Financial Planning Considerations When Helping Aging Parents

"My mom/dad's health is starting to decline somewhat quickly - what should we be helping them with from a financial perspective?"

First, if you're reading this because you're currently facing these challenges, I'm sorry. It's never easy to watch a parent's health decline, and the work that comes with it is frustrating and challenging - especially because you're just trying to do what's best for your family.

If you find yourself looking for some assistance, that's where a financial planner may come into the picture. Here are some of the things I help with in these situations.

Review Estate Documents

If your parent has estate documents, make sure you understand what they say. Someone should be named to have power over their finances, and someone should be named to have power over their healthcare decisions. They might be the same person, they might not.

Depending on the situation, your parent might also have a trust (potentially even more than one). If that's the case, you need to know whether it's Revocable or Irrevocable, and you should also find out who the trustee and successor trustees are (often the financial power of attorney will be named here).

Actions Before Incapacitation

If your parent is still able to act on their own behalf, it might be a good idea to double check some things while their signature is still legally binding.

Do they have beneficiaries named on all of their assets?

These may show up as POD (payable on death), TOD (transfer on death), or just beneficiary. Check to see if the beneficiaries match your parents' wishes and that they're all still living. It can be a bit of a mess if one of the beneficiaries is deceased, and the rules around how this is handled can be complex. It's quite challenging (sometimes impossible) to change beneficiaries for an incapacitated person, so it's best if your parent can do this themselves.

Are their financial accounts somewhat consolidated?

If there are accounts all over the place, it might make sense to get them all to one brokerage before a Power of Attorney needs to take over to make it easier to manage and ultimately transfer at their passing. Remember, diversification doesn't mean having money at a bunch of different brokerages, it means diverse investments. This can often still be done after a parent's incapacitation, but it's a lot more challenging, and it may be difficult to retain current beneficiary elections.

Insurance

What insurance does your parent have in place?

This is the area where I find the most "fun" surprises.

"Why did mom take out a life insurance policy on herself and gift it to the church?"

"Why did they buy an annuity they were locked into at age 80?"

"How much have they paid into this policy? It's SUPER EXPENSIVE!"

Life Insurance

Generally, our conversations at this stage of life revolve around keeping policies in force. Universal Life Insurance and Variable Universal Life Insurance can make this a bit tricky, as the "cost of insurance" rises as the insured person ages. This cost of insurance is drawn out of the cash value, regardless of how much is paid in premiums. Unless there's a "no-lapse guarantee," once the cash value is depleted, the insurance will lapse. It feels terrible to run a cost-benefit analysis on an aging parent's life insurance policy, but you have to remember that they would likely want what's in their beneficiaries' best interest.

Annuities

Wait, why are annuities in the insurance portion? You might think of annuities as a type of investment, and in a sense, they are. HOWEVER, at their base, they are insurance contracts, and some of them have provisions for long-term care events! It's probably a good idea to have a professional review any annuity contracts. There are also some considerations we'll touch on in the "Tax Planning" section.

Long-term Care Insurance

Standalone LTC insurance isn't as popular as it once was - more often we see this coverage tacked onto a life insurance policy or annuity contract. That said, it’s important to find out if your parent has a policy, or if this is a benefit included in any other policies they may have.

Tax Planning

It kind of feels weird to think about it this way, but we are starting to get to the point where multi-generational tax planning comes into play. Is your parent in a higher or lower tax bracket than those who will be inheriting their assets? Sometimes it’s a little of both - one successful sibling, one less so; one working sibling, one retired… you see the point. It gets complicated. But here are some things to watch for.

Health Savings Accounts (HSAs)

HSAs are often renowned for how tax-efficient they are; however, they are the WORST account type to leave behind. Why, you ask? Because they’re taxable in the year they’re inherited for non-spouse beneficiaries. The whole thing! So if your parent has an HSA, make sure they’re spending those funds on any qualified expenses while they can do so tax-free.

Annuities

Yes, they’re back! The gains in non-IRA annuities (aka nonqualified annuities) are all taxable at ordinary income rates. Unlike other nonqualified accounts, the basis doesn’t receive a step-up at the owner’s passing, meaning their heirs are left to foot the tax bill. If your parent is in a lower tax bracket than his or her heirs, it might make sense to make annuity distributions prior to their passing to have them pay the tax in their lower brackets during their life.

Pre-tax IRAs

Like annuities, when you inherit an IRA, you have to pay taxes on any withdrawals. But there’s a slightly more elegant way to handle these. Enter: Roth Conversions. If we want to generate income with an IRA, the best way to do so is by converting it (typically just enough each year to fill low brackets) to a Roth IRA, where it grows tax free. When an IRA or Roth IRA is left behind, it generally needs to be emptied within 10 years by most non-spouse beneficiaries. The difference is - pre-tax IRA withdrawals are taxable to the beneficiary, while Roth IRAs are not (tax free, baby!). Note, if a Roth IRA it’s not already open, you may need to be wary of the 5-year rule, which is outside the scope of this post.

Nonqualified Accounts

This one is simple: gains in nonqualified accounts go away when you pass away (note that rules vary if you pass away married with joint assets in community property states or regular states). What this means is that we want to AVOID creating taxable gains before someone passes away. Try not to sell positions with a gain. Maybe even try to create losses to offset gains and ordinary income. This is a bigger deal if the gains are really big - for instance, if your parent bought Apple or Nvidia 10 years ago and forgot about it.

Pre-conclusion Conclusion

Most of this applies to everyone's situation. Prepare estate docs and review them periodically. Review your beneficiary elections to make sure they're current and align with your wishes. Analyze your insurance periodically to make sure your coverage still applies and isn't at risk of lapsing. Engage in tax planning to ensure you decrease your lifetime tax bill (and potentially your kids' future tax bills, too). Admittedly, these things are a bit more pressing when you can see the finish line, but that doesn't mean you should wait until then to address them.

Conclusion

There are a lot of complicated and interrelated considerations in situations like these. That fact paired with how emotional this life event can be make it a great time to involve a 3rd party who has dealt with all of it before. If you find yourself in need of this help, please don't hesitate to reach out.

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As always, keep in mind that you don't have to go it alone. I’m Austin Preece, a financial planner in Eau Claire, Wisconsin, and I work virtually with people across the US. Check out my website to see what it's like to work with me and reach out if you have any questions.

If you found this post helpful, help spread the word! Share with friends and family that you think may benefit as well. But remember, this is solely for educational purposes - it's not advice.