Three Ways to Help Aging Relatives Manage Their Finances

| July 4, 2022 | 0 Comments

As the average age in America increases and more Baby Boomers retire, the so-called Sandwich Generation (those with school-age or young adult children and aging parents) are finding themselves having to assist both parents and kids simultaneously. Whether it’s helping to invest, pay bills or going to medical appointments as a second set of eyes, people are looking for ways to make these tasks easier to manage without taking away the freedom and flexibility of their aging relatives.

Planning ahead is very important. The process of stepping in once incapacity has occurred can be expensive and time consuming under the best of circumstances. Having the documents in place to seamlessly transition from gentle assistance to full-blown management can make a difficult period a lot easier.

In the early stages of assisting relatives, most people will opt for a simple solution like adding a child to an account as a joint owner. This has the advantage of being easy – all you need is a signature or two – and it avoids costly legal fees and complex agreements. However, this approach also has several drawbacks. First, as co-owner of the account, the child can access the funds at any time and take them for his or her own use. The account also becomes available to the joint owner’s creditors, whether or not the money was originally theirs. Some accounts, like IRAs, aren’t eligible for joint ownership, so you may need a more complex solution anyway. Finally, when the original account holder dies, the joint account holder automatically inherits the funds, regardless of what the parent’s wishes might have been.

Another option is to use a power of attorney (POA); a legal document allowing one person to act on another’s behalf (called an “agent”). This can be done through an attorney or by going to a financial institution and signing their power of attorney forms. Using an attorney to create a POA can allow you to act on multiple accounts or assets from banks to IRAs to real estate and business transactions. This provides a lot more flexibility, control and responsibility on the part of the agent. Most importantly, the agent does not become the owner of the assets, which solves a significant drawback of the joint account holder above. A POA is also the only tool that will allow a child to manage retirement accounts for things like ensuring that required minimum distributions get done on time.

Powers of attorney do have drawbacks. When the person who granted the POA expires, so does the power and the agent’s ability to act on behalf of mom or dad. Also, some POAs end when the grantor (principal) becomes incapacitated (called a non-durable power of attorney) while others are written to become effective only after incapacity occurs (springing POA). A springing POA requires proof of incapacity which can be a burden to activate it when needed. It’s also useless if you need to help your parent before incapacity occurs. A Durable Power of Attorney that is effective immediately when signed is the most flexible option for helping a relative before and into incapacity.

A Revocable Living Trust is another tool that you can use to assist your parents. Trusts can be created to hold investments, real estate, businesses and most non-retirement assets. Generally, the parents will set up the trust and be the initial trustees. A child can be added as a co-trustee in order to work with the parent to manage assets during life, or as a successor trustee after death or incapacity. The greatest advantage of the trust is that it becomes the owner of the assets and the trustee doesn’t have to keep proving that the trust is still valid (as can happen with a POA). In addition, the trust will remain in effect after the death of the parent, allowing the trustee to continue to manage the assets and help organize and settle the estate. The main drawback of a trust is that it can’t manage retirement plans (and things like required minimum distributions or qualified charitable distributions) during the account owner’s life.

Regardless of which method you ultimately choose, planning ahead is the key to success. Spending a little money up front to work with a qualified attorney and design the right strategy for you can make things a lot easier (and cheaper) in the long run.

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management with Blankinship & Foster, LLC, a financial coach specializing in financial health for physicians and people in or preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at Brooks and his family live in Mission Hills.

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