Help Young Adults Move Out of Your Finances/ July 12th, 2019
From a financial perspective, it's not when your young adults move out of the house that matters. It's when they move out of your finances that really counts. Helping your adult children reach this milestone depends on factors ranging from family expectations to legal requirements.
Parents' legal responsibility for supporting their children financially typically ends when the child achieves the age of majority in his or her state of residence. In many states, that means the young adult is legally responsible for debts and living expenses at age 18. Some states make an exception for children who still are in high school when they reach age 18. These states require the parent to continue providing support until the child either graduates or reaches age 19. Many parents voluntarily extend their financial responsibility past age 18 as part of divorce settlements, or by co-signing for rental leases, loans, and credit cards.
Co-sign with extreme caution
When adult children seek help to get a loan or rent an apartment, it’s better for parents to provide a specific amount up front instead of co-signing, since lenders and landlords often waive co-signature requirements in exchange for a higher down payment or deposit. If you do decide to co-sign for your children, know what your responsibilities are. When you co-sign, you become legally responsible for repayment of the debt. As a co-signer on a loan or credit card application, you're lending your name and solid credit history. You also make a promise to repay in full if the original borrower can't or won't.
Vehicle owners are required to carry insurance, so make sure to pay the insurance on any vehicle that still is in your name. Transfer vehicles to the adult child's name to limit liability if an accident occurs. You still can be liable, however, if you help an adult child buy a car despite knowing about issues that may impair driving, such as alcohol or other substance abuse. The Insurance Information Institute suggests purchasing an umbrella liability policy to cover these situations and offers information about insurance requirements.
In the past, rules for "dependents" dropped most young adults from employer-based health policies at either age 19 or when they graduated from either high school or college.
The Affordable Care Act extends dependent eligibility for health insurance to young adults until age 26, regardless of their tax, student, or marital status.
Tax status can be a touchy issue with young adults, who often get a bigger tax refund if their parents don't claim them as dependents. Internal Revenue Service (IRS) guidelines state that parents can continue to claim young adults as dependents until age 19. That is extended to age 24 if the young adult:
- Attends school full time;
- Shares the parents' principal residence for more than half a year; and
- Receives at least half his or her annual support from parents.
Some parents make claiming the child as a dependent a condition of financial support to avoid conflicts when filing returns.
Experts advise parents to spell out exactly what they will pay for, as well as the type of expenses that the adult child must cover. While rejecting a request for help is difficult, it often leads to a better understanding of financial obligations.