waiver. This allows you access to their medical records in case of emergencies or to help them manage health care decisions if needed.
• Educational Records (FERPA): Similarly, the Family Educational Rights and Privacy Act (FERPA) restricts access to your child's academic records once they enter college. You can have your child sign a FERPA waiver to continue to assist with educational matters.
• Medical and Financial Power of Attorney: Consider having your child sign a durable power of attorney, giving you the ability to make critical financial and medical decisions on their behalf if they become incapacitated.

These legal steps ensure that, in a crisis, you can still help your child navigate the complexities of adulthood without any unnecessary barriers.

Residency and Insurance Considerations

If your child is planning to attend college out of state or move to a new location, there are several residency and insurance issues that need attention:

• Residency Requirements: Review in-state versus out-of-state residency requirements to determine if your child qualifies for in-state tuition and what documentation is needed. States typically require proof of residency through a driver’s license, voter registration, or other legal documentation to ensure your child receives the appropriate benefits.
• Health Insurance: If your child is under 26, they are likely still eligible to remain on your health insurance plan. You’ll want to assess whether staying on your plan is the most cost-effective option. You’ll also need to decide if they should contribute toward their portion of the premium, especially if they are working.
• HSA-Eligible Plans: If your insurance plan is eligible for a Health Savings Account (HSA) and your child is no longer a dependent, they may be able to open and fund their own HSA.
  

Financial Adjustments After Your Child Leaves Home

Once your child moves out, your budget may change significantly. This is a great time to revisit your family’s financial goals and plan for the future:

• Budget Revisions: Without the regular costs of supporting a child at home, your expenses could decrease, but certain costs, such as college tuition or ongoing support, may still play a role. Adjusting your budget now to account for these changes will help you manage your finances more effectively.
• Downsizing or Relocating: If your child leaving the home means you no longer need as much space, downsizing or relocating could make sense for your financial and lifestyle goals. A smaller home might reduce your mortgage or eliminate it entirely, while a move to a new location could lower your cost of living.
• Reevaluating Financial Goals: As your child gains independence, your long-term financial goals may shift. Whether you’re planning for retirement, more travel, or supporting family in other ways, now is the time to assess whether your financial plan is still aligned with your current life stage.

Supporting Your Child's Major Life Events

You may also be thinking about helping your child with significant life milestones, like buying a car, making a down payment on a house, or even paying for a wedding. These expenses can have a meaningful impact on your own financial goals.

• Large Upcoming Expenses: If you plan to help with a major purchase, such as a wedding or a home, consider how this financial commitment will affect your own goals. Be mindful of the annual gift tax exclusion. If you exceed this amount, you'll need to report it to the IRS.

Tax Considerations

Your child’s new independence will likely lead to changes in how you file taxes. Here are some critical tax issues to keep in mind:

• Education Tax Credits: If your child is attending college, you may be eligible for the American Opportunity Tax Credit or the Lifetime Learning Credit. Keep an eye on your income levels, as these credits have phaseout ranges. If your income is too low or too high, you may want to strategize to maximize the credit.
• Dependent Status: If your child is older than 24 and still a dependent (such as attending graduate school), you may be eligible to claim them for the “other dependents” tax credit. This can also entitle you to the Lifetime Learning Credit.
• Kiddie Tax: If your child has investment accounts, such as a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) account, be mindful of the “kiddie tax.” This tax applies to unearned income (e.g., dividends, interest) over a certain threshold, and it's something you should watch closely to mitigate tax penalties.
• Insurance Coverage: Consider purchasing renters or dorm insurance to ensure your child’s possessions are covered while they’re away at school. While your homeowners’ insurance might extend to their dorm room, double-check the coverage limits and any potential gaps.

Risk Management and Future Liability

As your child becomes independent, new risks and responsibilities will arise. You can take proactive steps to ensure your family’s liability exposure is minimized and that your child is financially protected.

• Health and Disabilities: If your child has any serious health conditions or disabilities, you’ll want to establish a strong support system before they leave the house. This could involve setting up long-term care options, securing specialized health insurance, or managing their care remotely.
• Driving and Auto Insurance: If your child is still listed as a dependent and is driving, consider whether a separate auto insurance policy is appropriate. This could provide additional liability protection and help safeguard your own assets in case of an accident.
• Life Insurance Review: With your children moving out, your life insurance needs may also change. You may want to review your policies to see if adjustments should be made to the death benefit, or explore options like a 1035 exchange or even surrendering the policy if it's no longer necessary.
• 529 Plans: If you have unused funds in a 529 plan, you can either transfer them to another child or consider utilizing the new 529-to-Roth transfer feature, subject to limitations. This allows the funds to still be put to productive use, even if they are not needed for educational purposes.

Estate Planning Considerations

As your children mature, you might also think about revisiting your estate plan. Here are a few key issues:

• Updating Roles in Estate Documents: Your children may now be old enough to take on more important roles in your estate documents, such as power of attorney, executor, or trustee. This transition provides a valuable opportunity to involve them more meaningfully in your financial affairs and decisions.
• State-Specific Planning: Depending on where you live, there may be additional state-specific planning issues to address. Estate and tax laws can vary, so working with a financial advisor or estate attorney who understands local laws can be beneficial.

Conclusion

As your child becomes independent, there are a multitude of factors to consider. From health care access and insurance coverage to tax strategies and estate planning, it’s a significant transition for both you and your child. By proactively addressing these issues, you can ensure a smoother path toward your child's independence while safeguarding your family's financial well-being. With thoughtful planning and support, you and your child can both thrive during this exciting stage of life.

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