Michael Jackson's Estate: When Grandparents Get Custody
By Elaine Floyd, CFP
Aug. 17, 2009
Circumstances may compel grandparents to take custody of minor children, thrusting them into a planning situation they hadn't foreseen. The situation has become more common in recent years, and you should be prepared to guide your clients through all of their financial options.
After the unexpected death of Michael Jackson on June 25, his mother, Katherine, immediately stepped in and began caring for his children: Prince Michael Jr., 12; Paris Michael Katherine, 11; and Prince Michael II ("Blanket"), 7. On Aug. 3, Katherine Jackson was awarded permanent custody of the three children.
You can bet that Michael Jackson's 79-year-old mother never expected to become the primary caretaker of three preteen children at this age. Fortunately, she has the financial resources to both assure that their material needs are met and to hire people to help care for them. Some grandparents aren't so lucky. The untimely death or disability of a child's parents is one of those rare occurrences that grandparents seldom plan for. But there are 2.4 million grandparents caring for 6 million children in the United States, so it is possible that you know, or may come to know, a family in this situation. Following is what you should know about grandparents caring for grandchildren. You may choose to incorporate into your financial planning checkups the possibility of becoming a "grandfamily," as this type of unit is known, or you may simply tuck the information away for yourself in case you ever encounter the situation.
Legal issues
Without a formal legal relationship, grandparents may have a difficult time making the necessary decisions for the children, such as enrolling them in school or obtaining medical care. The most important first step a family can take—long before the need arises—is for the parents to specify who they want to care for the children should they become unable to do so. This paves the way for grandparents, if they are named by the parents, to step in and care for the children with minimal hassle.
Michael Jackson's last will and testament, executed in 2002, specified that in the event of his death, he wanted his mother to raise the children. Indeed, the traditional way to name a testamentary guardian is via a will, which should be drawn up by an attorney, signed by the parents, and witnessed by two "non-interested" persons. A statement by the parents as to why they have chosen a particular guardian will facilitate the judicial process that must occur when custody is legally transferred. Michael Jackson named Diana Ross as contingent guardian should Katherine die or become unable to care for the children while they are still minors—not a bad idea, given Katherine's advanced age.
After the triggering event—the death or incapacity of the parents—a court of law will determine if the custody arrangement is in the best interests of the child. The parents' wishes are usually—but not always—honored. In some cases, the children's preferences are taken into consideration. Among court documents at Katherine Jackson's custody hearing were declarations signed by the two oldest children stating their wishes for who would raise them; the judge did not disclose what they said, but presumably they consented to their grandmother serving as their guardian. States differ in their preferences for calling non-parent caregivers "custodians" or "guardians." In many states, "custody" relates to family or juvenile courts, while "guardianship" relates to probate court. Clients may also want to look into their state's standby guardianship laws. Standby guardianship allows some overlap in caregiving responsibility in cases where the parent is sick or dying; the parent retains control over guardianship while the standby guardian waits in the background and steps in when needed. Not all states have enacted standby guardianship laws, so you should encourage all parents and grandparents to see an attorney about the best way to transfer custody in case of the parents' death or disability. One advantage of standby guardianship is that it may be easier to have custody transferred following the triggering event, but laws differ by state on this. Regardless of which advance planning tool is used, upon the death or incapacity of the parents, the grandparents—if they have been named—should immediately contact an attorney about having their guardianship status judicially confirmed. Courts will generally not deny grandparents custody because of their age, as long as they are healthy.
Once permanent guardianship has been granted, the grandparents have the power and responsibility to make any decision for the child that the parents could have made, including medical, educational, and place of residence. And, of course, the grandparents should now execute a will or other document specifying who they want to take care of the children should they become unable to do so.
Financial issues
The expenses of raising a grandchild can throw a client's retirement plan completely out of whack. If the family is lucky, the parents will have left enough assets or life insurance to cover the child's expenses. If not, grandparents will need to review their financial plan and perhaps make some lifestyle changes.
Katherine Jackson is all set: she was awarded an allowance for herself and the three children from Michael Jackson's estate, estimated at around $500 million. (The actual amount of the allowance was not disclosed.)
The major expenses for a newly formed grandfamily are housing, education, and health care. Housing. In choosing the best place to live, grandparents will need to consider not only the size of the home but also the location. Someone—either the grandparents or the children—may be forced to move. In the Jackson kids' case, moving to the family compound was the natural thing to do and was the least disruptive for Katherine. But if grandparents live in a small home, or if they live far away from their grandchildren and do not want to disrupt the children's lives, they may have to move.
Education. If the children will be changing schools, the usual public-vs.-private decision will need to be made. And, of course, the grandparents will want to set up a college savings plan, if they haven't done so already.
Health care. One of the first things grandparents will need to do is put the children on their health insurance policy—if possible. If they can't (say they're on Medicare), or if it would be too expensive, they should look into state-supported health insurance through Medicaid or CHIP (Children's Health Insurance Program; some states call it SCHIP). Normally these programs are for very low-income families, but the requirements are different for grandparents raising grandchildren. Most states take into account only the child's income, not the grandparents'. (Five states—Colorado, Florida, Montana, Nevada, and Pennsylvania—do take the grandparents' income into account for CHIP if they are the legal guardians.)
Taking custody of minor children also gives grandparents access to certain resources. Grandparents who aren't used to having a child in the home will be pleased to learn about the Social Security and tax benefits that come with their little charges.
Social Security. Retirees who are receiving retirement benefits through Social Security may, if they are taking care of a grandchild under 18, receive children's benefits as well. The child's benefit is normally half the grandparent's Primary Insurance Amount (PIA). However, it is subject to the maximum family benefit, so if there are several children or a spouse receiving benefits off the worker's record, all of the ancillary benefits may be reduced proportionately.
Personal exemption. Each additional dependent comes with a personal exemption of $3,650 per person in 2009.
Child tax credit. Grandparents may be able to claim a $1,000 child tax credit for each qualifying child under 17. This credit is limited or eliminated if modified adjusted gross income (MAGI) exceeds $110,000 for couples filing jointly or $75,000 for single taxpayers.
Dependent care credit. If the grandparents work and pay child-care expenses, they may receive a tax credit for up to $3,000 for one dependent, or $6,000 for two or more dependents. This credit is a percentage of expenses paid, on a sliding scale depending on income.
Adoption credit. If the grandparents legally adopted the grandchildren, they may receive an adoption credit equal to actual expenses associated with the adoption up to $12,150 in 2009. If the child has special needs, the full $12,150 credit may be claimed without regard to actual expenses.
Education tax credits. All the usual education tax credits are available to grandparents who are paying for college expenses for dependent grandchildren.
Filing status. A single grandparent who takes a grandchild into her home may change her filing status from "single" to the much more favorable "head of household."
Grandparents who may be called to step in and care for their grandchildren need to be prepared for this eventuality, as remote as it may seem.
In addition to familiarizing themselves with the legal and financial matters, they should also consider the emotional issues their grandchildren would face if they lost their parents to death or incapacity. If grandparents ever needed an excuse to bond with their grandchildren, they might be reminded that frequent contact and fun activities will help strengthen family ties so that the
transfer of custody—if it ever needs to happen—will be easier on everyone.
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