As our loved ones age, it becomes increasingly clear that beyond their physical and emotional needs, the financial needs of our parents become a priority. Aging parents may face various challenges when it comes to handling their financial affairs, so stepping in to assist them in maintaining their financial well-being may be necessary. Taking on the role of managing parents’ finances comes with its own set of challenges and responsibilities, here we cover practical guidance on how to manage their finances, ensuring their financial stability and security in their golden years.
Assessing the Current Financial Situation
Income
To effectively manage parent’s finances, you must first have a clear understanding of their financial situation. This includes having open and honest communication around sources of income, including pensions, social security, investments, and part-time work.
Expenses
Once you’ve identified the monthly income, it’s time to get a better picture of their monthly expenses. Expenses include mortgage or rent, utilities, groceries, entertainment, and any other common or recurring expense that would typically be debited from their account. Additionally, consider looking closely at bank account statements for large wire transfers, as this might be evidence of financial elder abuse.
It may be challenging for aging parents to recount each and every recurring expense, as many from this generation use checkbooks to balance debits and credits. If your parents are not yet set up with online banking, this may be a good time to consider this option for easy and trackable access to account information.
Assets & Debts
Having clear insight into your parent’s assets and debts may take some time, but gaining access to their investments and debts now will make for an easier process later in life. Document their assets, like checking and savings accounts, investments, real estate, as well as any debts or liabilities that fall outside of their typical monthly expenses. Be on lookout for statements (both electronic and paper) to identify assets such as annuities or insurance policies that you may previously not have been aware of.
You can only begin making information decisions about your parent’s’ financial future once you have insight into these financial areas.
Legal and Financial Planning Documents
Power of Attorney
Having insights and access to their financial documents may be step one in managing parent’s finances, but before you start making financial decisions on their behalf it is advisable to go through the proper channels by being legally deemed as a decision maker.
Encourage your parents to establish durable power of attorney (POA), which is the legal authority of a person or group of people to act on behalf of another person. By deeming a member of their family as their POA, that individual can make legal decisions over matters like healthcare and finances.
As it pertains to financial matters, the POA has the legal authority to take on responsibilities like:
- Paying bills
- Accessing financial records
- Filing taxes
- Managing real estate investments
It is important that the POA be a durable power of attorney, as a standard POA will become invalid if the person who granted it becomes incapacitated. A durable power of attorney will remain valid in the above scenario.
Estate Planning
Establishing POA is a critical piece of the recommended legal documentation needed to begin managing a parent’sparents finances, but it’s not the only one.
Estate planning is a fundamental part of a holistic financial plan. This collection of documents can hit on both short-term and long-term financial goals by creating a source of income, minimizing tax liability, and establishing a long-lasting financial legacy.
Creating a Trust
Establishing a trust can offer various benefits for your parents, depending on their specific financial situations, goals, and estate planning needs. A trust can serve multiple purposes, from avoiding probate to minimize tax liabilities to incapacity planning, but at its core the principle of a trust is to be able to direct what happens to assets even after the person who is creating the trust (i.e., the trustor) has passed away. In essence, it allows the trustor to have control beyond the grave. This can be important as part of a strategy to protect and preserve assets and make sure the assets are used the way your parents intended.
Creating a trust within their overall estate plan is a valuable tool that provides financial security and peace of mind for both you and your parents. A well-structured trust can help prevent disputes and conflicts among family members by clearly specifying your parents’ wishes and the distribution of assets upon death.
The decision to set up a trust should be made after careful consideration of your parents’ specific needs and goals. It’s important for your parents to consult with an experienced estate planning attorney to determine the most suitable type of trust and design a plan that aligns with their wishes and financial situation.
Health Related Documents
Although this blog post is about financial matters, be aware that when doing estate planning, there may come a time when decisions need to be made related to your parents’ well being. Consult an attorney, but in general documents such as advanced health care directives or a durable power of attorney for healthcare are an important part of the estate- planning process.
Reviewing Beneficiary Designations
With the proper legal documents now in place, it’s a good time to remind your parents to review and update their beneficiary designations. Beneficiaries are typically designated on any financial accounts, life insurance policies, or within a will or trust.
It’s essential to keep designations current, especially after significant life events.
Budgeting and Cash Flow Management
Creating a budget
Developing a comprehensive budget is essential to ensure your parents’ financial stability. With the knowledge of their income and expenses coupled with their financial goals, you can help formulate an attainable monthly budget. Here’s how:
Subtract their total monthly expenses from their total income. If their expenses exceed their income, you may need to work with them to make adjustments by either reducing expenses or finding ways to increase their income. If at the end of the month they are in a surplus, consider allocating that money towards their financial goals or bulking up their savings.
Creating a budget is just the beginning. Track spending to ensure your parents are sticking to the plan is crucial. Consider using apps, spreadsheets, or budgeting software that both parties can access to record expenses. Be sure to regularly review spending against the budget to ensure goals are on track.
Managing Bills
Whenever possible, simplify their finances. Combine accounts, consolidate credit cards, and set up automatic payments for recurring bills. This reduces the chances of missed payments and late fees, while also reducing your administrative burden.
Investment and Retirement Account Management
Aging seniors have different investment priorities than their children, which is why most of the investment strategies that your parents subscribe to may be opposite of your own investment strategies.
Risk Management and Asset Allocation
Seniors often have a lower risk tolerance as they rely on their investments for income and security. Work with their financial advisor to review and adjust the asset allocation to include a greater proportion of conservative and income-generating assets, such as bonds, dividend paying stocks, and cash equivalents.
Your parents also have different liquidity requirements to help cover unexpected expenses, like medical costs or long-term care needs. Ensure that a portion of their portfolio remains easily accessible and in a low-risk, liquid form for easy access.
Rollovers and RMDs
In 2022, Congress passed new laws related to Required Minimum Distributions (RMDs) via the Secure 2.0 Act. This change raised the age at which individuals are required to start taking RMDs from 72 to 73 starting January 1, 2023. The Act also delays RMDs to 75 in 2033, helping America’s aging seniors grow their retirement savings tax-deferred.
The IRS provides guidance on how to calculate your distribution based on your life expectancy.
Rollover contributions is a process that allows your parents to move funds from one tax-advantaged retirement account to another without incurring taxes or penalties. When it comes to managing parents’ finances, if your parents do not count on these funds as an immediate source of income you have the option of rolling over an employer-sponsored plan (e.g. 401(k)) into an IRA to access a wider range of investment options.
Tax Considerations
If your parents have entered into the golden age of 73 and somehow overlooked jumpstarting their retirement withdrawals, they could potentially find themselves in a sticky situation with tax penalties.
As part of the Secure 2.0 Act, the IRS slashed the excise tax penalty from 50% to 25% and further reduced the penalty to 10% if the RMD is rectified within a two-year timeframe.
Rollovers do not trigger taxes or early withdrawal penalties as long as the funds are deposited into an eligible retirement plan within the specified timeframe.
However, if you complete an indirect rollover, the distributing account may withhold 20% of the distribution for tax purposes. To avoid this, you should deposit the full distribution amount into the receiving account within the allotted 60-day window.
Seeking Professional Financial Advice
Managing parents’ finances can be complex, and seeking professional advice is often beneficial.
Financial Advisor
If your parents are not already leveraging the experience of a financial advisor, consider consulting with a professional qualified in estate planning and senior financial matters. A financial advisor can provide valuable guidance on how to actively manage investments, identify areas of financial opportunity, and establish realistic and achievable financial objectives for this next phase of life.
Elder Law Attorney
Elder law attorneys specialize in legal matters that affect seniors and their families and can provide expertise when it comes to managing your parents financial affairs. They can help develop strategies to protect your parents’ assets and ensure they are used wisely for their care and well-being.
If your parents require Medicare assistance for long-term care, an elder law attorney can help you navigate the eligibility process and develop a strategic plan to protect assets while still qualifying for Medicaid benefits.
Ensuring Financial Stability for Mom and Dad
Managing parents’ finances requires careful planning, open communication, and ongoing monitoring. By organizing appropriate documents, gaining financial insight, and keeping to a realistic budget, you can help ensure their financial stability. Remember to seek and lean into professional support when needed; by doing so your aging parents can navigate their financial journey with confidence and security.
At Prudent Investors, we help organize and simplify finances through a financial planning process tailored to any needs. Experienced in the realm of estate planning and trustee investing, we understand the unique needs and complexities of supporting an individual or individuals with their finances. If you’ve recently taken over managing your parents finances or are considering whether it’s time, schedule a complimentary consultation with a Prudent Investors advisor to discuss protecting their legacy through optimal financial planning.
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