Financing Adoption: A Guide for Adopting Families & Their Benefactors
WELCOME
June 29, 2021- Many families and individuals feel called to care for orphans by helping them find forever families. We see this directly through families who adopt and indirectly through the many people and organizations who help facilitate adoption by providing financial resources and other support. Adopting and adding a child to one’s family is an exciting time, yet the process can be overwhelming. Many resources are available online and through the agencies that assist families who want to adopt, but where does one begin? And where do those who have a desire to help find the best and most efficient ways to do so?
We at Timberchase have a heart for the vulnerable and a desire to help families called to adopt or those with the means to support adopting families. These families need a plan, guidance, and resources they can trust along the way. Our goal is to help point families in the right direction and provide a source of information, including things they may not think about in the adoption process. There are many great people, entities, and resources whose purpose is to facilitate adoptions. Below, we provide thoughts on how to find the people with the necessary areas of expertise with whom to partner on this journey. Then we focus on other items and financial concerns adoptive families may need to consider, making sure nothing falls through the cracks.
HOW TO HELP THOSE WHO ARE ADOPTING
Not all are called to adopt, though they have a passion for caring for orphans, while some who are called to adopt are not yet in that stage of life. Neither of these situations precludes one from providing support, as there are many ways to care for orphans and adopting families. The adopting family is at the core, but the other layers of support that extend from there are equally important. This goes from the immediate family to extended family and friends to the family’s community, including their neighborhood and church, to the wider community, businesses, and organizations. No matter which of these circles you find yourself in, you can help support adoption.
Give Financially
“Money should never be the reason a child doesn’t have a family.” –Andy Lehman, Lifesong for Orphans
A common issue in adoption is families who feel called to adopt but do not have the funds to pay for an adoption. On the other side of that are the families who have the means and want to support adoption. Connecting these resources to the families who are adopting is a great way to serve. Frequently, those with the means to help do so by giving directly to a family adopting. While this generosity is wonderful to see, a direct gift like this can have unintended tax implications. This type of giving is considered a gift for tax purposes, and if the amount given is over the annual gift tax exclusion, it could trigger gift tax consequences. The annual gift tax exclusion for 2021 is $15,000 per person, or $30,000 if it is a joint gift from a married couple. Since the IRS considers this a gift, there is no tax deduction as there would be were it considered a charitable contribution. While the motivation for supporting adopting families is not to get a tax deduction, giving to families in a more tax-efficient way is beneficial to both the benefactor and the adopting family. For adoption, there are a couple of ways to do this.
Establish an Adoption Fund
Many wealthy families establish funds at a tax-exempt organization that can distribute those funds efficiently to adoptive families in need. There is flexibility in how to go about this. One may give money to the fund while remaining anonymous, which lets the organization distribute the funds as they see fit, or one may desire to be involved in the details of the fund, naming it after their family and approving each distribution from the fund. Giving this way allows the giving family to take a charitable contribution while assisting others with their adoption costs.
Contribute to an Existing Adoption Fund
Many tax-exempt organizations, especially religious institutions, have existing adoption funds already established. These are generally available to members of the organization and the surrounding community. If a family does not want to pursue establishing their own adoption fund, giving to an already established fund at their church, synagogue, or other charity is a good option. This also generally allows for a tax deduction for a charitable contribution.
Give to Specific Families
The most common situation where people wish to support adoption is when someone they know is adopting. Giving to a specific family is a great way to be personally connected and invested in an adoption. In these situations, if the family does not already have a fund established at a 501(c)(3) tax-exempt entity, which allows for contributors to receive a tax deduction, it is best to let the adopting family know of this option . Not only does it benefit contributors, which in turn allows them to contribute more, it generally helps the family raise more money and keep specific records of funds raised and expenses paid. We will talk about this option more later in this article.
Give Non-Cash Assets
Certain adoption funds or organizations may allow ways to give other than cash. Below are some of the most tax-efficient ways to give:
Appreciated Assets: If one has stock or other assets that have large unrealized long-term gains, giving this stock to support adoption is a great strategy. Selling the stock would incur capital gains tax. Alternatively, giving that stock to a charity, who can then sell the stock without incurring any tax, avoids capital gains. The giver then receives a tax deduction for the contribution equal to the fair market value of the stock at the time of the contribution. This is a great way to give away capital gains and free up cash to reinvest.
Qualified Charitable Distributions (QCDs): The most tax-efficient way to give for someone over 70.5 years old who has an IRA is through qualified charitable distributions. These are distributions directly from an IRA to a qualified charity and can be counted toward satisfying a required minimum distribution for the year. The amount of QCDs allowed each year is currently limited to $100,000. Instead of being an itemized deduction like a normal charitable contribution, QCDs are not included in taxable income, like most withdrawals from an IRA. This results in a lower adjusted gross income (AGI), which can impact other tax items such as social security and Medicare. QCDs also do not require itemized deductions, which means one can get the tax benefit of the charitable contribution while still taking the full standard deduction. Due to the higher standard deduction, many charitable contributions are not tax deductible. This strategy gets around that limitation.
THE COST OF ADOPTION
For many, adoption was something they had always planned on doing to grow their family. For others, it may be a more recent decision. The challenge is knowing how to begin the process. The first things to investigate are where to adopt, how to adopt, and the financial costs of adoption.
Where to Adopt
Domestic: There are more than 400,000 children in the foster care system in the United States, of whom more than 125,000 are eligible for adoption. This is in addition to the thousands of newborns who are adopted every year. The need for families to adopt domestically is clearly there, and adopting domestically provides the most options. One can adopt an embryo, a newborn infant, or an older child through the foster care system, and these options can range in cost from essentially free to $60,000 or more. Besides having the most options in terms of age, domestic adoptions have the benefit of allowing the adoptive families to work solely with the U.S. and state governments and agencies. Adopting domestically may be a smoother process than adopting internationally.
International: There are more than 150 million orphans across the globe, representing a massive need for adoptive families. Many Americans turn to international adoption because of this great need. While the total number of intercountry adoptions has declined significantly over the past 20 years, “U.S. families continue to provide homes for half of all children adopted through intercountry adoption,” according to the U.S. Department of State. The costs and process for international adoptions differ greatly depending on the country. Some, like China, have a streamlined process with a predictable timeline and cost. Others do not have a developed system or are plagued with corruption that can cause unexpected delays, costs, medical issues, or situations where the birth mother is being coerced. Depending on the country one chooses, the total cost typically ranges from $30,000 to $50,000. Countries also have different requirements when it comes to parental age, family status, number of trips required to the country, and length of time in the country to finalize the adoption. Agencies that work with international adoptions can provide summaries of information for each country with which they work, and the State Department provides statistics and information for each country at https://travel.state.gov/content/travel/en/Intercountry-Adoption.html. Adopting internationally requires finding reputable and trustworthy organizations as well as doing independent research to ensure the best interests of the family, adopted child, and birth mother.
How to Adopt
Depending on where one chooses to adopt, there could be many options for pursuing the adoption. Those who choose an international adoption will need to work with an agency to guide them through the required paperwork and process in both the U.S. and in the country of adoption. However, with domestic options, several routes are available, each with different costs:
Agency Adoption: Many people choose to work directly with an agency that is either referred to them or is well-known in their area. Most domestic adoptions through an agency cost around $26,000 in fees, and one can expect to pay a few thousand more in expenses for travel, attorneys, medical providers, etc. Agencies can be good resources to guide adopters through the complicated process.
Foster Care: Adopting through the foster care system usually involves minimal fees, many of which can be covered or reimbursed by the government. However, it presents other challenges that need to be considered. It may be possible to adopt an infant from foster care; however, children who are ready to be adopted have a median age of eight years old. Many states require that families be approved to foster before adopting, and an important part of fostering is that a foster parent must actively support reunification of children with their birth parents until that is no longer part of the child’s permanency plan, determined by a court or public agency. This means that, in many cases, adoption is not in the child’s best interest, and foster parents must keep the child’s best interest at heart.
Consultant: Adoption consultants work with families to advise them throughout the adoption process, connecting them with agencies, home study professionals, etc. Working with a consultant can bring the total cost of adoption to upwards of $50,000. Since consultants can network with multiple agencies, this can expose adopting families to more potential birth mothers and decrease the amount of time until a family is matched. The adoption consultant does not provide actual adoption services such as legal representation or home study. Consultants are not regulated, which means families need to do their due diligence to make sure the consultant is working in legal and responsible ways. It also requires much more work to determine if the agencies the consultant networks with are acting in the best interest of everyone involved.
Private Adoption: Private adoptions rely on word-of-mouth and community involvement to be effective. This type of adoption typically ranges from $3,000 to $5,000. These situations usually arise from connections to pro-life groups, churches, or other organizations that come across situations where birth mothers are choosing adoption. It is not a streamlined process like an agency, but it can sometimes be the quickest and least costly option.
This is a high-level overview of the various options for facilitating an adoption. We encourage consulting a professional such as an adoption attorney to learn more about the pros and cons of each option.
HOW TO FUND YOUR ADOPTION
“In one sense, adoption costs everything. From another angle, adoption doesn’t have to cost you really anything monetarily.” – Sam McLure, The Adoption Law Firm
One of the first concerns about adoption is cost. There are many intangible costs to one’s family that must be considered when thinking about adoption. How does this impact other children in the family? Is the extended family supportive of adoption? How does this change long-term goals for retirement and the empty-nest years? These are just some of the questions that we strongly encourage families to consider.
Then there is the pure monetary cost of the adoption process. Depending on the path one chooses for adoption, this could cost as much as $50,000 or even more. Many families see that number and immediately think they cannot afford it. However, there are options to help pay for adoption, and it is not unheard of for families to have all their adoption expenses covered. Below are some of the best ways to fund your adoption.
Fundraising
Many people who know someone who is adopting are aware of how expensive it is and want to help by donating to the family. Harnessing these resources through fundraising events or crowdfunding is a great way to raise money while also building a community of support for the family. Different types of fundraisers like silent auctions, community garage sales, etc., are creative ways to get family and friends involved. However one chooses to raise awareness about fundraising, it is good to explore working with a 501(c)(3) organization to receive the funds.
Several 501(c)(3) organizations allow families to set up an online account where people can make donations. Those donating are then able to receive a charitable contribution tax deduction. Many people also work for large companies that will match charitable contributions to a 501(c)(3) organization. Once money is donated to the adopting family’s account, those funds can then be disbursed from that account to cover adoption expenses. Fundraising can be more successful when it provides a tax deduction as well as the security of knowing all of the money given will be used to fund an adoption.
Grants and Interest-Free Loans
One of the first areas to investigate for adoption funding is grants. There are countless grants available, and most adoption agencies have resource pages that provide information on applying. It is worthwhile to find out which grants one might qualify for and apply.
There are also matching grants, where organizations match fundraising efforts. Sometimes this is offered by the same entities that make crowdfunding accounts available. These types of grants offer the benefit of helping increase fundraising as well as providing funds.
Not everyone will qualify for a grant, but many of the same organizations that offer grants offer interest-free loans. It is best to first exhaust all options for grants, fundraising, and other financial assistance that does not have to be repaid, but an interest-free loan is a good option for any remaining expenses.
Employers and Religious Institutions
Many companies offer adoption assistance to employees as one of their benefits. These can range from a few thousand to an unlimited amount, depending on the company. The amount of adoption assistance received can be excluded from taxable income if one’s income is below the phase-out threshold for that year. It is worth reviewing company benefits and talking with one’s human resources department to see if adoption assistance is offered.
Many churches and other religious institutions have adoption-assistance funds or a line item in their annual budget for assisting families who are adopting. This is another avenue worth pursuing.
Income Tax Credit and Government Aid
One of the most well-known ways to assist adopting families is the adoption tax credit. This tax credit is for qualified adoption expenses (i.e., adoption fees, attorney/court costs, travel expenses, etc.), and for 2021, it could be as high as $14,440. This credit does phase out for those with income over a certain threshold, and it is a nonrefundable credit, meaning it is limited to one’s tax liability for that year. The timing of when this credit is available depends on whether the adoption is domestic or international. For domestic adoptions, expenses that are paid before the adoption becomes final are allowable as a credit for the tax year following the year of payment. This means that for a domestic adoption, the expenses can be used toward the credit, even if the adoption falls through. For a foreign adoption, expenses are allowable as a credit in the year the adoption is final, so expenses paid for a foreign adoption that falls through are never eligible for the credit. Once an adoption is final, domestic or international, the expenses paid during or after the year of finality are allowable as a credit in the year of payment. The IRS publishes updated information on the adoption tax credit every year on their website. Adopting families should research this and talk to their tax advisor about how the tax credit impacts their situation.
Other forms of government adoption assistance are available, depending on the situation. Parents who adopt a child with special needs may qualify for reimbursement of some adoption expenses, but the amount varies depending on the state. Adoptive parents in the military may qualify for reimbursement of some adoption expenses, as well. If a family is adopting from foster care, they may qualify for assistance such as monthly subsidy payments, Medicaid, or reimbursement of adoption costs, depending on the state. Whatever one’s situation, it is a good idea to research what state and federal government adoption assistance is available.
FINANCIAL PLANNING: BEFORE AND AFTER AN ADOPTION IS FINALIZED
Liquidity
Cash Savings
Depending on where a family is adopting from and how they decide to adopt, there may be times when cash is needed earlier than anticipated. This could be from matching with a child faster than expected or paperwork being processed faster and thus needing to travel to pick up the child earlier than expected. Whatever the situation may be, it is best to plan for extra liquidity. First and foremost, families adopting should prioritize extra cash savings, on top of their usual emergency fund. The amount of extra cash savings needed will depend on the individual situation, but having easy access to cash at a moment’s notice is important during the adoption process.
HELOC
In addition to extra cash savings, a home equity line of credit (“HELOC”) may be a good option. A HELOC allows one to take out a loan against the equity they have built up in their home. It is best to apply for the HELOC early in the adoption process, or even before, so it is readily available to draw upon if the need arises. This can be a great option when a family is still in the process of fundraising but matches earlier than anticipated. In that situation, the family may not have the cash on hand yet but know that they will in the near future. The family can draw on the HELOC to cover immediate expenses and then pay down the HELOC as they finish fundraising.
Retirement Plan Loans and Distributions
Once all other options are exhausted, the last resort for liquidity in the adoption process is taking a distribution from one’s retirement accounts. Some 401(k) plans allow for loans of up to 50% of the vested balance or $50,000; however, these loans may be limited to certain circumstances. If the plan allows for a loan, it is not subject to tax or penalty and typically must be repaid within five years. If the plan does not allow for loans, then any distribution for an individual under 59.5 years old before the adoption is finalized would be subject to income tax and a 10% penalty. This early distribution comes at a high cost, and for this reason, it should be a last resort for immediate cash needs. The SECURE Act of 2020 did institute a change where new parents, through biological birth or adoption, may withdraw up to $5,000 each from their IRAs or 401(k)s without penalty. To qualify, the $5,000 must be withdrawn within 12 months after the adoption is finalized. The amount withdrawn is subject to income tax but not the 10% penalty. Even though this law change allows for some penalty-free withdrawals, it is not a good option for immediate cash needs, since it is available only after the adoption is finalized. It should also not be a primary source of adoption expense funding due to the cost of income taxes due.
Insurance and Estate Planning
Life Insurance
As with any change in life circumstances, when adding a child to a family, insurance coverage and estate planning need to be reviewed, particularly if this is the first child in the family. Life insurance needs to be reviewed to determine if it provides adequate coverage for the needs of the family if something were to happen to either or both parents. Things to consider are annual income, lifestyle, education plans, etc. It is typically better to over insure and buy insurance earlier than necessary, if there is a plan for a larger family, as this can be a hedge against the possibility of becoming uninsurable later. It can also be a good option to buy multiple smaller policies and then cancel some later, if they are not needed. Many countries also require proof of life insurance coverage when adopting internationally.
Wills
Wills should be updated to include the new child and state who will be appointed guardian in the event something happens to both parents.
Health Insurance
Health insurance must be updated quickly when an adoption is finalized. Depending on the insurance coverage and employer, the process for adding a dependent to a plan can vary. Typically, one has thirty days after a birth of a child or adoption to add a dependent to a plan. It is best to review that process early so there is no delay in adding the coverage once the adoption is finalized. It is also critical to know what the child’s legal name will be upon adoption or returning home from an international adoption so that it can be listed properly on health insurance.
Special Needs Trust
For those families who are adopting a child with special needs, it may be beneficial to include a special needs trust in their wills and estate planning. The special needs trust is a tool used to provide a special needs individual with income in a way that does not reduce public assistance such as Social Security, Medicare, or Medicaid benefits. This may not be necessary in all situations when a child has special needs, but it should be discussed with an attorney when drafting or updating wills.
Other Considerations
Education Savings
In addition to insurance and estate planning, it is never too early to start planning for education savings. Parents should consider what their goals are in terms of providing education for their children (i.e., private school, college, graduate school, etc.). One thing to keep in mind for any child and especially adopted children is that parents can plan for the education they would like to offer their child, but they need to keep an open mind about what is ultimately best for that child. College or the type of college the parents have in mind may not be what is in that child’s future. Thankfully, there are multiple vehicles for education savings, and some offer flexibility if the funds are not needed for education. One of the best options is 529 plans. These are tax-advantaged accounts that can be used to pay for qualified education expenses, including K-12 or college. The 529 plans are established by states, and many states offer a tax deduction on the state return for contributions made to the 529 account. There is not a federal tax deduction for contributions; however, any money withdrawn from a 529 account to pay for qualified expenses is tax free. The owner of a 529 plan can also change the beneficiary. For example, if a parent has a 529 plan for one of their kids who earns a scholarship and does not need the money, the parent can change the beneficiary to one of their other children to use for their education. Besides the 529 savings plan, other options include prepaid tuition plans, Coverdell Education Savings Accounts, and bonds. Regardless of the situation, parents should start planning early for education savings.
Long-Term Costs
Besides the long-term goal and cost of education, there are other potential long-term costs that families should be prepared for. It is not uncommon for the adopted child or members of the adopting family to need counseling or therapy. Future medical issues may arise unexpectedly due to incomplete or poor medical records at the time of adoption. It is important to know what is or is not included in one’s health insurance plan and what portion of expenses will need to be covered and to build up extra savings or room in the budget to pay for unexpected events. It is also wise to find a healthcare provider who specializes in adoption clinical and therapy services. Children’s of Alabama Adoption Clinic is one such provider, and their website (childrensal.org/adoption-clinic) provides many resources to consider when adopting.
Community
It is not only imperative to lean on one’s existing community of friends, family, coworkers, church, etc., leading up to an adoption, but it is equally important to build a community of other families who have experienced the ups and downs of adoption. This community is essential both for the adoptive family and for the adopted child.
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Information presented is for educational purposes only and is not personalized investment, financial, legal, tax, or accounting advice. Nothing on this website should be interpreted to state or imply that past performance is an indication of future performance. All investments involve risk and unless otherwise stated are not guaranteed. Be sure to consult with tax, legal, accounting, and financial professionals about your specific situation before implementing any planning strategies. Investment Advisory Services offered through Timberchase Financial, LLC, a Registered Investment Adviser with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training.