Many of us are taking more responsibility for the financial affairs of our elderly parents. Some of our parents are now unable to monitor fully their investments and interact with their advisor effectively. The reasons are various, including visual impairments, physical impairments, dementia, or the loss of a spouse who handled the finances.
In the case of dementia, the need for the children to get involved can sneak up on everyone. In one case, the surviving spouse had for years been highly organized and was always on top of household financial matters. But as he got into his mid-80s, he started having more and more trouble sorting through his mail, filing his various financial statements, and throwing out unsolicited requests from nonprofits. Tasks that used to take him an hour started to take half a day, if not more. Soon piles of paper covered the den couch and table tops. Even financially competent parents are not going to stay financially competent forever.
While the specifics of when and how you get involved overseeing a parent’s financial affairs are highly situational, the issues you will need to investigate are not. The purpose of this blog post is to frame the issues you need to assess. In future blog posts, I will take these topics and share insight and options you have for addressing them.
When you get involved helping to manage the financial affairs of your parents, you will likely need to spend time on some or all of the following eight topics:
1. Investment portfolio. They are likely to have multiple investment accounts spread across a number of different financial institutions. Getting a bird’s-eye view of the investment portfolio is the first order of business so that you can understand how both the taxable and retirement accounts have been invested. Issues you may find include: excessive fees for actively managed mutual funds, large single stock positions, and inconsistency between the portfolio asset allocation and the likely drawdowns from the accounts.
2. Required minimum distributions. When you turn 70 ½, Federal law requires that you start taking what are called required minimum distributions (RMD) from your retirement accounts, i.e., your IRA and 401(k) accounts. Not only do you need to confirm that your parents have been taking these distributions, which are subject to complicated IRS rules, but also that they are taking the money from the right accounts.
3. Insurance. It is not uncommon to find elderly parents who have accumulated a complicated portfolio of different insurance products: life insurance, disability insurance, long-term care insurance, liability insurance, and auto and home insurance. Often times, the agents they bought these products from have long since retired. Understanding what they have in place, which may have made sense years ago when the products were first purchased, can form the basis for figuring out what should stay, what should go, and what needs to be modified.
4. Bill paying. Making changes to who and how bills get paid can be a particularly sensitive topic because many elderly parents see bill paying as a way of maintaining control. There are ways to partner up with parents on this fraught topic so that they feel a sense of control, while at the same time, the children can be assured that the bills are being paid and that there are no unauthorized leakages from the accounts.
5. Debt. Neither good nor bad: it all depends on the situation and circumstances. For example, if your parents will have a large estate with a lot of low cost basis assets, then it may make sense for them to take on additional debt to finance living expenses, gifts to grandchildren or philanthropy in their lifetimes rather than selling low cost basis assets and incurring capital gains taxes.
6. Account titles and beneficiaries. It is something you need to be aware of because most of the time they are out of date and will cause a lot of headaches if not corrected before your parents pass.
7. Essential documents. There are three important documents that you need to make sure your parents have in place: a power of attorney, a health care proxy, and a will. If your parents have recently moved to a different state to be near relatives or moved into an assisted living facility, they will need new wills and perhaps will need to add revocable trusts to their estate plan.
8. Working with your parent’s advisor team. Your parents are likely to have long standing relationships with many different advisors: the accountant who prepares their taxes, the lawyer who drafted their will and perhaps a trust, the financial advisor they turned to for investment advice. It is likely, however, that some of the people on the team have inherited the account from colleagues who have since retired. You will need to take a fresh look at how much care is given to your parent’s account and how effectively the team is working together.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. This is presented for informational or educational purposes only and does not constitute a recommendation to buy/sell any security investment or other product, nor is this an offer or a solicitation of an offer to buy/sell any security investment or other product. Any opinion or estimate constitutes that of the writer only, and is subject to change without notice. The above may contain information obtained from sources believed to be reliable. No guarantees are made about the accuracy or completeness of information provided. Past performance is no guarantee of future results.