A/B Conversations: CFP® Your Way Out Of It
A/B Conversations: CFP® Your Way Out Of It
Ep #113 - Helping Aging Parents Protect Assets When They Need Care
Aging is a part of life. While we enter this world under the care of parents, we often times need to return the loving favor by caring for them as they enter their twilight years. Needing care can have many financial repercussions for your parents, and for you. Listen to Ben and Adam dive into 5 important topics that need to be reviewed if you want to help your aging parents be efficient with their resources and protect the family’s assets as much as possible. From taxes to investments to gifting strategies to important documentation, they leave no stone left unturned in this important (and often emotional) topic.
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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.
00:00:04 Benjamin Haas:
Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!
00:00:30 Adam Werner:
Hey, Ben, how are you doing?
00:00:33 Benjamin Haas:
I'm well, Adam. How are you today?
00:00:35 Adam Werner:
Doing all right. Doing all right. It's a lovely rainy day in March.
00:00:40 Benjamin Haas:
We're making it through.
00:00:41 Adam Werner:
That's right.
00:00:42 Benjamin Haas:
The sunny and 72 in no time to your Florida listeners.
00:00:49 Adam Werner:
Yeah, I guess that's fair. We're all assuming everyone's within a couple of mile radius of where we're at right now. Yes, from your lips to God's ears, let's hope spring is just around the corner.
00:00:59 Benjamin Haas:
Groundhog was right. So topic today, we'll start by telling them the story. It was not that long ago. I get an email. Wonderful long time client. I think we've been considering increasing home care for mom. Situation of re-finances was discussed and I thought I'd run it by you. We are anticipating the possibility of her requiring a stay at an elder care facility. There's been some discussion as to whether or not we need to take steps to protect her assets. Here in lies the podcast, right? I think this situation. This is a big part of life, right? Aging parents need care. Clearly he thought to reach out to us. I bet there's many clients who don't go through this situation. So what better way for us to answer these questions than to share it with all of you, right? So that you have the information going through this with an aging parent. It's also good for all of us to know when we kind of get to that point where we may require some sort of assistance and then it's education for our children.
00:02:05 Adam Werner:
Yeah, and it's not only, I mean, I think a lot of the initial questions do come from that aspect of we know there's going to be this added expense. How do we protect or preserve as much as possible of the finances? And some of that's through the lens of making sure that however long that stay or however long those long term care expenses are needed, that there is enough set aside to essentially carry that through. The other side is just from our perspective, trying to be efficient with how to pay for that care. And I think, you know, from our standpoint, we often default to the retirement planning side of things, cause that is kind of our main focus. And this is no different in that sense that it is, we can kind of build that hierarchy or that pecking order of where should you take money from to help satisfy these expenses that we know you're now going to have to deal with to try to be as efficient as possible because not all assets are created equal. I know we've said this in other podcasts, but there are potentially ways to structure thing, or there are strategies or opportunities to try to be as efficient as possible to try to maximize what what you have for long term care expenses.
00:03:27 Benjamin Haas:
So then I'm going to say, I believe we have planned to hit on five different things today so our listeners know what's coming. We've got a list of five things we think are really important to know and I'm going to use what you just said as number one. Let's just take inventory, right? Understand what types of accounts there are, right? The totality of those accounts matter, but also the type of account and I'm going to say more granularly, how are these accounts going to be taxed? And it's good for you to know what's accessible and what's not on that front. So let's use that as number one. Is there after tax savings to pull from like money in a bank? Is there IRA money that now, if you're pulling from there, that might mean more income taxes may be owed, although a point on that to come, is there Roth IRA money? It's just going to be good to know what are their tax brackets? What do distributions from these accounts mean? When you say we want to be efficient with the resources that are left at this point in life? Yeah, that's what we mean. Let's not pay more in taxes than we have to.
00:04:28 Adam Werner:
Right. Well, and even the idea of, we say it all the time, not everyone's situation is not equal and what they have saved in these different buckets is not going to be equal. So something as simple as the income that someone is going to receive, even while they're in a nursing facility, potentially. Right. If it's social security, maybe there's pensions, maybe there's multiple pensions, there could still be, I mean, we often hear this question through my last parent, right? That it's one parent remaining that needs this care, but this is not to rule out that both spouses are still living at both your aging parents are still requiring care and that there are other factors that would kind of play into that. But that income, theoretically, if it's coming from a pension or it's coming from social security is going to continue. So really what we would want to be solving for is whatever that gap is and we know that gap is going to grow more often than not. We've heard the pretty eye popping numbers of what care can cost. And even then it can very widely between lower level of careand then full nursing home in a private room. So trying to figure out what that gap is then can lead us to this next part, which is okay. Now that we have identified what that gap is, and now we can see what you have saved or what's available in these different tax buckets, where does it make sense to pull from first? So to your point, not wanting to have more taxes triggered. In this scenario, it's almost from our standpoint when it comes to retirement, we often think or especially early in retirement if anybody retires before 65 it's really imperative to have non retirement assets that are just more favorable from a tax side of things. And in this scenario with long term care, sometimes it can be the complete reverse where sometimes it makes more sense to pull money out of taxable retirement accounts, like an IRA. Assuming that with your long term care expenses, you're going to be able to deduct a lot of those on that tax return. So it could be a scenario where if there are high levels of expenses, you can kind of match that up with IRA withdrawals and actually still come out relatively. I'll say unscathed from a tax standpoint if you're kind of matching those things up and you're able to deduct a lot of the expenses that you're now pulling from an IRA that could be taxable, but if those things align, you could theoretically not pay taxes on IRA withdrawals. And in the grand scheme of things, from our standpoint, it's how to maximize? How to limit taxes paid over multiple lifetimes? Not just, you know, a single person.
00:07:17 Benjamin Haas:
So that was awesome. Thank you for that. Take a deep breath. If we call that number two, once you take inventory, yeah, that's number two. No, like let's mock up that return, right? Let's understand where those tax brackets are. Right? Medical expenses, I believe it's above seven and a half of your adjusted gross income, seven and a half percent. We can calculate out and to your point we've gone through this with other clients and their aging parents. It is good to know that, okay, we're going to try to exhaust this account knowing it's really not going to be taxable, even though it usually is. And even if we don't have to use all that money, let's make sure we're shifting it to another bucket here. That's just going to be better for estate planning purposes, too. So let's not miss those opportunities. Whoever's doing that tax return, right? Sometimes, hey, where do we get to a phase of life where things feel simple and we'll just do our own return or we'll use TurboTax. We've shared this story before, you hate to miss reductions, right? So if you're thinking about this for mom and dad, or even yourself, you get to that point, who's doing the taxes. Let's make sure we're not missing these things. When we say let's be efficient from a tax perspective, that's what we mean on number two here. Mock up the return, know what brackets you're in, know what we can pull from and try not to have taxability go higher.
00:08:40 Adam Werner:
Maybe I'll say it a little bit differently. I think it can often feel icky to think about the efficiency from, well, at some point this person is no longer going to be with us and if there's something left over, we also want that to pass efficiently, too. So that's where that idea of maybe using more IRAs than non retirement dollars. It ultimately can come down to if something's going to be left, then making sure that that passes efficiently, much better for someone to inherit a non retirement account or a Roth than a fully taxable IRA. And by the way, if you're able to then match that up while while you're paying long term care expenses. Again, you're just limiting taxes overall not just in a vacuum looking at any one given year or one situation.
00:09:29 Benjamin Haas:
So then let's pivot a little bit because we can talk about when you take inventory of the different types of accounts that you have. We also want to then be efficient from an investment standpoint on what are you liquidating? At what time from your savings, assuming you've got different investments, what are you liquidating that also hopefully can be efficient for you that you're not, I'll just say liquidating the wrong thing at the wrong time from a market and economic standpoint.
00:10:03 Adam Werner:
Yeah, it's like we're essentially just coming up with a withdrawal plan at that point. To your point, it's making sure that the mechanisms are in place. That there is cash to pay bills. These long term care expenses, but then there is that conveyor belt to essentially replenish cash. Where's that coming from? That's where trying to figure out what is that gap between fixed income and what the expenses are. That's what needs to be filled and conceptually, I think that makes sense to a lot of people, but then when it comes down to the actual, okay, but where am I pulling money from? How am I setting these things up so that it actually happens? It's the implementation where I think things can get a little tricky. Coming up with that, it's essentially a withdrawal plan and that's not something that you set and that it's static. There are so many variables that can pop up throughout the year that could potentially change the strategy at any given point in time. But I think coming up with that is imperative. And one of the things that we had noted here, too, is again, depending where, how people have savings structured, something as simple as just turning off dividend reinvestment in an investment account can essentially replenish cash to a certain degree without having to be a seller you know, of your investment holding. Just turn off dividend reinvestment. Don't reinvest that anymore if we know you're going to be spending that money. Just let those dividends pay to cash knowing that we're going to be using them at some point.
00:11:40 Benjamin Haas:
Yeah, so it's almost like we want to give you that checklist. If there isn't a cash reserve, let's imagine that we don't even get this note from client until they've already been paying for some care. They've been paying down savings. Now the question is, where are we pulling the money? You know, money from, I, what I hear you saying is if you don't have a cash reserve, let's create the cash reserve. If you've got this bucket of investments and you've been reinvesting things, stop reinvesting. We need that cash but then we would also go through that next step of what funds or what investments should be sold first before anything else. It all comes back to how much money do we think we need over what period of time and let's give ourselves enough of a cushion to not have to time the market. Okay. You know, things are good right now, but let's imagine it was a down market. You'd hate to go and sell mom's favorite stock that she's held for 30 years at the wrong time. So it is coming up with a timeline. Our three bucket theory supports that.
00:12:38 Adam Werner:
Yep. So another point to make moving on to the next round of four. It's that I think going back to protecting assets being a focus for a lot of people. And I think there is that general misconception that just how long term care is paid for or what coverages exist. I think people understand that at some point, if I run out of money, Medicaid, essentially, will pay for care, but those spend downs to qualify for Medicaid are essentially, they leave you with not much and by not much, it's several thousand of like liquid dollars. Now that changes if there are two spouses in the equation. But essentially for most people, unless they have a dedicated long term care insurance policy to help pay for care, a lot of these expenses are essentially going to come right out of your pocket, out of your savings. And you would have to essentially exhaust most, if not all of that before the state system would kick in. So this is where that idea of the five year look back on gifting because again, it comes down to protecting the assets is a big focus for a lot of people. How do I get money out of my parents name? And kind of tucked away where it's not having to be spent down on their care. And at some point, if they do live a long time in a facility, they could qualify for, you know, government assistance or government benefits at that point. But that idea of there is a five year window or five year look back on any gifts or essentially any changes in ownership out of that person's name for a five year period. So, I'll give the example. Say mom had to move to a nursing home. She's in a nursing home. You could still do gifting in that scenario. Two years goes by. Mom makes a gift to a child and at some point within that five year window now qualifies for Medicaid, they're going to say, well, this was money that was given away that now needs to come back or needs to be paid for in some way, shape, or form that it can get very messy. But the key there is that for that five year look back to really matter, you have to get to the end of that process. You've spent down all the assets.
00:15:02 Benjamin Haas:
So the important part, I think in this conversation, like the next step of that is that doesn't really matter for estate planning purposes. The statistics are the statistics. I realize it's a tough conversation, but most people that go into a facility are not going to live five years in that facility. They're going to pass away before five years. So in that case, would we have wished that person would have gifted while they were in there? Absolutely. Right. Get money out of the estate. That's the point of estate planning to make sure that less is there to be taxed upon that passing. So it still may be good to get money out of the estate, even at that phase of life. And I realize there's a balance there, but that's why the conversation needs to occur. So gifting 18,000 a year to any individual. Then you try to stack those gifts, depending on husband and wife. You know, we could do some proactive estate planning even at this stage of their life of needing care.
00:16:00 Adam Werner:
Yeah, and it's one of those scenarios where with the right set of parameters, I think with the right people who are being gifted to essentially to your point, right. That five year look back is still an important piece of the puzzle. You can do gifting, assuming that's not going to be an issue, but, if you're going to be doing that gifting, the person receiving that gift probably should have a plan to not necessarily spend that, right. Kind of set it aside, just mentally account for this is essentially potential future inheritance that I'm receiving now, but in a worst case scenario, within a five year period could need to flow back to the parent to help pay for care. So there is a scenario where I agree with you. A hundred percent makes all the sense in the world to try to get ahead of that. Because once you get to the end of life, all that flexibility is removed. You just take that out of the equation. So at least you can do some of that gifting, but sometimes it does take a little bit of discipline or at least that mental accounting. That is, I'm going to receive this, but it's not mine yet. So I'm just gonna kind of set it aside just in case it needs to ever flow back.
00:17:15 Benjamin Haas:
And the final thing is like equally important to these four other ones. Like this is now the perhaps the oh crap moment of making sure that all estate planning documents are done. Hope to God that long term care is more of a physical than a mental thing, right? That you still have somebody that's of sound mind to be able to review those things, beneficiaries on accounts, make sure nothing's lost. Everything still fits together and if it hasn't been done, now's the time to absolutely get it done.
00:17:47 Adam Werner:
Yes. I don't know what I have to add to that other than yes, it is super important and it's one of those things that I know we've talked about in past podcasts too. Even the most organized estates are the most organized, financial life for aging parents going through the estate process is still a challenge. Like there are still hurdles. It's not a fun process. So, add on top of that, potentially not having things organized and I know I've referenced it as the estate settlement scavenger hunt, where now you're having to dig through parents documents. Does this account still exist? This statement is from 1999. This bank changed hands four times since it was open. Yeah, just getting that documentation in order, even if it is late in the game, still just sets that next person up. Whoever's going to have to deal with settling that estate, sets them up in a much better position to just handle it and take care of the administrative side at passing so they can just focus on now we may have lost a parent add on top of that now dealing with the headaches of settling a estate. It can be very, very challenging.
00:19:07 Benjamin Haas:
It's not a fun topic, but I hope this is helpful. It's something that does not get any better by ignoring it. So we hope to provide not only the information, but the space to talk through it, to try to work through it, you know, rely on us as you can. But there is still clearly even at that phase of life, you know, aging and needing this type of help. There is a space for planning and I would say it's so very important that you as the child play an active role in that.
00:19:42 Adam Werner:
Yep. I couldn't have said it better.
00:19:43 Benjamin Haas:
All right, sir.
00:19:45 Adam Werner:
All right.
00:19:46 Benjamin Haas:
I appreciate it.
00:19:47 Adam Werner:
Thank you.
00:19:48 Benjamin Haas:
A great rest of your day. I'll see you in like three minutes.
00:19:52 Adam Werner:
See you next time.
00:19:53 Benjamin Haas:
Bye.
00:19:54 Adam Werner:
Bye.
00:20:01 Benjamin Haas:
Hey, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual to determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!
Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.
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