Aging Options

When your parents outlive their savings

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Usually wealth transfer goes down the generations, meaning that the older generations transfer wealth to younger generations.  But the longer life the majority of our elders are living today means that a significant portion of them will outlive the resources they’ve set aside. 

An Ernst and Young 2008 study found that three out of five middle class retirees would probably outlive their savings unless they made significant cuts to their spending due to the combination of much longer lives and a low savings rates.  For their children, the result may be that they are unexpectedly paying their bills or otherwise financially supporting them.  There are several ways to transfer assets to avoid paying huge tax bills or having other unintended consequences says an article in the Wall Street Journal.

Rather than giving parents money directly, their children might opt for strategies such as: annual gifts, directly paying their parents’ bill, trusts and/or loans.  There is usually some tax savings associated with the various strategies but it’s important to contact an attorney that specializes in elder law to ensure that such transfers don’t inadvertently harm a parent’s ability to claim Medicaid or VA benefits.

Beginning in 2013, the IRS raised the yearly limit for gifting to $14,000.  Spouses can combine their annual exclusions to double the size of the gift.  If you’re giving to a couple, each member of the couple can receive that amount for a total of $56,000 a year.  Gifts can count against your lifetime exclusion so you’ll want professional help to avoid causing injury to your own estate while you’re helping out parents.

You can directly pay bills and not have your payments count against your lifetime gifting limit.  This can be useful if they need help paying for assisted living, skilled nursing or hospital costs.  You can also buy a house and let them live rent free as long as the fair-market value does not exceed the annual gifts amount.

Another method is to loan them money.  You must charge a minimum rate of interest called the applicable federal rate.  The rate changes monthly but that rate is lower than what they would pay for a bank loan.

Trusts are an estate planning strategy usually used the other way around but an “upward trust” allows elderly parents to live of the income generated by the assets within a trust without depleting the assets.  This type of trust can be structured to allow your parent(s) to qualify for Medicaid or VA benefits, protect them from fraud and still provide something for your own children.

Please contact a professional to avoid having these strategies create unintended tax consequences or otherwise harming a parent’s right to public benefits.

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