This post was written by Amy Jo Lauber who is an adoptive mother and provides financial planning, coaching and guidance.
I am a proud adoptive Mom. My husband and I welcomed our daughter into our hearts the moment we saw her (fortunately at birth) and into our home three days later. Here is what we did to prepare ourselves (at least financially) for becoming a family. The following is not tax or legal advice, please consult with the appropriate professionals.
(1) Decide if you will continue to work, investigate family leave options and address day care issues Determine if you are eligible for family leave and the details of such leave (paid, length of time allowed, if you must use vacation/personal time first). Be honest about your situation as well as your feelings. If you must or choose to work (no judgments here) start inquiring about child care (family, friends, nanny/au pair, day care). Some employers offer pre-tax cafeteria plans that you may contribute to and then be reimbursed for child care expenses.
(2) Funding the Adoption Placement Fee
I have a few colleagues (Mark Tronconi, CPA and attorney Lisa Allen) who present a seminar along with me that is devoted to the topic of financial planning for the adoptive family. Every time we present, the overwhelming question is how to come up with the funds for the placement fee. Most agencies offer a sliding scale fee based on your income, but coming up even with a nominal fee can be daunting. Really, the best way to go about this is to start saving your money in a special account that is earmarked for this goal. It is also prudent to have a separate account to keep track of all of your adoption expenses (attorney fees, medical care for the birth Mother, home study fees etc…) in order to apply for the adoption tax credit (see #4). Be careful not to spend too much money outfitting your dream nursery; it’s not necessary, uses money that could be used in other ways and (this is not financial advice) it will only haunt you every time you are not selected or profiled.
Some people take out home equity loans to fund their child’s adoption. If you are likely to opt for this, you may want to sit down with your banker and get a line of credit open or get the loan amount set up in a savings account; you can always use the tax credit (if you qualify for it) to repay the loan, partially or completely.
Others use their credit cards. This is especially beneficial if you have a card that offers points, frequent flyer miles or other benefits.
Some employers offer an Adoption Assistance Program. This is a tax-free employee benefit available to adoptive parents. Check with your benefits department to see if it is available to you.
You may also have a loan provision on your 401(k) but this is generally not a good idea because if you leave that employer (by choice or not by choice) the loan will come due. Moreover, that money must be preserved for your own retirement.
(3) Protection Issues
As you become responsible for another person, your financial obligations will increase.
It is important for you to reduce your consumer (not mortgage, student loan or business) debt as much as possible (but not if it may conflict with your ability to save towards the placement fee). Pay down the credit cards that have the highest interest rates first.
Contact your health insurance provider to determine when your new child will be covered under your insurance. In my experience, most plans cover from the day you take custody of the child but may back date to the moment of birth. I suggest you call a couple of times and talk with different people, because you may not get the same answer twice.
Increase your life insurance coverage. A CERTIFIED FINANCIAL PLANNER TM Professional and/or a licensed insurance agent can give you some illustrations of what you may need (amount, type) and how much it will cost.
You should also obtain or review your disability insurance coverage.
Review your homeowner’s/renter’s insurance as well as your automobile policies. Discuss coverage, deductibles, premiums and discounts.
(4) Taxes The Adoption Tax Credit is a nice chunk of change – $13,170 – as long as your modified adjusted gross income is below $225,210/married filing joint (in 2011). So, you will get a fair amount of money back.
A new child means a tax deduction, so you may be able to increase your exemptions so your tax withholding decreases.
One strategy for consideration is if you are nearing placement or already have adopted early in the year, to reduce your income tax withholding from your pay check(s) if you know you’ll qualify for the adoption tax credit. This eases up your cash flow. Even if you are not nearing placement but typically receive a large tax refund, you may consider reducing your tax withholding to receive your refund throughout the year and using the money to save towards placement fees or other expenses. It is important to consult with a tax professional before you make any changes.
(5) Visit your attorney
Now is the perfect time to have your will, power of attorney and health care proxy forms drafted. Start to consider who will be appropriate guardians for your child(ren) should you die while they are minors. Discuss establishing a trust in your will that will hold assets for your minor children until they are old enough to manage the assets themselves.
There is so much to do with a new child coming into your life. Managing your finances well will help you feel confident and in control of some portions of this process.