The Government has also signalled it will run a recruitment campaign for foster parents to cope with the changes.
Labour children's spokesperson Jacinda Ardern said the change was understandable because there had been many cases of abuse of children in extended family care.
"There is not the same level of scrutiny around kin care, so there is not the same level of assessment of whether or not it's the right or safest placement for the child.
"That unfortunately has undermined kin care and I can see why we have ended up in this place."
However Ardern hit out at another provision in the new law that adopts all the principles of a "Covenant for the Nation's Children" drawn up by Judge Carolyn Henwood except for a promise "to strive to provide them [children] with a proper standard of living".
The Cabinet paper says: "These commitments (with the exception of the pledge to provide children with a proper standard of living) will be incorporated into the Child, Young Persons and their Families Act."
Ardern said Labour would support putting the entire covenant into law. She said the state didn't have to do everything itself, but it did have a role to play in ensuring affordable housing and adequate incomes.
The new law will also reform financial assistance to foster parents "to meet the reasonable needs of the child or young person".
The new system will be more flexible than the current age-based pay rates for foster care, with new regulations "setting out the level and circumstances in which financial assistance can be paid in relation to a child poor young person in out-of-home care, including reasonable costs, extra assistance and higher rates".
"These proposed changes will help to provide the foundation for a proactive and transparent financial support system that assist caregiving families to manage through critical times and cope with challenging behaviours," Tolley told other ministers in a Cabinet paper.
"The Ministry of Social Development is also undertaking work with Inland Revenue on the tax treatment of care support payments to ensure there is clarity and consistency for caregivers."
However, the Cabinet papers make no mention of a proposal by the foster parents' support group Fostering Kids for higher pay rates for foster parents who do extra training to cope with the most challenging young people.
The changes are the second step in the reform of what is now Child, Youth and Family and will be rebranded the Ministry of Vulnerable Children Oranga Tamariki.
The first step, which includes raising the age for young people transitioning out of state care from 17 to 18, is already going through Parliament.
Tolley said the new changes would ensure that children and young people had an opportunity to have a say on decisions made about their care.
They will also set out National Care Standards including the rights and needs of children, the standard of care they can expect, and standards for caregiver training, monitoring and support.
Maori Party co-leader Marama Fox declined to comment on the changes.
