Helping Your Parents Age Well—Without Derailing Your Finances

Planning for aging parents is one of the most emotionally and financially complex tasks many of us will face. It involves navigating the maze of healthcare, estate planning, and long-term care, maintaining family harmony, and ensuring that your parent's wishes are respected. The decisions you make today can have a profound impact on your family's financial future. Let's explore a few key areas to consider when planning for your aging parents, with a focus on maintaining family harmony throughout the process.

Organize Important Documents

Start by ensuring that all crucial documents are organized and accessible. This includes financial records, estate planning documents, health care directives, and insurance policies. Knowing where to find these papers can save a lot of stress when critical decisions need to be made quickly.

Ensure your parent's estate plan is up-to-date and includes essential legal tools like a general and health care power of attorney and a living will. Some financial institutions may not honor powers of attorney that are more than a few years old or from out of state, so it's crucial to review and update these documents periodically.

Review Estate Plans and Trusts

If your parents have estate plans in place, now is a good time to review them. Many older estate plans include A/B trusts, which may no longer be necessary, especially given the high estate tax exemption ($13.61 million in 2024). However, it is essential to consider the potential sunset of the Tax Cuts and Jobs Act (TCJA) of 2017, which is set to expire at the end of 2025. If Congress does not extend or modify the provisions, the estate tax exemption is expected to revert to much lower levels (around $5 million per individual, adjusted for inflation). This change could impact your parents' estate planning strategies, especially if their estate size approaches or exceeds this reduced exemption limit.

With the possibility of receiving a step-up in basis for assets upon a parent’s death, it's worth discussing whether trusts still serve a beneficial purpose or if it might make more sense to simplify the estate plan. Given the impending changes in tax law, working with an estate attorney to ensure flexibility in the plan is prudent.

Assess Long-Term Care Needs

One of the most significant financial burdens that can arise is the need for long-term care. Whether it’s home health care, assisted living, or a nursing home, the cost of care can quickly deplete your parents' savings. Having an open, values-based conversation about how your parents envision their later years is essential.

You might want to consider whether your parents qualify for Medicaid planning, which can help cover the cost of long-term care. Alternatively, if your parents own their home, a reverse mortgage could provide additional cash flow to cover these expenses without forcing the sale of the property.

Consider the Impact of Estate and Gift Taxes

While the federal estate tax exemption is relatively high, some estates may still face tax liabilities, mainly if your parents have used up some or all of their lifetime gift tax exclusions. In 2024, the exclusion is $13.61 million for individuals and $27.22 million for married couples. However, this exemption could drop significantly, with the TCJA expiring in 2025. Suppose your parents' estate exceeds these limits in the future. In that case, it’s important to explore strategies to minimize estate taxes, such as making gifts during their lifetime, funding irrevocable trusts, or even accelerating wealth transfers before the potential reduction in the exemption.

If your parents own multiple properties, ensure that the ownership and residency of each property are clear for probate purposes. This can help avoid probate in multiple states and the associated legal fees. Consider using tools like joint tenancy with right of survivorship (JTWROS) or transfer on death (TOD) arrangements to make asset transfers smoother.

Long-Term Investment and Income Planning

Managing your parent’s income and investments in retirement is another crucial step. It’s vital to align their investments with their needs, focusing on generating steady, reliable income while minimizing risk. Additionally, Roth IRA conversions can be a valuable strategy for reducing future tax liabilities. If your parents expect to be in a lower tax bracket in retirement or plan to leave assets to heirs in higher tax brackets, converting a portion of their traditional IRA to a Roth IRA may provide significant tax benefits. This strategy is particularly relevant as the lower tax rates introduced by the TCJA are also set to expire in 2025, which could push tax rates higher.

Family Conversations and Involvement

Having open and transparent discussions with your family about your parents' financial and healthcare wishes is crucial. Financial planners often use strategic questioning to facilitate these conversations. For example, swing questions like “Could you explain your vision for your healthcare needs in retirement?” are more effective than direct or confrontational queries. These questions open up dialogue and help ensure everyone’s concerns are addressed, which can prevent disputes and misunderstandings down the road.

Remember, disputes and misunderstandings are more likely to arise when families don't communicate well, especially during emotional times. A well-drafted family mission statement can help align everyone’s goals and minimize conflict down the road.

Updating Beneficiaries and Account Titling

Finally, ensure that your parents' accounts and beneficiary designations are current. Many people neglect to update these details after significant life events, like a spouse's death or grandchild's birth. Failing to update a beneficiary designation can lead to unintended heirs receiving assets. By taking the proactive step of updating these designations, you can ensure that your parents' assets are distributed according to their wishes. Adding transfer on death (TOD) or payable on death (POD) designations can help assets bypass probate altogether.

Conclusion

Caring for aging parents is a complex process that requires thoughtful financial and emotional planning. Organizing essential documents, reviewing estate plans, assessing long-term care needs, and maintaining open family discussions can help ensure that your parents' final years are lived with dignity and security. Consider working with a certified financial planner or estate attorney to guide you through these decisions and ensure your family is well-prepared for the future. Also, keep the potential changes in tax law on the horizon, as they could significantly impact your parents' estate and financial planning strategies.

WHWM is here to guide you in identifying your priorities, developing a plan, and making adjustments along the way. By choosing WHWM, you're partnering with our Founder and President, Stephen Bodwell. As a CPA and CFP® professional, Stephen is committed to helping you achieve your financial goals and aspirations. Don't hesitate to take the next step toward realizing your dreams. Schedule your complimentary, no-obligation 30-minute consultation with Stephen. 

Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.