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DebtFreeGuru.com's - Tip of the Week - Monday, July 7, 2003 |
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(Please
read my commentary at the end of this article!)
Supporting Your Parents Eight
Financial-Management Tips To Aid The Folks By Ray Martin, CBS.MarketWatch.com (As seen on CompuServe)
BOSTON
(CBS.MW) -- More and more Baby Boomers are discovering it's payback time.
Because people are living longer, an increasing number of adult Americans are faced with caring for an older relative. Twenty-five percent of U.S. workers provide care for someone over 65, and individuals over 85 are the fastest-growing segment of the population, according to Senior Link, an elder-care management company based in Boston, MA.
The
magnitude of this caregiving challenge impacts businesses. It's estimated
that employers lose $29 billion in productivity each year due to
absenteeism and workday interruptions caused by caregiving
responsibilities and replacement costs for those employees who leave the
workforce to care for a senior.
The
impact on a family's quality of life also can be profound, as many adult
caregivers are still employed and still caring for their own children,
when the significant needs of their parents arise.
There
are also the financial considerations, ranging from how to pay for a
parent's care, how to pay for housing and how to assist in managing their
finances.
Paying
for Care Adult
children have no legal obligation to pay for a parent's care with assets
that are their own. But that can get complicated if a parent transferred
assets to their adult children in an attempt to impoverish themselves
shortly before an application for benefits under Medicaid. Generally, in
that situation, assets transferred to others within 36 months must be
taken into account when calculating the amounts required to be paid for
elder care before state and federal government sponsored benefits can
begin. The best advice is to seek counsel of a competent and experienced
attorney who specializes in Medicaid applications and benefits.
Adult
children can pay for their parent's care, but when doing this, they need
to be aware that any payments can be qualified as gifts. Gifts in excess
of $11,000 per person per year are subject to federal and state gift
taxes.
One method of avoiding the gift tax when paying for a parent's caregiving and medical needs is to make payments on behalf of the parent directly to the medical service provider. Such payments are exempt from the gift tax.
Adults whose financial support meets the IRS tests for dependents can claim their parents as a dependent and qualify for an additional personal exemption, which allows them to reduce their adjusted gross income by $3,050. For an explanation of the five dependency tests, see IRS Publication 501.
Also,
adults who pay the qualified medical and caregiving needs of parents who
qualify as dependents may include those expenses in the total medical
expenses allowable for deduction on Schedule A of their federal income-tax
return. While only such expenses in excess of 7.5 percent of annual
adjusted gross income are deductible, when paying for a parent's care
(even if doing so with assets they gave you), these expenses can quickly
add up. See IRS Publication 502 for a list of qualifying expenses.
Paying
for Housing Here
are some ways to trim a parent's housing costs, or draw money from their
property:
Reverse
Mortgage: Qualified lenders, most notably the HomeKeeper
mortgage offered by the Federal National Mortgage Association, provide
these programs. Seniors who want to stay in their home can cover housing
and medical costs through payments from such a loan, which is paid off
when the home is sold, they move or die. For example, according to a
calculator on the AARP web site, an individual born in 1933, with a home
valued at $180,000, could receive $374 to $677 per month for life,
depending on the reverse mortgage program selected. So far, this option is
not widely used, with about 13,000 individuals getting a reverse mortgage
last year, but that number is growing.
Make
Your Parent Your Tenant: An increasing number of adults are
building additions to their homes for their parents or buying larger
houses to accommodate their families and their folks. Under this
arrangement, it is important to have a formal lease agreement and charge a
fair market rent to your tenants, even though they are your parents. The
rent they pay is rental income to you and is reported on your tax return
on Schedule E along with the related deductions against this source of
income. It is also important to inform your homeowners insurance company
of this situation to ensure that the proper form of coverage for liability
and property damage is in force.
Elder
Cottage Housing Opportunity (ECHO): This option provides a way
for parents to live with their children, but not in the same house. An
ECHO unit is a separate, small manufactured home installed in the side or
backyard of a single-family house. The upside is that when no longer
needed, the unit can be removed. Local zoning commissions may not allow
ECHO units while others only provide variances for people over 55.
Sometimes a special use permit can be obtained when this is the case.
Another factor to deal with is the reaction from NIMBY
(not-in-my-back-yard) neighbors. More information on this option can be
found on the Administration on Aging web site (aoa.gov).
Accessory
Apartments: These are created within single family homes and
are complete living units, which include a private kitchen and bath. Often
finishing the walkout basement into an accessory apartment can be a
practical solution to providing for the housing and care needs of a parent
as well as improving the resale value of the home.
Financial
Management Parents
may also need help or assistance with managing their financial accounts.
One option is to title their accounts jointly with an adult child. This
can backfire several ways: Assets titled jointly are subject to the
liability of all joint owners, and these assets will pass on only to the
surviving joint owners, possibly disinheriting other family members. For
these reasons, it's often advised to seek other arrangements such as:
Letter of Authorization (LOA): This instruction for a brokerage or bank grants another person access to account information and duplicate statements. That puts adult children in a position to assist their parents without taking over control of the accounts or subjecting them to additional liability.
Durable Power of Attorney (DPOA): This document gives a person the legal authority to act on another's behalf. The specific reference in a power of attorney to the survival of the power in the event of incapacity or disability means that it is durable, or remains in effect under these conditions.
Springing
Power of Attorney (SPOA): This power of attorney can include
language that limits its effect only upon a certain event, thereby
limiting the authorization to be permitted only upon certain
circumstances.
Limited
Power of Attorney (LPOA): Like a springing power of attorney,
this POA can limit the authority of the attorney-in-fact to certain
activities, such as paying utility bills and tax payments only from
certain financial accounts.
Regardless of the arrangement chosen, it is advisable to seek the review of competent counsel to ensure these authorizations are valid and properly signed.
Certified Financial Planner Ray Martin writes on personal finance for CBS.MarketWatch.com and also appears on the "The Early Show" on CBS. He is co-author of "The Rookie's Guide to Money Management."
Commentary
by John Moore With
25% of the workforce providing for someone 65 or older further
substantiates the need for each of us to be fiscally responsible,
debt-free and financially independent by age 65.
We
should also consider obtaining long-term care insurance, especially after
accumulating substantial assets. If
you reach retirement simply being debt-free and were not able to
accumulate substantial assets then Medicaid will provide for long-term
care after your assets are consumed (by the way this can leave the healthy
spouse financially devastated). As described in the article, some choose to transfer assets,
or divorce their spouse, in an effort to have taxpayers foot the
long-term care bill, while I understand the need, I am opposed to
defrauding taxpayers.
Long-term
care insurance should be considered around age 55 and when you are
confident that you will be able to pay the premiums over the long term.
If you were to obtain the insurance at age 55 and then found the
premium unaffordable at age 75 and lost the policy, you would loose 20
years of premiums!
Seek
an insurer who is Triple-A rated by AM Best Company and has experience in
the industry. One such
insurer that I have seen favorable reports on is General Electric through
the GE Financial Network. With
over 700,000 policies and 25 years experience, they would certainly be a
place to start.
As
with all insurance thats designed to protect us in the event of a loss,
I hope you never have to file a claim! |
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DebtFreeGuru.com - Tip of the Week - Monday, July 7, 2003 PO Box 3782 Clearwater Beach, FL 33767 Voice/Fax: 813-354-2563 Copyright 2003 DebtFreeGuru.com All Rights Reserved. |
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