Time for The Talk. No, not the kind of “talk” you give your kids when they’re young. This talk is about their finances, and final wishes. Yeah, that’s a tough talk to have. And an even more difficult one to start. “Hey, let’s talk about what’s going to happen to you and your finances when you die”. Depending on your parents, that might just work.
For my own personal situation, I was pretty fortunate. My mom – who basically manages my parents’ finances and such – really just started talking about it one day. She already had plans of adding her children to titles and accounts, power of attorney, DNRs and such. She said she has it covered and gave us any info we would need at the time. Nice! Where’s my EASY button?
But it’s not always that simple. After all, coming to terms you may not be around one day isn’t a pleasant thought for many people. While there’s no textbook way to approach this with an aging parent, here are a few considerations I would suggest.
Please keep in mind, these are just my experiences and personal opinion. I can’t urge you enough to educate yourself more on the topic and/or talk to an estate planner.
Kicking things off
You know your mother/father probably better than anyone. Sometimes a more direct approach works – Hey, we need to sit down and talk about your finances and wishes as you get older. That responsibility is going to be on me/us and I want to make sure we have your wishes in mind and any pre-planning done now.
And sometimes you may need to appeal to their sensible/responsible/emotional side. You know with your recent illness I’m concerned you’ll need help with having your finances and wishes followed.
There’s no one good way, but starting the conversation is probably going to be the hardest part. Best to not avoid it and just get things started. A parent you thought would be resistant may surprise you. They likely have already heard stories of how friends or relatives have had issues because their family wasn’t prepared.
It sounds simple at first – you need to talk about things such as identifying assets and liabilities. The problem is over decades of, well life, this could be quite the list. Start with identifying any liabilities they may have – mortgage, car loan, 401k loan, reverse mortgage, tax bills, credit cards, property taxes etc. You’ll need to know the companies involved, account numbers, and balances.
Similar process for assets – what type of asset along with account numbers and balances. List out everything: real estate, investment accounts, pensions, banking, safe deposit boxes, jewelry, cars, and cash. Even after the conversation, some parents still won’t feel comfortable with letting you know what they have; urge them to at least tell you where they have it. You may be the one paying off bills after your parents have passed; having access to a checking account and knowing all the liabilities will make the process go much smoother.
If a parent or parents are planning on leaving an amount for inheritance, a wise tax move would be to “gift” that amount or a portion of it now. You see, the IRS provides an annual gift exclusion of $14,000 (for 2016) to the donor. This is per parent as well. So technically grandma and grandpa could give little Sally $28,000 with no tax burden. $14k would come from grandma and $14k from grandpa and then no taxes would have to be paid. This allows money to be passed down now and tax free. You can actually do this anytime by anyone. But for aging parents who want to insure their great granddaughter inherits a few bucks tax free, it works really well. And no paperwork is needed to the government if kept under the $14k exclusion. If interested, read up more at the IRS site.
Now, keep in mind there is a lifetime tax exemption for estate taxes – $5.43MM for 2016, per parent. This means that any amount up to $5.43MM could be passed along and not incur any federal estate taxes. While it isn’t taxed, anyone gifting money to their heirs need to track how much because it all counts against the lifetime $5.43MM federal estate exemption.
Have any legal forms available. Power of attorney (POA), or successor trustee, in their revocable living trust will be needed to be shown to any financial institution you’ll have to deal with on your parents’ behalf. Don’t have either a POA or trust set up? It’s never a bad time to start looking into them. It will make dealing with the paperwork, paying bills, and owner transfer much simpler. For these you’ll need to contact an estate planner/attorney.
Better yet, if your parents are open to it have them add you and/or your siblings to their accounts. This will allow you to manage the account without the need for any POA or trust. Keep in mind, if you’re on the account you’re also liable. So if your parents aren’t good with money management, you may owe for any negative impact to the account.