I am so mad at my mother!

  • May 21, 2018

BY: DAVID RUSSELL, CFP®, CSA® – Vice President & Trust Officer
(6115) 385-2345   drussell@argenttrust.com 

So begins Steve Martin’s monologue in his 1977 comedy album, “Let’s Get Small.” He continues,

“I don’t know…she’s 102 years old. She called me up the other day and wanted to borrow ten dollars for some food! I said, ‘Hey, I work for a living!’”

To not be a burden on my children must be one of the top five goals of every client over the age of 65 that I have ever met with over my 34 years of personal financial planning. For a long time, I thought this meant to not be a financial or emotional burden, but in recent years I’ve come to realize that what it really means is that they don’t want to lose independence. Who does? Planning for advanced age and dependence is even more difficult than planning for death. At least death is final, but dependency can last years.

The Pew Research Center published a 2013 report[1] on the Sandwich Generation and the stresses this generation is under. What is the Sandwich Generation? The Sandwich Generation is defined by the report as “those who have a living parent age 65 or older and are either raising a child under age 18 or supporting a grown child.” (At my current age of 57, I tend to think more in terms of having parents over the age of 80 and having grown children or even young grandchildren.) Among the report’s findings:

  • • Nearly half (47%) of adults in their 40s and 50s have a parent age 65 or older and are either raising a young child or financially supporting an adult child (age 18 or older)
  • • About one-in-seven (15%) are providing financial support to both an aging parent and a child.
  • • Nearly four-in-ten (38%) say both their grown children and their parents rely on them for emotional support.
  • • 75% of adults age 40-59 agree that adult children have a responsibility to provide financial support to their elderly parents.

Combine these findings with the demographic reality that the fastest growing age group is those over age 65[2] and you have the recipe for a wave of dependency that most of us want to avoid.

So how can we include planning for the possibility of dependent parents other than simply making cash gifts or jeopardizing our own financial plan? I discuss three options below. Preserving their autonomy, honor, and dignity is another matter entirely that I’ve discussed in other articles. I’m also excluding some things that the parents can or could have done earlier in life in order to focus on what their adult kids can do once their parents enter a period of dependency.

  1. Life Insurance. For adult children in their 40s or 50s whose parents might be financially dependent on them as they enter advanced age, they should consider purchasing life insurance that would provide a lump sum or annuity benefit to the parent should the adult child predecease their parents. For example, suppose Frank is 52 and his parents are 78 and 75. The chances are very good that one or both are going to need some form of long term care and that Frank will have to pay for some of that care. While a long-term care policy on either of them would be cost prohibitive at their ages, Frank could purchase a life insurance policy on his own life naming his parents (or a trust for their benefit) as beneficiary of the policy. Should Frank predecease his parents, there would be cash available to pay for sitters, nurses, or facility care when they need it, without Frank’s widow feeling responsible. Term insurance is less costly than whole life insurance in this case unless Frank wants to build equity in the policy to cash in should his parents die before him. Alternately, Frank may have some older policies on his life that are no longer needed for his own family that he could change the beneficiary to his parents. This is preferable to purchasing a new policy especially if Frank has health issues that would make new insurance difficult to purchase. Life insurance is a powerful tool that allows for creative beneficiary planning outside of most estate documents such as wills or trusts. No one likes paying for it, but I’ve never seen anyone resent a benefit payment.
  2. Claim Parents as Dependents. Adult children who provide over 50% of the financial support for their parents, may be allowed to claim them as dependents on their tax return. In order to claim parents as dependents, they must first meet income requirements for “qualifying relatives” set forth in the IRS’ annual Publication 501, Exemptions, Standard Deduction, and Filing Information. Each parent must not have earned or received more gross income than the exemption amount for the tax year ($4,050 for tax year 2017), which should generally include dividends, capital gains from the sale of stock, interest earned in a bank account, and other passive investments, such as income from rental properties owned. It would notinclude their non-taxable income received from Social Security benefits and other tax-exempt pensions.

Not only must parents satisfy the income guidelines, but the claiming adult child must also provide more than half of their financial support during the tax year in order to claim them as dependents. Claiming parents as dependents also makes them eligible to receive Social Security Survivor’s benefits in the event the claiming adult child dies before his or her parents. The benefit is 75% of the deceased child’s Primary Insurance Amount (PIA) if both parents survive, or 87.5% of PIA if only one survives. PIA is the name given for the calculated retirement, survivorship or disability benefit due to a Social Security recipient. This survivor’s benefit is in addition to any survivor benefits payable to an eligible widowed spouse or dependent children and can provide a lifetime of income. To qualify for survivor benefits, a parent must be at least age 62, must not be entitled to a Social Security retirement benefit equal to or larger than the amount received as a survivor benefit, must meet the support test requirements of dependency discussed above, and must not have remarried since the adult child’s death.

  1. Purchase their home. The two options above are practically effective only if the adult child predeceases his or her parents. For many older parents, their home is their most valuable asset. Accessing the equity in that home for advanced age care has traditionally been available only through loan arrangements such as reverse mortgages or equity lines of credit. Both options have their pros and cons, but at the end of the day, both involve debt owed to a lender. If the home is to be left to one or more of the adult children anyway, one alternative is for the adult children to purchase the home from their parents through an installment loan. Rather than moving Mom and Dad out of the house upon purchase however, the kids rent the house back to Mom and Dad for $1 per month, while using the note payments for sitters or other care. There are possible gift tax consequences of this arrangement, but as long as the “gifted rent” does not exceed the “annual gift tax exclusion amount ($15,000 per donor in 2018) gift taxes should be avoidable. If only one adult child purchases the home from both parents, $30,000 in gifted rent can be excluded from gift tax. If Mom or Dad move into a nursing home, the note payments can supplement that cost. It is important to consult with a qualified tax and/or legal professional when considering this technique.

Supporting our parents financially as they age is a responsibility embraced by society and reinforced by many of the religious traditions that shape our cultural values. For most adult children, this will mean sacrificing time, energy, and sometimes, their own retirement planning. Traditional financial planning has not historically included parental support as part of the process, but the new demographic realities suggest that it should be.

 

David W. Russell, CFP®, CSA® is Vice President and Trust Officer with Argent Trust in Nashville, TN. He is founder and editor of Wealth and Honor, an educational website offering community and resources to families in age transitions. His book, What You Need to Know: The Adult Child’s Guide to Becoming an Effective Financial Caregiver is available on Amazon.

 

[1] Taylor, Paul (2013) The Sandwich Generation: Rising Financial Burdens for Middle-Aged Americans. Pew Research Center; www.pewsocialtrends.org

[2] 2010 Census Shows 65 and Older Population Growing Faster Than Total U.S. Population; Nov 30, 2011; U.S. Census Bureau; CB11-CN.192