Lend Your Parents a Safe Financial Hand

Physician's Money Digest, September30 2003, Volume 10, Issue 18

A growing number of parents, struggling tomake ends meet during retirement, are turningto their children for a helping hand. Butmost children aren't prepared to provide thefinancial support that many elderly parents need.

Money

The problem of children scurrying to fix their parents'finances is only going to get worse as the babyboom generation ages, a magazine reportnotes. Many boomers face a double-edged sword:helping their parents and simultaneously raising theirown children. Karen Cunningham, a managing partnerat the Oklahoma Financial Center, says that shehears concerns over an elderly parent's financial well-beingabout twice as often as she did 3 years ago.

The costs associated with caring for a parent canbe enormous. A 1999 MetLife study found that theaverage loss in total wealth by someone who takescare of an aging family member over their lifetime is$659,139, including lost wages by the caregiver.

Keep It in the Family

How can you help financially strapped parents,while protecting yourself at the same time? Financialadvisors say 1 strategy is to allow your parents tobecome your tenants. Either buy your parents' homeor buy a rental property and rent it to them at a lowrate. When purchasing real estate from your parents,consider an installment sale in which you make regularpayments. Getting payments in regular intervalswill result in a lower tax bill for your parents.

Downside:

Discuss the benefits of a reverse mortgage with yourparents. This allows homeowners age 62 and older toreceive a loan against the home, which is repaid withinterest when the borrower sells the house, moves, ordies. Besides providing monthly income, reverse mortgagesalso offer a line of credit to the borrower. Reverse mortgages result in a smaller inheritancefor heirs, a feature some parents dislike.

Buying valuables, such as jewelry, from your parentsis another good way to supply them with extracash. Parents tend to be more willing to accept helpwhen it doesn't come in the form of a handout. Usethis strategy if your parents have an heirloom thatthey plan to give you upon their death. Paying yourparents for the item while they're still alive rather thanreceiving it as an inheritance will improve their financialpicture. However, be careful that your purchasesdon't activate a big capital gains tax for your parents.

Establish Dependence

You may be able to claim your parent as a deductionon your income tax return. If your parent has lessthan $3050 in income and you pay more than half oftheir support, you can claim them as a dependent.High medical expenses are also tax-deductible. If youpay out more than 7.5% of your income in medicaland dental expenses, you can deduct that amount.

Children sometimes set up joint savings or checkingaccounts when elderly parents are no longer able tomanage finances. While this can make life easier, thereare pitfalls. For example, your parents' creditors mighttry to access the money you have in the account.

Having your parents sign a power of attorney is abetter solution. A power of attorney gives you authorityto handle your parents' finances if they become ill orincapacitated, but allows you to keep their money separatefrom your own. Attorneys and financial plannerssuggest drawing up a medical power of attorney forhealth care. You could find it difficult to convince yourparents of the merits of granting you power of attorney.Many parents resent losing control of their money.

While we live in an unpredictable world, we cantake steps to insure our parents' financial health withouthurting our own.