One of the financial planning rules we use here in the office and with our clients is to “plan for the unexpected”. There are many things can derail a good financial plan, but proper planning can help keep you on track. A common theme we see here is clients having to deal with elderly parents. Not only is it time consuming, but it may also be stressful and hectic. As my wife and I personally start to go through this phase with my in-laws, I am seeing it firsthand. Yes, there is a financial piece to this, but there is also an emotional side to this, which can be draining and time consuming. In addition to running your own house, you may find yourself running your parents house including paying the bills, yard maintenance, grocery shopping, hair appointments, keeping track of (and attending) doctors’ appointments to name a few.
In dealing with elderly parents, I can’t begin to tell you how important it is to make sure the proper estate planning documents have been completed and updated if necessary. I’m referring to wills, power of attorney, advanced medical directives, and a living will which I will discuss in more detail.
If you are working with an elderly parent, the first question you need to ask is if they have capacity. There are two main types of capacity:
- Testamentary capacity: the ability to make a will or trust.
- Contractual capacity: the ability to enter into contracts.
Each state has its own interpretation of capacity and the distinction between the two. In general, the mental capacity required to enter into contracts is higher than the mental capacity required to make a will or trust.
The practical consequence of testamentary incapacity is that an individual can no longer make or modify a will or trust. For contractual incapacity, the consequence is the inability to enter into contracts. In other words, if an individual enters into a contract while she is incapacitated, her rights and obligations under the contract may not be enforceable.
Most individuals do not recognize when they themselves reach the point of incapacity. This can lead to a whole host of financial problems, ranging from not paying bills on time to becoming a target of fraud or undue influence. Accordingly, it’s up to an individual’s family members to recognize the signs of incapacity, and to take the appropriate actions to have the declaration of incapacity made official and a conservator or guardian appointed by the court. If you think a parent could be incapacitated, you should contact an estate planning or elder law attorney in the state where the parent resides.
Another question that needs to be asked is if there is a plan for incapacity. There are several steps that can be taken to help ensure the safety of the parents and the security of their financial affairs through incapacity.
It is important to have a durable power of attorney and health care directive in place and also make sure it is up to date. In these documents, an individual appoints a person to make decisions on his or her behalf if he or she is incapacitated. This person has the authority to make certain financial decisions on behalf of the individual. For the power of attorney to remain effective through incapacity, it must be a “durable” power of attorney.
Under the health care directive, the named person has the authority to make health care decisions on behalf of the individual. In addition to naming a person for health care matters, the health care directive should include a living will, in which the individual makes known his or her end-of-life wishes.
If your elderly parents have already completed these documents, you also need to make sure that the estate plan reflects their current wishes. If a significant amount of time has passed since your parents last reviewed their estate planning documents, a lot may have changed from a family and financial perspective. Take the time to review the beneficiaries, fiduciary succession, and the terms of any continuing trusts (if applicable).
Furthermore, in certain circumstances, it may also make sense for the parents to consider certain gifting strategies that I will discuss. Before I discuss these gifting strategies, please note that there may be some serious legal ramifications of gifting and how Title XIX (or Medicaid) is affected (which I will talk more about later). We recommend consulting an estate planning attorney before any gifting is done.
Annual exclusion gifts. Depending on how many children, grandchildren, and other potential beneficiaries the parents may have, this technique can have a serious impact. Each year, an individual can give $15,000 each to as many people as he or she likes, without cutting into his or her lifetime exemption. For 2021, the federal lifetime gift tax exemption is $11.7 million. This means that you can give up to $11.7 million in gifts over the course of your lifetime without ever having to pay gift tax on it. For married couples, both spouses get the $11.7 million exemption. This means married couples can give $30,000 each year. If the parents have three children, and each of these children has a spouse and three children, two years of annual exclusion gifts to all of these individuals will remove $900,000 from the parents’ taxable estate. Please note that each state has their own gift tax rules and states, so please consult a tax professional before gifting.
Paying tuition and medical expenses directly. The payment of tuition and medical expenses directly to a school or medical provider is not considered a taxable gift. With the cost of private school education and college today, this can be an impactful way to benefit younger generations.
Depending on the financial situation of your parents, they may qualify for state or federal benefits like Medicaid or Title XIX. Persons are only eligible for Medicaid if they satisfy both the financial and non-financial eligibility rules. In general, Medicaid is only available for individuals who do not have sufficient income and assets to pay for their own medical treatment. Medicaid covers skilled long-term care and has no limits as to how long a period of care is covered for an eligible individual. In determining who is eligible for Medicaid, each state has their own “lookback period”. Connecticut (along with 49 states and DC) has a lookback period of 5 years, which means they review all bank accounts and asset statements (in detail) for the past 5 years to see if any gifting has taken place which may disallow immediate Medicaid benefits. Examples of the type of transactions that could result in a penalty include money that was gifted to a granddaughter for her high school graduation, a house transferred to a nephew, collectors’ coins sold for half their value, or a vehicle donated to a local charity. Even payments made to a personal care assistant without a formal care agreement or assets that were gifted, transferred, or sold under fair market value by a non-applicant spouse can violate the look-back period and result in a period of Medicaid ineligibility.
As CFP’s we do have a background in estate planning and can help point you in the right direction. As you can see, navigating these waters can be tricky, which is why we always recommend consulting an estate planning attorney.
The reversal of the caregiver dynamic between parent and child is a significant transition and can be very draining and emotional. This is why we recommend getting this financial and legal piece taken care of ahead of time, so you can focus on the caretaking and emotional side of it.