Many of your retiring boomer clients are dismayed to finally reach financial independence, only to find themselves spending valuable time and money supporting and caring for one (or two, or more) of their elderly parents.
We recently covered the first steps to take when taking responsibility for an older person's well-being. Over the next several columns we'll discuss several other issues (financial and otherwise) faced by those who are compelled to become caregivers, and how your advice can alleviate the difficulties involved.
This month we'll discuss innovative strategies you can use to maximize the ongoing amount of money available to the families who are enduring this unfortunate circumstance.
- Optimize IRA withdrawals
Most older IRA owners default to just taking the annual required minimum distribution (RMD) from their retirement accounts, leaving the rest of the money sheltered from taxation. But that may be a mistake, especially if there is a wide difference in income between the older and younger generations of the family.
If the older parent is in a lower tax bracket than the adult children may be if and when the beneficiaries inherit any of the elders' unused retirement funds, you should suggest taking more out of the IRA than the RMD deems necessary, and moving any unneeded balance into a Roth IRA.
How much? A good rule of thumb is to try to keep the older parents at the top of the 15 percent federal income tax bracket. For 2011 that amount is $34,500 for single filers, and $69,000 for married couples filing jointly.
The figure that determines the taxpayer's federal bracket is the one found on Line 43 of the 1040, Line 27 on Form 1040A, and Line 6 on Form 1040EZ. However, the conversion should also be considered for any alternative minimum tax consequences — Line 28 on Form 6251.
If the older IRA owner can't afford the extra income taxes that might be incurred by the excess IRA money withdrawn and converted, the younger potential inheritors can make up the difference. But any funds used must adhere to the gifting limits (for 2011 it's still $13,000 per person per year).
- Keep Paying Premiums
Another way adult children can use a little of their own money now for a potential larger benefit later is to make sure that a cash-strapped older parent's insurance coverage is established and maintained.
The first insurance type to consider is a “Medigap” policy — supplemental health insurance that covers various medical treatments that an older parent might need, but that aren't covered by basic Medicare (get more information at www.medicare.gov/medigap/).
Long-term care insurance can be an extremely important component of an older person's financial safety net. Although it might be difficult or impossible for adult children to establish a new long-term care insurance policy on elderly parents, the kids should definitely pay the premiums to keep a current policy in force.
The premiums will typically cost less than a few hundred dollars per month, yet spending that money will ensure that potentially hundreds of thousands of dollars worth of ongoing care will be available for the older parent if she needs it, without depletion of her (or the children's) nest egg.
Finally, the kids should consider paying out of their own pockets to keep a current life insurance policy on the older parent in force. Some might say that expressing an interest in a potential life insurance death benefit of a mother or father is insensitive at best, and morbidly greedy at the worst.
But in the better case scenario, continuing the life insurance policy means any accumulated cash value can serve as one more potential source of funds that can cover emergency expenses incurred by the insured while she is alive.
And in the worst-case circumstances, an eventual death benefit might provide a tax-free sum that inheritors can use to replenish money spent on their parents, uncovered medical or long-term care expenses incurred by the parents, or as a simple addition to the next generation's financial security.
If there is no pressing inter-family need for the eventual death benefit, donating the insurance policy or proceed to a qualified charity can provide tax benefits to the family, and a sense of contentment to the insured.
- Help With The House
Clients who have older parents with more home equity than spendable cash can employ plenty of tactics to make the most of the mothers' and fathers' most-common intangible asset. The most complicated (but potentially lucrative) option is to help the older homeowner obtain a reverse mortgage. The process is not as daunting as you and your clients might believe, and can provide an instant infusion of tax-free cash that never needs to be paid back.
However, taking out a reverse mortgage means that it may be more difficult and costly for the adult children to inherit the house in the future. If your clients have both the means and the motivation to keep their parents' home in the family, they can arrange to purchase the house, and then rent it back to the parent for an agreed-upon rate.
Keep in mind that if the sale price or subsequent rent levied diverge from market rates for similar properties, the difference may have to be accounted for under the aforementioned “gifting” laws. A slightly-less-effective but much-simpler strategy than either of the above is to recommend that the adult children co-sign for a new home equity line of credit (HELOC) on their parents' home.
Once established, the HELOC can be tapped at a moment's notice, and the only cost to doing so is the subsequent interest that will be charged on the borrowed amount. In the meantime, though, the parent can remain in the home for as long she wants.
Joint Owner Jeopardy
Next month we'll discuss why the well-intentioned move of making an adult child the joint owner of an older parent's home (and other assets) offers little in the way of rewards, but can trigger a host of pain and problems down the road.
Kevin McKinley CFP is Principal/owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of the book Make Your Kid A Millionaire (Simon & Schuster), and provides speaking and consulting services on family financial planning topics. Find out more at www.mckinleymoney.com.