Financial Literacy

When we're young, it's hard to imagine our parents aging into senior citizens. We rely on them for so much; the notion that we could someday be responsible for ensuring their financial security seems abstract and hard to grasp.

The truth is that those days may arrive faster than any of us expect. If we don’t work with our parents to prepare for this uncertain transition, we could expose the entire family to unnecessary financial, legal and emotional risks. 

This week, we're going to explore some of the most important financial, legal and medical issues associated with caring for aging parents.

First, we'll talk about the importance of an open line of communication with older parents about these important issues. Depending on your family, your parents may have already addressed these issues or they may react defensively to the very mention of them. Either way, open and honest communication is critical - by speaking honestly about your parents’ financial situation and reviewing the status of health insurance, bank and retirement accounts and estate planning documents, you can work to identify potential blind spots before it’s too late.

Next, we'll explore financial challenges commonly experienced by the elderly. We’ll learn how to audit income and expenses, find additional sources of income, and discuss warning signs that a parent's finances have veered off-track. By recognizing these often-subtle indications, children can know when to intervene or seek help from outside the family.

We'll also take a look at the value of smart estate planning and the need for a living will. Many Americans have no will or advanced medical directives in place, documents that are important no matter your age or health. If your parents don’t clearly state their preferences about end of life medical care and estate disposition through legal documentation, their wishes may not be followed.

Finally, smart preparation is the most effective means of dealing with the financial, medical and emotional implications of aging parents. To that end, we'll outline some of the most common surprises you'll want to avoid, like the extraordinarily expensive cost of long-term care.

For some, caring for older parents can be an enormous challenge. By taking the time to explore the some highly relevant issues, you can help to ensure your parents remain as financially secure as possible.

Given the sacrifices most parents make for their children, they deserve no less.

It’s one thing to talk about “getting older,” but initiating a conversation about physical decline and the possible loss of independence can be a challenge. Some aging parents won’t feel comfortable discussing their situation, even if they clearly need help. Others may be more comfortable than you are.

It can be a tricky talk – some older parents may not be receptive to the notion that they need (or could need) assistance, feeling their independence could be compromised. On the other hand, it can be difficult for children to step into the advisory role their parents may have filled for nearly a lifetime.

Whether you have one big conversation or a number of smaller ones, some of the topics you’ll need to cover include:

• Your parents’ financial, insurance, and legal affairs.
• Their health status and how to handle any costs if their health worsens.
• Their wishes during a health emergency and after death.

The more you talk about these issues, the more comfortable you and your parents will become. After all, the goal is to provide the best care possible for your parents. Ideally, you and your parents will work together as a team - discovering their wishes in addition to their needs.

When to Start

Elder care issues rarely seem pressing (until they are), but one thing is certain – the earlier you start, the better prepared your family will be. In fact, there are many reasons to start the conversation early with your parents:

• You may be able to help them make sure they have done everything they can to preserve their estate, including proper insurance coverage.
• You may be able to help them take advantage of resources they might not have known about, such as free or low-cost services, discounts at stores, free rides, activities, and alternative living arrangements.
• There are a growing number of communities and long-term facilities that require people move in before they require skilled nursing care. It’s much better for them to move to one of these places when they’re young and healthy enough to take advantage of what they have to offer, including social activities and exercise options.

How to Start the Conversation

The first thing to remember is that the purpose of your talk is to gather information, not counsel them emotionally. So while this conversation often results in a discussion of feelings, what you’re really after are facts, plans, and a status report. Whether that comes as a result of many discussions or a written response to a list of questions doesn’t really matter. The focus is to get answers to your questions.

If you aren’t sure how to get started, here are some approaches to talking with aging parents about their future:

• Direct: “I’d like to talk with you about the future. There are lots of things I need to know about. Is this a good time to talk?”
• Written: “Here’s an article/book/chapter I think might be good for you to read. I think it’s really good and helpful. After you’ve had a chance to digest it, I’d like to talk with you about what it says.”
• Third Party: “I’m concerned about the future and wondered if you’ve talked with your lawyer/accountant/advisor. If not, would you do so? If you have, do you think it would be good for me to talk with him/her or to have all three of us talk together?”

Whatever approach or combination of approaches you use, pay attention to your parents’ lead.  Be sure to listen to their answers and be open-minded about their wishes.

Knowing What To Discuss

You can't have a productive conversation if you don't cover the basics. To comprehensively address your parents' future situation, it's important to ask questions that include:

• Where are your financial records and accounts? This includes accounts with brokers, retirement plans, bank accounts, IRAs, etc. It's also important to ensure you have the log in information, including user names and passwords. 
• What is the situation with regard to healthcare? Are they using Medicare? Medicare Advantage? Is long-term care coverage in place?
• Do you have enough income and savings to finance your retirement? How much can you draw annually without exhausting your nest egg? Do you have a budget?
• Has any estate planning been done? Are directives in place for end of life care and relevant financial questions?

By covering these fundamental questions, adult children can develop an in-depth view of their parents’ financial situation and take corrective steps in necessary.

The steps involved in planning for your parents’ later years are not much different than planning for your own. However, there are some important differences - they have fewer years to prepare, their income is most likely decreasing, and they need safer investments.

The first step is to get a “big picture” a reality check – what to they own versus what they owe. Add all assets, including the value of their home and investments, and subtract any debts. The final figure is their net worth and will be an important factor in determining their financial options moving forward.

Next, you’ll want to explore their monthly expenses. Whether your parent will be living at home, in your home, or in a long-term care facility, determine how much they need to pay their bills. It may be helpful to prepare for different scenarios, such as moving to a nursing home versus staying at home.

Finally, total all monthly income, including Social Security, pensions and any wages. Add in the expected interest and dividend income from any investments, based on what these assets have earned in the past.

If your parents have income that exceeds their expenses, that’s great news. But if they currently live independently (not in a nursing home), you’ll want to explore how to pay for long-term care should it become needed.

If your parents’ expenses are greater than their income, the problem can be serious. Since their income is not likely to increase significantly, any shortfalls require the spending of savings. And as assets are depleted, there will be less and less income will be realized through interest or dividends, causing an even greater shortfall.

When searching for additional income to meet expenses, there are strategies for making the most of your parents’ assets – from the value of their home to tapping the value of other assets to making the most of gifts from family.

The Home as an Asset

For most people, the bulk of their net worth is tied up in their home. A home may be worth $400,000, but the equity in your parent’s home is available only if your parents sell the home or borrow against it. But without including the net worth of their home, it may not be possible to produce the income needed to preserve their lifestyle.

If your parents need to tap their home’s value to make end meet, options include selling their home and moving to a cheaper home, tapping home equity through refinancing, and reverse mortgages. Each of these topics has potential risks and benefits and we encourage anyone considering these options to consult with a financial advisor, accountant, or attorney who specialized in elder care issues.

Additional Strategies for Income

Depending on the assets of your parents and the financial situation of you and your siblings, there are additional income options to consider.

If your parents have “whole life” insurance policies, it is possible to borrow against the value of the policy in the form of a loan. There can be tax benefits to these loans as well and repayment is not required. However, taking loans from the value of these insurance policies will reduce their value when the policy is payable. Typically, these loans are best for emergencies and are eventually repaid.

Next, a loan from a family member, particularly from a child of aging parents, is a common way older folks meet expenses. These loans have many benefits. For example, the loan is often an advance on an inheritance and the funds will be offered at low or no interest rates. If you are considering loaning money to your parents, work with an attorney draw up the paperwork and make sure your siblings or other close relatives know you’ve made the loan.

Gifts are another potential source of income for aging parents. Tax rules stipulate that any individual can make a $14,000 gift to any other person without any taxable gain. That means that you, and potentially your spouse and children can each give each of your parents $14,000 per year without them having to claim that amount as income on a tax return. A gift is a gift, and that means you don’t expect any financial payback.

When family gifts and loans increase to the point where you are supplying more than half the support of your parent, you can legally claim them as dependents. That means claiming them on your tax return as additional household members. Depending on your financial situation, a potential benefit is that all their medical expenses can be included in your itemized tax deductions. Claiming your parent also means that your parent may be covered by your insurance plan.

Finally, viatical settlements are an option that can help terminally ill individuals cover expenses in the final months or years of life. Patients can sell their life insurance policy to a viatical settlement company and receive a lump sum benefit on which to live. If your parent’s life expectancy is six months or less, a viatical settlement company will pay up to 80% of the face value of the policy; up to 60% if your parent’s life expectancy is two years or less.

For Parents Without Assets and Special Situations

If your parents have few assets and a modest income, the federal programs can provide assistance if your parents qualify. If your parents have assets but one parent requires expensive nursing home care, Medicaid may also be able to help while enabling the healthy spouse to retain their home, car, and some savings under “spousal impoverishment” rules. Medicaid benefits vary from state-to-state, so be sure to seek the advice of a qualified attorney or advocate when researching federal benefits.

Financial issues have a tendency to snowball.  For example, a missed credit card payment can lead to a fee, which leads to a higher balance. Too many missed payments can lead to interest rates increases, which lead to both higher balances and increased cost for credit – making that original debt even more expensive and difficult to manage.

When we’re young, financial mistakes are common and relatively easy to overcome. After all, young people have a lifetime of earning ahead. But older adults don’t necessarily have the benefit of simply working harder and earning more. So there’s a unique risk with the financial lives of elderly. In some situations, their financial health can rapidly become precarious without timely intervention of adult children.

Here are some warning signs that your parents’ finances could be in trouble:

• Bills are paid late, or not at all. As we age, it's natural to become more forgetful, and this can certainly apply to missing the occasional payment deadline. If a pattern of late payment or non-payment develops, however, it's possible something more serious is at play. If you see mail from creditors demanding payment  - or have noticed piles of unopened mail - it could be a sign that you need to investigate further.
• Money and rising costs are frequent topics of conversation. If your parents begin to complain about the rising cost of goods and services, or simply begin discussing money with much greater frequency, it may be an indirect signal they are having financial issues. Because it's often difficult for people (especially parents) to come right out and admit they are in trouble, they may drop oblique conversational clues hoping you'll pick up the message.

• There are repeated episodes of forgetfulness and money mismanagement. Forgetting to cash the occasional check timely - or misplacing your purse or wallet - isn't atypical behavior for older parents. Yet allowing uncashed checks to pile up, making large, expensive and out of character purchases, and gambling more than normal are all signs that a real problem could be at hand. As we age and deal with cognitive issues, routine forgetfulness can sometimes turn into episodic memory loss and impulsiveness.

• You feel they may be vulnerable to a scam. Fraud against senior citizens has reached epidemic levels. Unfortunately, because some of these scams are executed so quickly and involve internationally based online perpetrators, it can be hard to recoup any losses once the bait has been taken. The best way to avoid falling victim is to closely monitor unusual calls, texts, emails, social media invitations and other common scam techniques.

• They become careless or excessively generous with their money. If you find significant sums of money in odd places - or in accounts that have been forgotten about - it's likely a sign your parent is having trouble managing their assets. Likewise, excessively large donations to charitable causes, or a newfound desire to give away possessions to friends or family members, may be a red flag that something is awry.

When to Step In

Your parents have worked hard for what they have. It's important that it be protected. If you’re concerned about their financial well-being, the first step is to gather all documentation about bank accounts, assets and investments, tax information, retirement policies, credit cards, financial advisors, and household bills. Then look closely at cash flow, budgets, and expenses.

If your parents absolutely won’t confide in you about their financial details, encourage them to speak with a trained financial advisor such as a financial planner, CPA, tax or elder issues attorney. It can be helpful to remind them how much is at stake - they could lose everything they’ve worked all their lives for.

Keep in mind that your parents’ decisions about their assets, income, and investments are theirs to make. How much they spend of their money and on what is up to them, even if you disagree with them. You can advise, but you have no legal right to intercede unless there is a legal decision about their competence.

When it comes to financial security in later life, nothing is more apropos than the Boy Scout's famous motto: Be prepared. Smart, early preparation is critical when it comes to ensuring that aging parents remain independent and secure. It's also vitally important when carrying out a parent's wishes regarding healthcare and end of life decisions.

When caring for your aging parents, it’s essential you understand the basics of the legal issues involved. A host of problems pop up when older people haven’t taken the appropriate steps to plan for old age. A great strategy is to consult an elder law attorney who is experienced in the fields you are most concerned with and who has access to other experts as needed.

The key to caring for your aging parents effectively is to avoid the court deciding their fate. By planning ahead, you can make sure their affairs are taken care of in the manner they would like.  An elder law attorney can help you make the most of this process. They are most concerned with three goals for their clients:

1. Ensuring that there is an orderly distribution of assets after the client’s death with a minimization of taxation.

2. Ensuring that your aging parents have a personal and financial management system in case they are incapacitated and unable to manage their own affairs.

3. Ensuring that your parents have access to adequate health care without depleting all their resources.

The Importance of a Will

A will is the best way to ensure an orderly distribution of assets after death. Most seniors have already executed a legal will. If your parents have not, urge them to do so. A will ensures that your parents’ wishes about their estate are met. The more detail that’s included in their will, the more likely their wishes about who gets what will be realized.

In a will you name one or more beneficiaries who are to receive some of your assets and property. It also names a particular person who will serve as the executor/executrix and who is responsible for making sure that the property goes to the right person and that all bills are paid. Make sure the person whom they designated is still able and willing to function in the role. If anything has changed since your parents drew up their will, they may need to change it or add a codicil (an amendment).

The cost for an attorney to draft a will runs from $50 to  $1,500, depending on the complexity and the size of the estate. Your parents can also draw up their own will using a software program or by using a preprinted form available in many bookstores and office supply stores. But if your parent choose a self-service option, double check to make sure that the will is valid in their state of residence.

Living Will and Medical Power Of Attorney/Healthcare Proxy

While the percentage of U.S. residents possessing a will is low, the number of those with a living will is even lower - fewer than one-third of Americans have one.

Living wills fill an essential function: They allow you to have your healthcare wishes implemented in the event you are incapacitated. If you don't want to be connected to a feeding tube or have your heart restarted after a traumatic injury, for example, a living will ensures those desires will be fulfilled. Common living will specifications include decisions about resuscitation, organ donation, pain management, dialysis, ventilation and body donation.

As parents age, it becomes ever more critical that living will directives are drafted, so their true wishes can be accommodated.

Medical Power Of Attorney and Healthcare Proxy both refer to a document that allows you to make important medical decisions when loved ones are incapable of doing so. Those possessing power of attorney are given the latitude to make all healthcare decisions, and only one person at a time may be designated as a proxy.

Proxies should be intimately familiar with the wishes of their loved ones with regard to crisis medical care and end of life care. It's also important to remember that parents must be mentally competent at the time power of attorney is granted.

Ensuring that there is a system in place if your parents become unable to manage their own affairs is also relatively simple to accomplish. It requires only that your parents complete certain legal documents under the direction of a professional.

Access to Assets

Having easy access to your parent’s assets is essential as you take on more of your parent’s financial caretaking. Power of attorney and joint ownership are two ways to get that access.

Power of Attorney

One of the ways you can get access to your parent’s assets is through a power of attorney. The power of attorney document can limit powers to the attorney in fact, depending on how much responsibility or authority the signer wants to hand over. That is why most attorneys recommend this method of giving children access to parents’ assets rather than simply becoming a co-owner of accounts or other assets.

Joint Ownership

A second way for you have access to your parents’ assets is through joint ownership. This method may not worry your parent as much, although most attorneys feel it is not as good a method as a power of attorney is. Like powers of attorney, your parents must be willing to turn over the responsibility.

Here are some other ways to ensure you have access to your parent’ assets:

• Bank accounts. Open a separate account with you and your parent having signature authority. Your parents can then transfer all or part of their funds as needed, and transactions can be handled through check writing or through telephone or computer transfers. And don’t forget about safe deposit boxes – if your parents’ have one, you should be able to get into it if needed.
• Stocks and bonds. Having easy access to your parents’ stocks and bonds is not quite as simple as just signing a signature card. Instead, consider opening a new account at a brokerage house in both of your names. Your parent can then deposit or transfer the stock or bond into this account, giving you access that can’t be easily revoked.
• Tax returns. In many families the person assuming the financial responsibility is often given the task of making sure tax returns are filed and estimated taxes are paid. You do not need any special authority to prepare a tax return for someone. Furthermore, unless you are a paid preparer, you do not need to sign the return yourself.

Understanding Legal Incompetence

Most people remain competent to make decisions for themselves until the day they die. But when your parents cross over the line and make choices that are harmful to them, you will have to step in. Going to court to get your parent declared incompetent is emotionally painful and it also can be quite expensive. If this step is unavoidable, discuss it with an elder law attorney who will be able to explain what will be involved and what the cost will be.

The Takeaway

Setting up legal documents ensuring the orderly disposition of an estate and providing healthcare guidance is a task that should be treated with urgency and completed under the guidance of a legal professional. By encouraging aging parents to take these steps now, you can make sure their preferences will be respected, while the risk for uncertainty and red tape is significantly lowered.

Everyone is familiar with the expense of child rearing. According to most estimates, it costs around $240,000 to raise a child to the age of 17.

Yet many people don't realize caring for the long-term needs of an aging parent is even more expensive - averaging around $140,000 in out of pocket costs over just four years, rather than 17.

It goes without saying the financial implications associated with caring for parents who cannot live independently are usually profound. To help you better understand these costs, let's take a deeper look at the issue.

Caring For Aging Parents Once Independent Living Is No Longer An Option

Once the determination has been made that an aging parent should no longer live without assistance, family members should help that parent come to a decision about their future care and living situation. While there are a variety of options available, financial limitations may limit the number of feasible choices.

According to the U.S. government, some of the average costs involved with eldercare include:

• More than $6,000 per month for a semi-private room in a nursing home
• More than $3,000 per month for a room in an assisted living facility
• $21 an hour for a home health aide
• $67 per hour for services in an adult day care health facility

It's important to note that Medicare does not pay for the vast majority of long-term care options. Typically Medicare only pays for short visits to rehab centers and hospice care. The program will pay for home health care under some circumstances, but this coverage runs out after 100 days.

Medicaid, on the other hand, does pay for long-term care services. However, strict eligibility requirements (which vary from state to state) means that only those with very low income typically qualify.

Planning for Long-Term Care

Long-term care refers to assistance that a person with a chronic illness needs in order to get through the day. The person receiving these services typically suffers either from a chronic illness or disability, a condition that can be managed but not cured. The primary goal of long-term care is to help the recipient maintain as much independence as possible; its timeline is indefinite. Care is not restricted to either a hospital or to any other long-term care facility. Long-term care could begin as home-care and may progress into nursing home care or some other intermediate level of care.

Most people don't think they will end up needing long-term care and may be reluctant to plan for it. But the reality is close to half of people over 65 will require some form of nursing home care at some point in their lives, and half of them will be in a long-term care facility for a number of years.

Nationally, the average annual cost for a nursing home varies from $75,000 per year to more than $250,000 per year, depending on where you live. This figure does not include all of the other expenses incurred for care that an individual received prior to being admitted into a nursing home. Talk with your parents about what funds are allocated for their retirement income and how many years of long-term care their nest egg could provide.

Caring for Our Own

Another common scenario for families is that children of aging parents have the aging parent move in with them and care for the parent there. However, this can be complicated. Most of us do not have the necessary medical expertise required for long-term care, plus it’s a huge responsibility. Think through it carefully before you take this step.

So How Do You Pay?

The fact is the majority of nursing home care and long-term care patients currently rely on self-funding. In fact, about half of nursing home costs are paid, out-of-pocket, by either the disabled/elderly individual or their families. There are several options available to people to pay for long-term care:

• Medicare - While Medicare does provide some long-term care benefits, they are very limited in their scope and they follow fairly restrictive eligibility requirements. In general, Medicare will cover the costs associated with nursing home care for a period of one hundred days only after a prior hospitalization of three consecutive days. Also, your parents must be admitted for skilled nursing care within 30 days of their discharge from the hospital. Furthermore, the nursing home must be a government-approved facility.

• Medicaid - Approximately 50 percent of nursing home residents have their costs paid by Medicaid. While it is mostly funded by the federal government, it is administered and controlled by each state. As a result, programs vary significantly state to state. In fact, Medicaid eligibility varies by county. Medicaid is a needs-based program and eligibility is influenced by your parents’ level of prosperity.

• Veterans’ Benefits - For veterans, the Veterans Administration (VA) may be a source of funding for long-term care. The VA provides benefits for custodial care provided at home via funding from the Aid & Attendance Special Pension (A&A). However, eligibility is heavily weighted toward those veterans with limited financial means. If your parent qualifies for A&A, they will receive it as a pension benefit. Nursing home benefits, although limited, are available for most veterans with a service-connected condition or a disability that is rated 70% or more disabling. All other veterans are eligible on a resource and space-available basis. Despite the limitations and strict eligibility requirements, if your parent is a veteran, it’s worth a call to the VA.

• Long-term Care Insurance - More and more people rely on long-term care insurance to pay for long-term care.

If you decide that a long-term care insurance policy may be suitable for your parents, it’s best to find a qualified insurance agent or broker to assist you in your search for the right insurance carrier and the policy that will work best for your parents.

While the cost of long-term care can be astronomical, there are ways to mitigate the expense. These options include long-term care insurance, life insurance policies, reverse mortgages, annuities, and trusts. Premiums for long-term care policies are also tax deductible, making them a smart option for most people.

Regardless of how you choose to handle your parents' living arrangements, the key to success is preparing as early as possible. 

The Takeaway

Caring for a parent who can no longer live independently often carries enormous financial implications. By taking steps to account for this possibility early, families can avoid being caught unprepared.

Given the sacrifices most parents make for the benefit of their children, the desire to help aging parents enjoy a safe and stable retirement is a natural one. Unfortunately, the physical, mental and emotional resources required to accomplish this are substantial. 

Early planning - and the ability to avoid the common traps that await adult children caring for their parents - are essential for negotiating this process.

With that in mind, let's examine some of the ugly surprises you need to sidestep.

Avoid Responding In Kind To A Volatile Reaction 

Because adult children are usually acting from the noblest of motives when it comes to caring for their parents, they are often surprised when they receive a dismissive or even vehemently opposed attitude toward intervention in their affairs. Older parents often have a hard time adjusting to their changing capacities and capabilities; they may fear ceding control and losing independence.

Before approaching your parents about this sensitive issue, prepare yourself for a range of reactions. Anticipating volatility can help you avoid responding in a similarly emotionally agitated fashion.

Avoid Getting Upset If Siblings Don't Share The Burden 

In an ideal world, all siblings would agree to share the burden and expense of eldercare equally. In practice, that's often not the case. If you expect a perfect division of expense and labor, you may not be viewing things realistically. Siblings have different financial resources and demands on their time. One sibling's housing situation may not be conducive to hosting a parent, making that burden fall entirely on another sibling.

Accepting that a 50/50 split may not be possible will help your family maintain solidarity and harmony during what can be a very trying period.

Avoid Missing the Signals That a Parent is in Trouble

As we age, our capacities may diminish slowly - almost imperceptibly to others. Additionally, because we may not see older parents on a daily basis, we may not have enough exposure to realize that they have become vulnerable. Even if aging parents realize something is amiss, they may hesitate to relay this information, not wanting to worry others.

This means it's important to pick up on the subtle signals that a parent is in need of help. Unusual spending patterns, bills stacking up and conversational clues can all signal that intervention may be needed.

Avoid Being Surprised by The Expense of Care

There's no two ways about it - caring for an older parent is expensive and time-consuming. Standard semi-private nursing home care can cost upwards of $70,000 annually. Even moving a parent into an adult child's home often requires expensive renovations and the use of a home health care worker.

Premiums for long-term care insurance, on the other hand, are only between $3,000 and $5,000 per year for a 60-year-old. By understanding the costs involved with eldercare - and taking early action to address these costs - children and parents can avoid making the costly mistake of being financially unprepared for late life care.

The Takeaway

Ugly surprises are never welcome - and they are even more problematic when an elderly parent's financial security is on the line. By avoiding the surprises outlined above, you can better serve the needs of aging parents.