Blogs and Vlogs
Planning for the Financial Support of Parents
Category: Long Term Care
Tags: financial planning cost support

"I am so mad at my mother!"

So begins Steve Martin’s monologue in his 1977 comedy album, “Let’s Get Small.” He continues,

“I don’t know…she’s 102 years old. She called me up the other day and wanted to borrow ten dollars for some food! I said, ‘Hey I work for a living!’”

To not be a burden on my children must be one of the top five goals of every client over the age of 65 that I have ever met with over my 34 years of personal financial planning. For a long time, I thought this meant to not be a financial or emotional burden, but in recent years I’ve come to realize that what it really means is that they don’t want to lose independence. Who does? Planning for advanced age and dependence is even more difficult than planning for death. At least death is final, but dependency can last years.

The Pew Research Center published a 2013 report[1] on the Sandwich Generation and the stresses this generation is under. What is the Sandwich Generation? The Sandwich Generation is defined by the report as “those who have a living parent age 65 or older and are either raising a child under age 18 or supporting a grown child.” (At my current age of 57, I tend to think more in terms of having parents over the age of 80 and having grown children or even young grandchildren.) Among the report’s findings:

  • Nearly half (47%) of adults in their 40s and 50s have a parent age 65 or older and are either raising a young child or financially supporting an adult child (age 18 or older)
  • About one-in-seven (15%) are providing financial support to both an aging parent and a child.
  • Nearly four-in-ten (38%) say both their grown children and their parents rely on them for emotional support.
  • 75% of adults age 40-59 agree that adult children have a responsibility to provide financial support to their elderly parents.

Combine these findings with the demographic reality that the fastest growing age group is those over age 65[2] and you have the recipe for a wave of dependency that most of us want to avoid.

So how can we include planning for the possibility of dependent parents other than simply making cash gifts or jeopardizing our own financial plan? I discuss three options below. Preserving their autonomy, honor, and dignity is another matter entirely that I’ve discussed in other articles. I’m also excluding some things that the parents can or could have done earlier in life in order to focus on what their adult kids can do once their parents enter a period of dependency.

  1. Life Insurance. For adult children in their 40s or 50s whose parents might be financially dependent on them as they enter advanced age, they should consider purchasing life insurance that would provide a lump sum or annuity benefit to the parent should the adult child predecease their parents. For example, suppose Frank is 52 and his parents are 78 and 75. The chances are very good that one or both are going to need some form of long term care and that Frank will have to pay for some of that care. While a long-term care policy on either of them would be cost prohibitive at their ages, Frank could purchase a life insurance policy on his own life naming his parents (or a trust for their benefit) as beneficiary of the policy. Should Frank predecease his parents, there would be cash available to pay for sitters, nurses, or facility care when they need it, without Frank’s widow feeling responsible. Term insurance is less costly than whole life insurance in this case unless Frank wants to build equity in the policy to cash in should his parents die before him. Alternately, Frank may have some older policies on his life that are no longer needed for his own family that he could change the beneficiary to his parents. This is preferable to purchasing a new policy especially if Frank has health issues that would make new insurance difficult to purchase. Life insurance is a powerful tool that allows for creative beneficiary planning outside of most estate documents such as wills or trusts. No one likes paying for it, but I’ve never seen anyone resent a benefit payment.
     
  2. Claim Parents as Dependents. Adult children who provide over 50% of the financial support for their parents, may be allowed to claim them as dependents on their tax return. In order to claim parents as dependents, they must first meet income requirements for “qualifying relatives” set forth in the IRS’ annual Publication 501, Exemptions, Standard Deduction, and Filing Information. Each parent must not have earned or received more gross income than the exemption amount for the tax year ($4,050 for tax year 2017), which should generally include dividends, capital gains from the sale of stock, interest earned in a bank account, and other passive investments, such as income from rental properties owned. It would not include their non-taxable income received from Social Security benefits and other tax-exempt pensions.

    Not only must parents satisfy the income guidelines, but the claiming adult child must also provide more than half of their financial support during the tax year in order to claim them as dependents. Claiming parents as dependents also makes them eligible to receive Social Security Survivor’s benefits in the event the claiming adult child dies before his or her parents. The benefit is 75% of the deceased child’s Primary Insurance Amount (PIA) if both parents survive, or 87.5% of PIA if only one survives. PIA is the name given for the calculated retirement, survivorship or disability benefit due to a Social Security recipient. This survivor’s benefit is in addition to any survivor benefits payable to an eligible widowed spouse or dependent children and can provide a lifetime of income. To qualify for survivor benefits, a parent must be at least age 62, must not be entitled to a Social Security retirement benefit equal to or larger than the amount received as a survivor benefit, must meet the support test requirements of dependency discussed above, and must not have remarried since the adult child’s death.
     
  3. Purchase their home. The two options above are practically effective only if the adult child predeceases his or her parents. For many older parents, their home is their most valuable asset. Accessing the equity in that home for advanced age care has traditionally been available only through loan arrangements such as reverse mortgages or equity lines of credit. Both options have their pros and cons, but at the end of the day, both involve debt owed to a lender. If the home is to be left to one or more of the adult children anyway, one alternative is for the adult children to purchase the home from their parents through an installment loan. Rather than moving Mom and Dad out of the house upon purchase however, the kids rent the house back to Mom and Dad for $1 per month, while using the note payments for sitters or other care. There are possible gift tax consequences of this arrangement, but as long as the “gifted rent” does not exceed the “annual gift tax exclusion amount ($15,000 per donor in 2018) gift taxes should be avoidable. If only one adult child purchases the home from both parents, $30,000 in gifted rent can be excluded from gift tax. If Mom or Dad move into a nursing home, the note payments can supplement that cost. It is important to consult with a qualified tax and/or legal professional when considering this technique.

Supporting our parents financially as they age is a responsibility embraced by society and reinforced by many of the religious traditions that shape our cultural values. For most adult children, this will mean sacrificing time, energy, and sometimes, their own retirement planning. Traditional financial planning has not historically included parental support as part of the process, but the new demographic realities suggest that it should be.


 

[1] Taylor, Paul (2013) The Sandwich Generation: Rising Financial Burdens for Middle-Aged Americans. Pew Research Center; www.pewsocialtrends.org

[2] 2010 Census Shows 65 and Older Population Growing Faster Than Total U.S. Population; Nov 30, 2011; U.S. Census Bureau; CB11-CN.192

 

7 Ways to Start a Conversation About Money with Aging Parents

A question I am often asked is “How do I begin the conversation with my parents?” I always answer, “Very carefully.” The truth is there is no one best way to begin the conversation. So much of it depends on circumstances and personality. Circumstances - usually health issues - may be at such a crisis point that you simply must take action with or without your parents’ approval – either by asserting your authority as attorney-in-fact under a valid Power of Attorney, or by seeking a court ordered guardianship or conservatorship. Your proximity to your parents, sibling agreement over what needs to be done (or the lack thereof), whether both parents are living, and the complexity of your parents’ financial affairs are just a few of the circumstances to consider. You also need to act quickly if you begin to notice impulsive spending or investment decisions.  

Personality and family dynamics are also factors, and the relationship between child and parent doesn’t always make a lot of sense. Your eighty-eight year old father may still view you as the “baby” of the family even if you are sixty-two years old and have raised a family, managed a medical practice or a business of your own, and are practically retired yourself. You are the baby and you always will be. So before you begin the conversation in the first place, you might want to talk to a family counselor, their personal physician, or clergy member before you set yourself up for resentment. It’s ok if you are not the one to initiate the conversation. 

Nevertheless, here are some ideas on getting the conversation rolling that you can try out.  

The “I’ve got this friend” technique. This ice-breaker allows you to set up a hypothetical situation involving a real or fictitious friend who is wondering how to talk to their parents about money. It starts something like this: “Mom (Dad), I’ve got this friend who needs to ask her parents some personal questions about their finances, but isn’t sure how to ask. What should I tell her?” Chances are your folks will be on to this one soon after you ask it, and hopefully you can turn it into a good laugh by your honest confession that the “friend” is you. Once the chuckle is over, you can come back to it with a “Well…what would you say?” and just let them talk. 

Ask how their friends are doing. Once your parents pass the age of seventy-five, chances are they will be attending more friends’ funerals or visiting more friends in nursing homes. You probably will have known these friends for a long time yourself, as well as the children of these friends. While remaining sensitive to the situation, use these events to ask how their friends are doing. Something like, “Mom, now that Jane is widowed, who is watching out for her?” Or “Dad, it’s sad to see your friend Sam lose his independence like that. Does he have children close by who can help with his business?” 

Ask for help with your own finances. If your parents are past seventy, this means you’re probably past forty and are making some important financial decisions yourself. Asking for Dad’s advice on preparing your will or how to invest your retirement funds can go a long way to opening up a dialogue on his own business. Maybe your dad is fully capable of managing his finances now, but this conversation can ease the next one when the time comes for you to be a little more inquisitive.  

Use the headlines. Unfortunately, the headlines can give you a lot of ammunition to use to open a conversation about your parents’ finances. All you have to do is Google the phrase “financial abuse of elders” and you’ll be provided with dozens of sites and news articles about the vulnerability of seniors for financial scams and high-pressure sales tactics. Print out one of these articles, or clip one from your local newspaper and show it to them. Use an opener like, “I doubt this could ever happen to you, but…” Their response will tell you how open or closed they are to the subject. 

Movies are great ice breakers. If your parents’ sight and hearing haven’t diminished, a good movie that deals with the subject of aging is a great ice breaker. One caveat, don’t use movies that are too dramatic or serious. Humorous movies are better at breaking down barriers to talking about this. Also, be sensitive to ratings that may not be comfortable for a generation that may see many of today’s PG-13 movies as too “racy”. Make Way for Tomorrow was a movie before it's time and classic movies are often some of the best.

Below are some of my other favorites.

  • Young at Heart (2007) 
  • Last Will and Embezzlement (2012)
  • Age-Old Friends (1989) 
  • Bucket List (2007) 
  • Cocoon (1985) 
  • Grumpy Old Men (1993) 
  • The Straight Story (1999) 

Try point blank honesty. If your parents are cut-to-the-chase kind of folks, then just try being upfront with them. “Mom and Dad, you’re both getting older and quite frankly, you’re not as sharp as you used to be. If something happens to either or both of you, I don’t know where to find your wills, or even where all your accounts are.” You may be surprised at how open they are willing to be if you show a compassionate yet firm resolve. 

Ask about their advisors. If your parents use a financial advisor, ask for an introduction, or for permission to attend their next meeting with him or her.  Sometimes advisors will be hesitant out of privacy concerns since they are bound to certain confidentiality standards. Getting written permission from your parents that the advisor is free to discuss their situation with you will generally alleviate these concerns. 

However you begin the conversation and no matter the reception you get, the point is that you as the adult child are (and should be) the first line of defense for your parents just as they were (or should have been) your first line of defense growing up. Perhaps your past was more tumultuous, and perhaps your present is not conducive to you taking on the responsibility now. But you can be an advocate, and you can be involved to ensure that their financial affairs continue to provide security and dignity in their twilight years.

This article was an excerpt from the book, What You Need to Know: The Adult Child's Guide to Becoming an Effective Financial Caregiver, by David W. Russell, CFP, CSA. 

Lintz vs Lintz
Category: W&H Case Files
Tags: elder financial abuse undue influence fiduciary breach case files Lintz

In this premier episode of Wealth and Honor - The Case Files, I examine the case of Lintz vs Lintz. It is the unfortunate case of a third spouse - twice married to the same individual - who manipulates her aging husband into amending his estate plans to leave more to her, and ultimately disinheriting his own children. This family's misfortune provides an obect lesson for other families who hope to avoid similar conflict and litigation.

This video and the commentary that follows if for education and entertainment only and is not intended as legal advice or expert legal analysis. Some of the concepts discussed are legal in nature and the application of such should only be considered under the advice of qualified legal representation.

 

For the complete court transcript, click here.

Next
1 2 3
RSS