If you have an aging parent, there’s a high likelihood that you will eventually need to step in to help them with their caretaking and financial decision making.
There are many steps you can take to protect their finances and well-being as long as these steps are taken ahead of time so that everyone’s better prepared. Many of these things you should actually be doing for yourself, such as making sure you don’t pay more than you need to in taxes, having a plan for care as you get older, and simply making sure your finances are managed in a way that benefits you in the long run.
By being prepared, mom, dad, and even you can enjoy life in retirement to the fullest.
In this episode we discuss what to expect and the steps you can take to be better prepared.
More specifically, I discuss:
- How to better prepare an aging parent for potential financial elder abuse
- The power and uses for a financial power of attorney (POA)
- How to prepare mom or dad financially ahead of key financial threats during retirement
- Examples of common mistakes made when paying for caretaking
- Protecting more of mom or dad’s income from the IRS
Resources From This Episode:
The Key Moments In This Episode Are:
00:02:10 - Elder Abuse
00:04:52 - Family Loans
00:06:13 - Financial Power of Attorney
00:09:20 - Types of POAs
00:15:12 - Planning for Long-Term Care
00:16:31 - Who Will Take Care of Mom?
00:17:20 - Long-Term Care Insurance and Self-Insuring
00:19:17 - Sequence of Returns Risk and Investing
00:20:46 - Considerations with Real Property
If you have an aging parent, there's a high likelihood that you will eventually need to step in to help with things like caretaking and financial decision-making. There are many steps you can take to protect their finances and well-being as long as these steps are taken well ahead of time so that everyone's better prepared.
Now, many of these things you should actually be doing for yourself, such as making sure you don't pay more than you need to in taxes, having a plan for care as you get older, and simply making sure your finances are managed in a way that benefits you in the long run. By being prepared, Mom, Dad, and even you can enjoy life in retirement to the fullest.
Hello, and welcome back to the Retired-ish Podcast. I'm your host, as always, Cameron Valadez, Certified Financial Planner, and in today's show, we are talking about protecting Mom financially as she gets older. The same could technically go for Dad, but as I've talked about in previous episodes, women tend to outlive men, and in practice, we see this is often true.
As sad as it may seem, Mom is more likely to fall victim to various financial blunders as she ages, which we'll get into today. However, you can help her with that and make sure that she doesn't get taken advantage of, doesn't pay more than she needs to in taxes, and has money available when she needs it for certain unforeseen events.
The first thing I wanna get into, which is also, I would argue, probably the most important thing, is elder abuse. Typically, in retirement, you look forward to spending more time with family and doing the things you love, like traveling or traveling with your kids, attending grandkids' sporting events, golfing, playing pickleball, arts and crafts, you name it. The last thing that you think about happening is someone trying to rip you off or take advantage of you.
Yet, it happens all the time. And as painful as it sounds, it's most often by family members. But you, being a listener to this show, I figure are the trusted child. And I know you likely wanna do what you can to help protect Mom as she gets older. The reality is that she, just like all of us, will eventually likely lose her mental sharpness and awareness, especially when it comes to things like her finances, which at this point in her life might be rather automated. So, she may not pay as close attention to them as she used to. This will leave Mom very susceptible to abuse.
Even if Mom is 100% there mentally and sharp as a tack, anyone can be manipulated and abused. No one is immune. One very common thing that happens with aging parents, especially if they have things like pensions and maybe social security coming in and even a paid-off mortgage, is that they end up saving a lot of money every month. And they enjoy seeing that balance grow over time in the bank where they think it's perfectly safe.
And when it comes to this, I wanna bring you in on a little secret. Don't let Mom continue to accumulate a large surplus of money in her checking account with a plastic debit card attached to it.
And no, I'm not saying that it's because she's just gonna spend all the money. It's for other reasons that have to do with financial abuse.
First off, this is low-hanging fruit for would-be abusers, especially anyone who may live in the household with her or spend a lot of time there. I have personally learned of several people where this has happened just in the last couple of years, where maybe a so-called friend of the family or maybe a non-licensed caregiver is sneaking the card and purchasing things or ordering extra groceries for their own family or even gambling. Shocking, I know, but I say that because I have seen that happen.
This problem can be mitigated by ensuring excess money over and above things like bills and just a small emergency fund is set aside into a separate account that is much harder to get to.
And secondly, that money is sitting at the bank, likely not making anything. It's not working for Mom in any capacity. In an interest rate environment like we're in today, in 2023, there are far better ways to put that money to work and earn a heck of a lot more interest while also keeping it fairly liquid and stable.
Another common situation that happens a lot of the time if, let's say, Mom is a widow and has substantial assets is that one of the kids or family members asks for a “family loan” to do something like start a business or whatever the case is.
And so Mom says, "Of course," and gives them the money. But you know as well as I do there was no official legal documentation done, and that money never gets paid back. And these are typically substantial amounts. They may even justify themselves by thinking, "Hey, Mom has enough money and won't need that money back.”
But what happens if all of a sudden she needs, let's say, care at home or has to go to a facility and all of a sudden needs eight to $10,000 a month? Well, now it really matters. Mom has no recourse, and the family starts to fight, and that's just not a good situation. You don't want it. Mom doesn't want it.
All this being said, hiding assets or income from children and not sharing certain financial information is not the best solution.
It's important to be involved as Mom gets older so you can help protect her. And to protect her, you're going to need to be able to access certain information and possibly do things on her behalf.
By anticipating the eventual deterioration of memory and mental clarity, you can help Mom transition the financial management to one or more trusted individuals well ahead of time. This might be you on your own if you have the time and wherewithal, or ideally, it's a fiduciary of some sort, such as an attorney, as well as a financial planner who can work with you and your mom on a consistent basis. You are the coach, and you delegate tasks to each professional to do what they do best. Legal stuff, finances, and taxes, even other possible caregivers and healthcare providers. Your eyes are on everything; you understand why and how things are done. And then, you are able to relay that to Mom to make sure that she fully understands. Everyone on the team, let's call it, should have permission to speak with each other for her best interest. That way, there can be some sort of checks and balances.
If you are the one that Mom trusts to help her, you need to be able to speak with transparency on all of her finances and her spending with each professional on the team as needed. Simply giving verbal permission won't cut it. Instead, one of the best ways to accomplish this is through a legal document called a financial power of attorney, or POA for short. And not just any POA, but one done appropriately for Mom's exact needs.
So, what is a power of attorney or POA? A financial power of attorney is a legal document that allows the principal, which in this case would be Mom, to name an individual or even multiple individuals to act on her behalf in certain situations. Those situations are dictated by Mom when she has a financial power of attorney created. They can be limited in scope, or they can be very broad.
A power of attorney is different than maybe having a trustee of a trust. It's similar, but it serves a different role. In cases where there's a trustee of a trust, the trustee manages the affairs of the assets in the trust on the creator's behalf. However, not all assets may be in that individual's trust.
For example, retirement accounts are usually in the name of the individual and not in the name of the trust. So those would not be a part of that. It wouldn't be part of the trustee's job.
You would need a power of attorney to act on those.
So, Mom signs a legal document that lists who her agent is to act on her behalf, what exactly they can do, and when they can do it. The agent, which may be you in this case, has to act in Mom's best interest. Some examples of things the agent can do for Mom might be sign documents on her behalf, open and close bank or investment accounts, transact on bank and investment accounts, buy or sell property, pay bills and cash checks, and even enter into contracts.
However, it is important to know that Mom won't necessarily lose the ability to do these things herself. In many instances, it allows another individual to also do them for her on her behalf if needed. In addition, Mom has to be competent to create and sign one of these powers of attorney. So these need to be done or possibly updated well ahead of time. Not only that, but different states interpret POAs differently. So you'll wanna speak with an estate planning attorney about the language in your specific POA or Mom's POA.
Now, there are a couple of main types of POAs.
As I briefly mentioned, they can be general in nature or limited in when they take effect and how long they last. The most common types we see are called a springing power of attorney and a durable power of attorney.
A springing power of attorney basically springs into action and is in effect only upon Mom becoming incapacitated in some form. So this could just be mentally. This typically requires that she is declared by a doctor or two, normally, that she cannot make decisions for herself that are in her best interest.
A durable power of attorney typically goes into effect right away and will still be in effect even if Mom eventually becomes incapacitated. They terminate if Mom were to pass away or if she were to revoke it or change her agent, let's say.
General durable powers of attorney are more common, I would say, for those trying to help aging parents manage their finances since they can act for Mom even though she isn't technically incapacitated yet, let's say. In addition, if and when something does happen, you can still act immediately if needed.
With springing power of attorneys, it often takes a bit of time to get the proper documentation and determination that proves Mom is actually incapacitated, and you'll have to provide that proof, like, let's say, the determination from the doctors when trying to use the POA at a financial institution, for example. It doesn't help if Mom needs your help, but the two doctors disagree on each of their diagnosis. This doesn't mean disgreeing power of attorneys are bad. It's just that each type of power of attorney has its use cases.
One example of when a durable power of attorney can help Mom might be that she is becoming very forgetful, although she has no official diagnosis yet, and she needs to, let's say, take her required minimum distributions from her retirement account that are needed each year before the year ends. If she doesn't take them, she will pay unnecessary penalties to the IRS.
So you, as the power of attorney, can communicate with the planner to get those done for her, or you can reach out to the financial institution where her accounts are. You and the planner or the institution can also communicate with the tax professional to make sure that the right amount of withholdings is taken out, let's say, for her specific tax situation. In this example, you are protecting Mom all around.
Another example might be that Mom may start changing her mind about various things and may even feel the need to do random crazy things with her money, like buying blocks of silver she saw in a commercial on the QVC channel or something. She may try and make large bank or investment account withdrawals to carry out these wild ideas, which may be the exact wrong investment decision for her, and may even cause tax nightmares.
But if her team of professionals has a POA on file that is currently in effect, they can make sure that the agent understands what is going on, and the agent can let them know if Mom really meant to do that or wants to do that, or if it was just a wild idea at the moment.
Many people choose to make their spouse, if they're still alive, or one of the trusted children, to be their power of attorney. And some even choose multiple children, for example, in which case the children have to agree on decisions.
There are pros and cons to each way, really, and it will ultimately depend on the family dynamics. Ultimately, what Mom needs to know is that she should pick the individuals that not only does she trust most but that would actually have the time and the wherewithal to act on her behalf.
Many times, we see Mom pick the child who is the most financially savvy, but that child ends up being so busy with their own life, and let's say running a business, or what have you, and they end up slacking because their own life issues are at the forefront. In addition, the person Mom picks as her agent or power of attorney can also resign from being the agent if they want. So it is especially important to pick successor agents or a successor power of attorney, just in case the first is unwilling or unable to at the time.
When she first gets it created, that child may agree that, hey, they'll take care of things, but then eventually, when something happens, their life may have changed, and maybe they don't wanna do it anymore. So you wanna have a backup plan. This should be a similar thought process when choosing trustees or successor trustees for a trust that Mom may have as well.
Last but not least, with powers of attorney, you'll want to make sure Mom has the completed and signed powers of attorney on file with all of her financial institutions and professionals before something happens. I cannot stress enough the importance of this, especially with banks. The reason is that you'll want to be sure ahead of time that they will actually honor it. There's nothing worse than needing to act, and you can't do anything. Most institutions will actually have their own paperwork or documentation that's needed in addition to the POA itself. Mom may even have to sign those, and she can't sign them if she's not competent at the time. You'll want to get the authorization forms and signature cards specifically in advance for bank accounts.
Okay, now let's discuss some other ways you can help Mom financially or just with her financial planning in general. Honestly, there's a lot to keep track of here to make sure that Mom remains financially secure. I will just mention the main things to be mindful of that often catch children who are caretakers by surprise.
Now, the largest risk is making sure there will be a means to pay for potential care at some point in her life. Not everyone will need care, but it is far more likely than not. If you don't trust me, you can look it up. I'm mainly referring to a long-term care need, which could be mental, such as Alzheimer's or dementia, or some of the activities of daily living we call them, such as bathing, eating, transferring, toileting, etc. At some point, you or one of your siblings may find yourself helping Mom with some of these things, which will significantly burden you mentally and physically.
Therefore, many people seek some sort of professional care to help out in Mom's home, or it may get to the point where she needs to be relocated to some sort of home or facility. The thing is, all of this costs money, a lot of money.
So you'll want to make sure Mom plans well ahead of time to address how this will be paid for. If you don't, you and/or Mom or siblings may be scrambling to find every dime you can to pay for care, which will likely cause Mom to pay more than she needs to in taxes and drain funds that she may have wanted to use for other goals. Or she won't have any funds, and you may feel obligated to help foot the bill, and ultimately, Mom gets on Medicaid or Medi-Cal in California and receives very basic care, which she and/or you may not like very much.
So, to combat this, there are a few things you can help her do. One is that you will need to know who will take care of her. Does she have a child who lives nearby who is able and willing to help if she needs care? Or does the one child that is able to do that live across the country? If you're willing to do it, will you be able to stop working or reduce hours, which will also reduce your income to dedicate the time necessary to help? These questions need to be answered sooner than later.
Secondly, depending on her current age and health, she may be able to look into long-term care insurance, which many people overlook but can be a lifesaver. Plus, there's something different about spending an insurance company's money rather than yours or your Mom's. Another option would be for Mom to self-insure. This is only possible if Mom has enough assets. These assets might include things like retirement accounts, non-retirement investment accounts, such as a trust account or a TOD account, annuities, properties she will be able to tap into or liquidate, et cetera.
Self-insuring, however, is a big risk depending on the size of Mom's overall assets. For example, if Mom has a relatively large retirement account or inherited one from her spouse that maybe pre-deceased her, you may think she has enough to self-insure. However, the entire account balance in that retirement account is likely not all hers, meaning that the IRS has a hand in the cookie jar.
If Mom gets to the point where large withdrawals each year to the tune of $100,000, let's say, that need to be withdrawn to pay for her care, she will likely find herself in a tax nightmare and may only actually get to spend, let's say, three-quarters of the entire account for herself or maybe even half. The rest of it will go to the tax authorities.
00:18:20A situation like this would pose even more issues than just that. For example, if Mom is collecting, let's say, Social Security and is in a very low tax bracket, she may not even be paying much or anything at all in taxes on those benefits, or maybe no taxes at all. Maybe she doesn't even file. However, once she starts making large withdrawals from something like a pre-tax retirement account, not only will she owe taxes on those withdrawals, but more of her Social Security will now become taxable. This means that when budgeting for her care, the income that she is receiving already would actually be reduced.
And it doesn't end there. If she's on, let's say, Medicare, which most people will be after age 65, she may also suddenly be subject to penalties on her Medicare premiums because of her higher income. This is essentially another tax trap that creeps up and is often unseen. You get the point.
If Mom has other invested assets and non-retirement accounts, you'll want to be sure enough is set aside for the first couple of years of possible care expenses that she might run into. This is because of a phenomenon called the sequence of returns risk, which I've discussed at length in previous episodes.
Essentially, if Mom needs care and her investments are, let's say, down at the time significantly, she will need to liquidate those investments to get the cash, which will hurt her accounts even more and increase the risk of her running out of money too fast. The solution to this is not to simply not invest money, by the way. Because if Mom doesn't invest at all, and let's say she leaves all of her money in the bank, she likely won't earn enough to allow her money to last her, not to mention outpace inflation and taxes over time.
And lastly, if Mom has real property, like rental property or something, and you're banking on selling that to fund her possible care, take a moment to think about that situation and how it could possibly play out. If Mom suddenly needs care, how likely is it that at that exact time, she would be able to clean up the different properties or get a tenant out and be able to find a buyer and get the liquidity she needs just in time to pay for care? Not very likely.
The process takes time, and by the way, it also costs money, such as selling costs, et cetera, commissions for realtors, things like that.
Some of you may say that you know an estate planning attorney who can get Mom qualified to get on Medicaid or Medi-Cal to pay for this kind of care for her. While this is possible and done all the time, it's often not ideal and may not be what Mom wants, nor what's best for her or what you really want in the end. This kind of thing is a last resort. Even if Mom goes this route, there are still many rules in how it is done, and some of them may not be feasible at the time.
And while I'm on the topic of paying for care, I wanna bring up another common scenario that can happen if Mom has maybe had multiple marriages or gets into a new relationship when she's older. Oftentimes, Mom may trust this individual more than the kids from, let's say, her first marriage, which may be you. And therefore, that individual may be her trustee or her power of attorney, for example. In these cases, you wanna think about the fact that that person could possibly mismanage Mom's finances in a way that doesn't allow her to do this sort of planning. Would they maybe overspend money that should have been set aside for Mom's care? You bet.
This, sadly, actually happens all the time, and it's usually because Mom may see her money as both of their money and not mind how it gets managed or spent. I'm not saying not to trust these individuals. It's just something to be mindful of. Everybody needs to be on the same page.
You can refer back to previous episodes of the podcast about long-term care, which I will reference in the episode show notes. I have a four-part series that we've done previously with Eileen Dunn, who is an actual care manager that deals with this type of stuff every single day.
The point is that these different situations need to be addressed before the need arises. That's kind of the ongoing theme here. And I don't just mention these things for fun. I mention them because they happen all the time. Whether it's Mom or Dad, do what you can do to protect them and their livelihood. Help them make decisions that are in their best interest and that will allow them to enjoy life as they get older, not make it harder. The family will thank you, and relationships can be well-maintained. The key is to have open communication and get the right team of people in place to help you and those different checks and balances I mentioned.
While it is possible to do all of this stuff on your own, or Mom may be handling it on her own, it may be far more valuable to seek help from others and take some of the burden off your and your loved one's plate. There's a lot more to this stuff than meets the eye.
Remember that simply being aware is much more impactful than doing nothing at all. In fact, I encourage you to also make sure that you take care of these things for yourself while it's fresh on your mind.
One day, you'll hope that your children want to take care of you and protect you, and it's never too early to get that process going.
If you want more insight or help to prepare your aging parents to live a more fulfilled retirement, or you wanna make sure that you can take care of this stuff in your own life, feel free to reach out to us at RetiredishPodcast.com or email us at email@example.com. There, you can also ask a question to me personally that I will answer anonymously in a future episode.
Now, if you can spare a minute and find this information actionable and you like what you're hearing, please subscribe to or follow the show on your podcast app. If you wanna learn more about the different topics that I talked about in today's show, again, like I mentioned, you can find the links to the resources we've provided in the show notes that are right there accessible on your podcast app, or you can visit us at RetiredishPodcast.com/33.
Be sure to sign up for our monthly Retired-ish newsletter. Each month, one time a month, we discuss many of the topics we cover on the podcast and more relevant and up-to-date information surrounding the retirement landscape, but I provide a lot more resources, and we dive a little bit deeper into some of these topics. Again, this can all be found at RetiredishPodcast.com/33. Thanks again for tuning in and following along. See you guys next time on Retired-ish.
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