Michael Jackson’s Estate: When Grandparents Get Custody

by Randall Luebke RMA, RFC on October 4, 2011

By Elaine Floyd, CFP

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. Be sure to send clients to their tax advisors for comprehensive
tax planning.

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. Be sure to alert your
clients to this important resource; many grandparents don’t know that it
exists.
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.”

Whether you use the Michael Jackson story to broach the subject with clients
and prospects or simply initiate conversations about who will care for the
children in the event of the death or incapacity of the parents, this is a
discussion that needs to happen. 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.