Help Flows Both Ways Between the Generations
As we work with more couples in the “sandwich generation” demographic, we have been encountering situations where these adult
For most families, it is healthcare which at some point creates the real pinch.children find themselves needing to contribute financially to help their aging parents maintain certain living standards. This should not come as a shock as many retirees are finding themselves underfunded due to poor investment choices, excessive spending, lack of savings, unexpected expenses or their own longevity.
We have written about the challenges of providing care for a parent(s), including loss of wages & benefits, stress at home due to less time with one’s spouse and children, and even compromised health. Because many in the sandwich generation are experiencing these symptoms, the alternative of providing financial support in lieu of (and in addition to) direct care has become more attractive.
Talking, Planning, Coping
In light of this trend we want to reiterate the importance of proactive planning between the generations for coping with these new realities.
The first crucial conversation between the generations should reveal how much the parents have prepared for the future, legally and financially. Reviewing key legal documents, such as a durable power of attorney and an up-to-date will and trust, is the best way to ease into the discussion about finances. Another essential topic: Is a long-term care insurance policy in place? If not, what is the plan for covering nursing home care or in-home help expenses if necessary.
If you are an adult child, learning your parent’s recurring monthly expenses may be the easiest and most practical way to help them — and will help you determine which bills you can most easily pay. The best approach might be to supplement a certain amount each month. Knowing that you’ll have a set monthly obligation may make it easier for you to plan and adjust your own budget accordingly.
If care is imminent, help make a caregiving budget. Take inventory of your parent’s resources and how they might be used to support caregiving activities. You might set up a meeting with their investment advisor to discuss how to help them maximize their income opportunities.
Closing the Gap
One avenue to explore for helping close a budget gap is determining whether benefits are being maximized? Medicare, Medicaid and Social Security are all programs that can make the difference between worrying and not worrying about meeting basic needs. It is possible that benefits are not being maximized from these programs. Understanding the details of these programs will lead to receiving the most rewards, and the younger generation will benefit by being able to plan more efficiently for their own retirement.
Downsizing is another effective lever for closing an income gap. Housing is usually a highly sensitive area, but it’s worth considering. If the family home is still the primary residence, a move to a smaller space might be a significant money-saver that would ultimately help the older generation retain their independence.
Finally, if there are more family members available to share the financial responsibilities, they should be part of the process. Other family members such as aunts and uncles or even adult grandchildren might also be willing to contribute in some way. At a minimum, getting them involved in the conversation serves to strengthen the extended family unit, from which support can come in other forms than monetary.
Commitment from a Son/Daughter
For those sandwich generation readers considering helping your parents financially, don’t jump into a commitment before considering the consequences for your own nest egg! You should be asking these questions: Will you be able to support yourself? How might your financial future be affected by taking care of a parent? Are there steps you need to take to deal with these implications?
When making a commitment to help, adult children should consider strategies that minimize their own taxes as well as their parents’ while preserving a sense of independence for the previous generation. Earlier this year the Wall Street Journal’s Julie Steinberg provided a short list of approaches being utilized to ease financial strains. Consulting with your estate attorney and your CPA on these strategies is advised.
Annual gifts. This is the simplest answer – giving money to parents. You can make annual tax-exempt gifts of as much as $14,000 to any individual in 2013. But bear in mind: Gifts could make your parents ineligible for certain government benefits, such as Medicaid and Supplemental Security Income.
Paying their bills. The Internal Revenue Service allows taxpayers to pay qualified medical and educational bills on behalf of another person without limits. But siblings, in particular, should negotiate such arrangements in advance. The bill-payer, for instance, might expect to be reimbursed from the parents’ assets upon their death.
Intrafamily loans. Family members can charge each other low minimum annual interest rates on intrafamily loans. To avoid tax implications, the interest needs to be at or above what’s known as the “applicable federal rate,” which is currently close to the lowest on record. But if the paperwork isn’t done correctly, the IRS could have its hand out.
“Upward” trusts. In these arrangements, parents typically live off the income generated by the assets inside the trust, without touching the core assets. Such vehicles can be ideal when adult children are concerned about parents’ ability to manage the money. But again, the trust could disqualify the parents from being eligible for government benefits.
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