LGBT family financial matters.
by Grace S. Yung, CFP
The definition of family can mean a variety of different things. While in the past it was somewhat rare to see same-sex couples rearing children, today many in the LGBT community are starting and raising healthy, happy families.
Having and raising children does require a financial commitment, though, so if you’re considering starting a family in the future, it’s important to be aware—and prepared—from a financial standpoint.
Starting and Expanding Your Family
While some LGBT individuals come into a relationship with children from a previous opposite-sex relationship, there are many others who decide to have children together—either through adoption or in vitro fertilization. Either of these options will require a commitment of both time and finances.
For example, the cost of adopting can typically vary anywhere between zero and $30,000, depending on the type of adoption that is pursued. It generally does not cost as much to adopt a child from a county foster program, as these children are oftentimes older. Newborns adopted through nonprofit agencies usually cost a great deal more—especially if an attorney is involved.
Many same-sex couples opt to use in vitro fertilization to start or expand their family. This way, the sperm or egg that is used may be from one of the child’s parents. While this process usually costs an average of $12,000, the total out-of-pocket cost may be closer to $19,000 if the procedure is not successful on the first try.
Costs of Raising a Child
Certainly, when planning to start a family, all thoughts are typically centered on love rather than money. Yet, the financial aspect is definitely something to consider, as the cost of raising a child can add up. There are numerous factors to consider, including food, clothing, day care, transportation, toys, computers, and other miscellaneous items.
Given that, according to the U.S. Department of Agriculture (source: http://money.cnn.com/2013/08/14/pf/cost-children/), it will cost an estimated $241,080 for a middle-income couple to raise a child born in 2012 for 18 years—and this amount doesn’t include the cost of college.
Planning for the Future
Looking ahead, many families consider sending their children to college. Doing so, however, can be costly—so it is important to start saving early. The good news is that there are several options available for setting money aside that also offer tax advantages and other benefits.
• 529 Savings Plans. A 529 plan will allow funds to be contributed to an account and invested in a variety of financial vehicles. This money is not subject to federal tax (or state tax, in most instances) provided that the funds are used for qualified colleges costs.
• UTMA/UGMA Custodial Accounts. The Uniform Gift to Minors Act (UGMA) established a way for minors to own securities without the need for an attorney to draw up trust documents or a court to appoint a trustee. The Uniform Transfer Act (UTMA) allows the creation of a savings account for minors who have no spending restrictions. This is a revised version of the UGMA. Through this type of account, gifts may be passed down to minors who can legally use them once they reach the age of majority. As the funds are a gift to the child, they may be used to pay for any expenses, including college. As long as the child only has a small amount of income—up to $950 per year—the funds in the account are subject to little or no taxes. The next $950 is taxed only at the child’s tax rate.
• Education IRA/Coverdell Accounts. Setting up an education IRA, now called a Coverdell Education Savings Account (ESA), is another way to put money toward future college education costs. Here, a parent or guardian may make a non-deductible contribution for a child who is under age 18. The funds in this account may be withdrawn tax-free when needed for qualifying college expenses.
Preparing for the Unexpected
As with any other situation, it is always necessary to prepare financially for the unexpected. With this in mind, it is essential to have life insurance in place in order to ensure that your child (or children) will have a financial cushion should the unthinkable occur.
Proceeds from a life insurance policy can be used for a variety of circumstances, including:
• Paying off a mortgage. This can help to ensure that your family will not lose their home. Imagine if your partner and child were forced to move to a different home for the sole purpose of cutting back on expenses, simply because they could no longer afford the mortgage. This is especially important if your income was the primary source of the monthly mortgage payment.
• Satisfying additional personal debts. If you have other debt obligations, such as personal loans or large credit card balances, it could create additional financial hardship for survivors. A certain amount of life insurance proceeds could be earmarked to pay off these debts.
• Funding of future expenses. If your child (or children) is still young, it is likely that you have just started saving for future expenses such as a college savings plan. The proceeds from a life insurance policy could go toward ensuring that this plan is fully funded upon your passing.
• Income replacement. Anyone who has dependent children should have life insurance. Policy proceeds can help to ensure that ongoing expenses such as rent or mortgage, utilities, and food can continue without disrupting loved ones in an already difficult emotional time.
Taking the Next Step
For those who are considering having or adopting children—as well as those who already have children in their lives—it is essential to always make sure that you have the most current information on parenting issues, as the law in this area is continuously evolving.
Therefore, it is important to seek the advice of a professional who is experienced in financial matters—especially as they relate to the LGBT community. Doing so can help to ensure that you are taking all of the proper steps.
Grace S. Yung, CFP, is a certified inancial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston.