What To Do When Your Parents Need Your Help
More and more baby boomers are becoming official members of the sandwich generation—that group of adult children squeezed between caring for aging parents and raising growing children. One of the many challenging responsibilities these adult children face is the task of handling their parents’ financial and legal obligations. The California Society of Certified Public Accountants offers the following advice.
Many adults approach talking to their parents about finances with the same kind of anxiety they feel about talking to their children about sex. While it may be difficult to ask them to talk about illness and death, it is critical that you have this discussion while your parents are mentally competent.
Tackling the Paperwork
With their permission, locate and review your parents’ bank savings and checking accounts, investment and retirement plans, insurance policies, outstanding mortgages and loans, and pension and Social Security payments. It’s also a good idea to round up the names of their attorney, stockbroker, insurance agent, financial planner, and CPA.
When it becomes necessary for you to begin managing a parent’s day-to-day finances, you might be inclined to set up a joint account. Before you do so, you should be aware that there are drawbacks to this arrangement. For example, if either of you gets into financial trouble, creditors can take all the money held jointly, regardless of who owns the money. Also, since any money in a joint account with your parent becomes yours when your parent dies (regardless of directives in your parent’s will), you run the risk of disgruntled siblings.
There are, however, some ways you can simplify your tasks. For one thing, you can save yourself extra trips to the bank by having your parent’s Social Security, pension, and dividend checks deposited directly to his or her bank account. You may be able to arrange to have the bank pay your parent’s regularly recurring bills, such as insurance premiums.
Putting Legal Documents in Place
Make sure your parent has a will and that it is up to date. If the estate is sizable, he or she might consider establishing trusts, which can be designed to accomplish many different objectives.
Your parent also should have a durable power of attorney drawn up, a legal document that enables your parent (who must be mentally competent when the power is given) to give you or someone else the authority to sign checks, pay bills, and handle his or her financial affairs. Be certain that the power of attorney is durable, since only a durable power of attorney remains in effect if your parent becomes incapacitated.
Two other documents that can make your caregiving task less complicated are a living will, which sets forth your parent’s wishes about the use of heroic measures to sustain life, and a healthcare proxy, allowing you or the person named in the document to make medical decisions on behalf of a parent. Legal requirements for powers of attorney, health care proxies and living wills vary from state to state. When executing legal documents, make sure you consult with an attorney in the state where your parent legally resides.
Taking Tax Breaks
There are several tax strategies that can help to ease the financial burden of helping elderly parents. If you provide more than half of their support, and if certain other dependency rules are met, you may be entitled to claim the dependency exemption. This tax break applies whether or not your parent lives with you. If you and your siblings share the costs of financially supporting your parent, and none of you contributes more than half the amount spent on support, you may enter into a multiple support agreement. Under such an agreement, one of you, with the permission of the others, claims the exemption. The person claiming the exemption must attach Form 2120 to his or her tax return.
If your parent qualifies as your dependent, you also may be eligible to deduct the medical expenses you pay for that parent. The medical deduction is limited to the amount by which the medical expenses you pay on behalf of your parent, combined with your own family’s medical expenses, exceeds 7.5 percent of your adjusted gross income. If your parent lives with you, you may include as medical expenses any costs you incur for installing special railings, ramps, or grab bars, or for widening doors for a wheelchair-bound parent. Medical expenses are deductible only by the taxpayer who actually pays them. You should not give your dependent the money to pay the expense, but should instead pay the provider or supplier directly, if you wish to be able to take the deduction.
The dependent care credit, the same tax break that helps working parents defray some of the costs of child care, can help if you are caring for a dependent parent in your home and need to hire help to care for your parent while you work. The amount of the credit depends on your income and on how much you spend for the care.
If your employer offers a dependent care spending account, check to see if you may be better off using this option, which allows you to use pretax dollars (typically up to $5,000 of the amount you spend) for the care of a dependent parent living with you. You can use one or the other, but not both. CPAs, especially those specially licensed to offer CPA ElderCare services, can provide additional information and assistance to you when sorting out the legal and financial issues involved with caring for an aging parent.