Dealing With Your Parents' Finances
Susan E. Kuhn, Fortune Magazine, 9/30/96
Talking about money with your parents is perhaps somewhat uncomfortable, but not having adequate wills and trusts, as well as a strategy to deal with their finances when the need arises is worse for everyone. You might now find yourself in the situation of many other baby-boomers, which is that financial needs are great: your kids are in college, your mortgage and other monthly expenses are substantial, and in addition your parents now need help with some aspect of their finances. For many baby-boomers, the latest financial crisis is aging parents who might not have planned completely and carefully for their retirement years. Deciding in advance who in your family will handle investment decisions, inherit assets or the family home, or provide general care for your parents is not easy, but it could save you all from some big financial problems later on.
To help you in this planning process, following are eight of the biggest mistakes your parents could be making right now regarding their financial management, and how to avoid these mistakes.
1. Your parents have no will, it is unsigned, or nobody knows where it is. Don’t delay in finding out about this aspect. Ask if your parents have an up-to-date will, and make sure everyone in the family knows its whereabouts. If they don’t have a will, have them draw one up.
2. Your parents haven’t drawn up a power of attorney or a living will. It is never too early for your parents to plan ahead for the day when they can’t pay bills for themselves because of their health, or when they can’t make health care decisions for themselves. A durable power of attorney will let you withdraw funds from your parents’ accounts and take care of their finances as the situation warrants. If they are concerned about abuse of these powers, the power of attorney can be designed to spring into action at a specific time - when they become incapacitated, for example. In addition many banks, leery of ripoffs, require your parents to fill out their own version, so it is necessary to take care of this in advance. Living wills, which inform doctors of your parents’ medical wishes (to be kept on life support, say) are not recognized in every state, but your parents can also arrange for a health care proxy, which designates someone else to make such decisions for them.
3. The trust your parents set up isn’t properly safeguarded. Here is a true story which illustrates a financial pitfall that can be avoided by reviewing these matters in advance with your parents. A man started a trust to gradually hand over half a million dollars in a life insurance policy to his daughter after his death. Unfortunately, he overlooked an important aspect of this: he never changed the title of the insurance policy from her name to that of the trust he set up for her. At his death, she got the money, quit college, and immediately wasted most of it. The trust was set up in stages to protect the daughter from exactly what happened, but the important detail of changing the title from the daughter to the trust had been overlooked.
4. The trust is outdated. Another financial pitfall which can be avoided is that the trust is not current in how it is set up, regarding current tax guidelines. For example, a man died, leaving his wife a trust he had set up for her 30 years earlier. When the trust was written, a spouse’s tax deduction was limited to half of an estate’s assets. Unfortunately, the man never updated the trust. The widow, today entitled to receive the entire estate tax-free, had to pay taxes on half the assets, because the trust had not been updated to reflect that change in tax law. The solution is simple: have a trust checkup every three years.
5. Fearful that a long illness in a nursing home will eat up everything, your parents have put assets in your name. This is not wise, especially if the asset, such as the family home, is worth ten times what your parents originally paid for it. When parents gift a house, the children must assume the original cost basis, saddling them with a huge potential capital-gains tax should they choose to sell. If the parents hold on to the house and specify who gets it in their will, the children get the house at death with no hidden tax bombs. The cost basis on which the asset is taxed reflects current market values at the time of death.
6. To elude creditors, your father has put everything in your mother’s name. The tax consequences of this action need to be carefully considered and managed. Estate taxes per person are levied on assets exceeding $600,000, progressively increasing from 37% to 55% over $3 million. The trick is to juggle the assets so that the estates of both your mother and your father utilize the $600,000 unified tax credit and neither exceeds $3 million. It is possible that it is better to pay some tax when your father dies, rather than tax your mother’s assets at the maximum later.
7. Your parents aren’t giving away as much as they should. Anyone interested in helping others and reducing their estate can give an individual up to $10,000 a year without paying tax. Spouses with several children can give each child $20,000 annually. In addition, anybody can pay for another’s tuition tax-free at an accredited school, simply by writing a check directly to the institution. Of course, gifting mistakes can be made. There’s the guy who stopped giving when the stock market slumped, then asked later if he could double up; you can’t. Another gave away his IBM stock - at a loss. In hindsight he should have sold the stock to take the loss on his income tax form, and then passed on the cash.
8. Parents automatically hand over control of their money to the children. Your father thinks he is doing your mother a favor by putting the children in charge of investments. However that leaves your mother with little legal recourse, should some be needed. Unfortunately, some children may care more about aggressively growing the inheritance than making sure their mother has enough income to live on. It is much better to make Mom a co-trustee.
For more information or professional assistance with your parents planning please contact S.S. Guru Roop Kaur Khalsa at the Sikh Dharma Development Office
Tel: (505) 753-5881 Fax: (505) 753-5982
Email: [email protected]