Remember when you were a kid, or maybe even a college student, and you were short of money. Where could you always turn?
That's right to good ol' mom and dad.
Well, for many Americans -- particularly those ever-present baby boomers -- 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 the age of 65, and individuals over 85 are the fastest-growing segment of the population.
The impact on the children's lives can be profound. Sadly, the emotional difficulties of caring for a parent are often compounded by the financial burdens. Children must decide issues ranging from how to pay for a parent's care to how to pay for housing and assist in managing their finances.
You would think that the government would allow children to pay for their parents' care without penalizing them. But you'd be wrong.
Each child can give each parent up to $11,000 a year. Anything above that is subject to federal and state gift taxes. Luckily, there are ways to get around that limit. One method of avoiding the gift tax when paying for a parent's care-giving 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.
One area where the government actually helps with paying for a parent's care-giving is on the child's tax return. 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. If you're in the 25 percent tax bracket, that means $750 in tax savings.
Also, adults who pay the qualified medical and care-giving 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.
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.
- 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.
But remember, if you decide that you can live with your parents, you'll need 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.
Parents may also need help or assistance with managing their financial accounts. Unfortunately, children dealing with their parents' financial often have their mother or father give them joint control over their checking and brokerage accounts. 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 you should 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 you chose, make sure you run the documents by a good lawyer to ensure these authorizations are valid and properly signed.
Mark Helm is a personal finance writer and financial planner. He can be reached at HelmFinancial@aol.com.