When Students Go Off to College: Financial Planning for Empty Nesters

Posted by Keven DuComb, JD, MBA

September 10, 2019 at 10:00 AM

financial planning for empty nestersGo ahead and pat yourself on the back! It’s September, and chances are a few more students just headed off to campus, supported by the college savings you helped their parents grow. The transition is a big one for everyone involved. As young adults, students are facing new financial responsibilities. And parents are figuring out how to adapt to their child’s (or children’s) new independence, while keeping the family on a steady course financially.

So, your clients with college-bound children might greatly appreciate some extra guidance on financial planning for empty nesters (or those soon to be in that stage). Here are some talking points to guide your discussions and keep everyone, parents and students alike, focused on protecting their financial future.

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Are College Students Kids or Adults?

Understandably, your clients might feel like their college-bound children aren’t truly adults. They have complicated feelings on this topic. Likewise, the rules governing financial matters for young adults are complicated. In many cases, a child’s financial status doesn’t change immediately when he or she turns 18. For instance, the “kiddie tax” still 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. So, we can see that college-age students do gain financial responsibilities and, in some cases, can begin independent investing.

How Important Are Powers of Attorney for College Students?

While your clients have no doubt filled out a litany of emergency contact forms and reviewed emergency preparedness plans in connection with their child’s on-campus housing, they might not have considered the value of health care and financial powers of attorney for college students.

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. Working with an attorney to craft each client’s desired powers and restrictions is always encouraged, in order to be sure that the overall impact of executing such a document is understood. Many states offer statutory forms, however, which are readily available through the state’s bar association or local probate courts.

Properly executed documents in the student’s home state are typically accepted across state lines. If clients have a student attending school out of state, however, it’s worthwhile to consult an estate planning attorney. He or she might advise working 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 clients will benefit if their 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 a child is a legal adult, your clients 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 their children are older than 18, your clients might not have access to important health information in the case of an emergency. That’s why it’s important to inform your clients about the advantages of health care powers of attorney and living wills. Having these types of directives in place should provide your clients with peace of mind, while also clarifying the child’s wishes on issues such as organ donation and palliative care.

Helping Clients Spend Wisely

Over the years, your client discussions have no doubt focused on saving, saving, saving. Parents who’ve taken your advice to heart will have to switch gears (at least in part) when their kids finally head off to college. Likely, their college funds will have been accumulating through different savings vehicles, with each one governed by a complex set of regulations. You’ll need to be ready to guide clients on how 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? To refresh your knowledge, read up on the 529 plan rules. In summary, 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. But suddenly having control over their own finances is a big transition for students. You’ll want to work closely with your clients to help their 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, clients might want to consider direct payment of tuition. If they 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 your clients don’t exceed the annual exclusion limit. It’s also important to consider other regular gifts associated with your clients’ estate plans. For instance, Crummey contributions might already be factored into the $15,000 exclusion a client anticipates using to provide extra funds to his or her children.

Finding New Ways to Save

And now back to a familiar topic! Finding new ways to save money is an essential part of financial planning for empty nesters. Perhaps your clients are thinking ahead to how their housing needs will change when their offspring go off on their own. Or, if they’re planning for retirement, they might be considering moving to a retirement-friendly state. In either case, downsizing is just around the corner. But even before that time comes, your clients might be able to save in small ways that could add up over the years. Here are three simple tips to suggest:

1) Auto insurance discount. Many of the major auto insurers offer a “student away at school” discount to policyholders. With Liberty Mutual Insurance, 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. Clients might find that rooms in their home are going unused once their kids and kids’ friends aren’t around all the time. Simply closing the vents in the unused rooms might not save money. Instead, it might be worthwhile for clients to seek the input of their energy providers. Most utilities around the country now offer free home energy assessments, such as this program from National Grid in Massachusetts. In addition to helpful, money-saving advice, these programs often offer discounts for further improvements and upgrades.

3) Subscriptions review. What about all those subscriptions clients have undoubtedly 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.

Looking Ahead

Congratulations and well wishes are in order when clients’ children head off to college. This event also presents a good opportunity to reach out to clients and find out if they’re interested in discussing financial planning for empty nesters. Deepening the value of your relationship will benefit both your clients and your practice.

Have any of your clients’ children recently headed off to college? What financial planning challenges were involved? Do you have tips for your fellow advisors? Please share your thoughts below!

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