How to Takeover an Aging Parent’s Finances

Like many difficult situations with people we love, planning to take over an older relative’s finances is best done in happier times, when both sides are healthy and various options can be considered. Unfortunately, events can sometimes intervene – death, illness or natural disasters can make an elder’s need for assistance a critical matter.

Once stricken, older relatives may be unable to understand questions or express their wishes in proper detail. If there is no plan, family members grasp at responsibilities – or shirk them – without any idea of what the older relative would really want.

What’s critical to understand is that such talks should go far beyond money. They need to be discussions about independence and basic preferences for the way an individual wants to live or die. Demographers believe that with the rising number of single Americans – those divorced or never married – these conversations will become increasingly complicated as they fall to nieces and nephews, younger friends or designated representatives.

Want to avoid a worst-case scenario? Start the conversation now. Here are some ideas:

Decide what’s important to talk about first: Maybe this conversation isn’t just about where the will or health care power of attorney is. Maybe this conversation is about you noticing that a parent or loved one is moving slower, is more forgetful, is clearly looking like their health has taken a turn for the worse – and maybe that’s why you want to know where the will is. Jumping into money issues first is usually a mistake. Deal with immediate health and lifestyle issues first.

Explain why you want to talk about finances: In some families, having a successful financial discussion means several attempts and some frustration. Don’t let yourself become angry or frustrated – just keep starting the conversation until it catches on. It might make sense to say something like, “You’ve always been so independent, Mom. I just want you to give us the right instructions so we do exactly what you want.”

Prepare your questions in advance: When a parent or relative is unconscious or unresponsive, the younger relative is immediately in the drivers’ seat. That’s why it’s critical to make a list of questions for the elderly relative to answer in detail. The basics: Where important papers are, how household expenses are paid, who doctors and specialists are, what medicines are being taken and whether there’s a will, an advanced directive and a funeral plan (and money or insurance proceeds to pay for it). There may be dozens more questions beyond these based on your family’s personal circumstances. But in creating this list, ask yourself: “What do I need to know if this person suddenly becomes sick or dies?”

Offer to get some qualified advice: If you don’t fully understand your relative’s financial affairs, it might make sense for you both to talk to an attorney or a tax or financial adviser. A qualified adviser can offer specific suggestions on critical legal documents that should be in place and ways to make sure accounts to pay medical and household bills are accessible to the older person and the designated friend or relative who will hold power of attorney.

Plan a caregiving strategy together: You should discuss the relative’s preferences and trigger points for various stages of heath care. An individual always wants to stay in his or her home, but you should have an honest discussion about how much you can do at home as a caregiver and whether various services (home health aide, geriatric care manager, assisted living) should be introduced at various stages. Talking through what a parent will be able to live with at various health stages – and putting that information in writing – will save plenty of doubt and bitterness later.

Discuss what should happen with the home: If an elderly relative becomes sick and irreversibly incapacitated, the equity in his or her home may come under consideration as a resource to pay uncovered medical or household maintenance. Since the home is both a major asset and an emotional focal point, it’s best to get good advice and spell out specifically what the elderly relative wants done with his property and under what conditions.

Make sure everyone knows the plan: Once you settle on a strategy, make sure all family and friends understand the plan and their assignments.


August 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

How to Buy Life Insurance

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Life insurance is primarily a product for families. If you have a spouse and children who depend on your income and you don’t have extensive resources, then life insurance is a useful tool to help them pay expenses. Single people without dependents typically don’t need the same amount of life insurance because they don’t have as many responsibilities that will outlive them.

Most financial planners would tell you that insurance is not a replacement for a long-term savings or investing strategy but an additional cushion. Depending on your financial situation, life insurance and its ancillary products can have some very attractive tax characteristics as well.

Who needs life insurance: Those with dependents, either children or friends or family members with special needs; with a nonworking spouse or one with an income substantially lower than yours or those with a big mortgage that will be too overwhelming for one income to pay off.

How much is necessary: Optimally, the right amount of life insurance allows your survivors to invest the insurance payout and then draw down the account over time in a way that matches the income you would provide if you were still around. You need to figure far more than a family’s basic living expenses adjusted for inflation. Also consider:

• Education funds needed for each child from grade school to college.
• Money to cover special health expenses for a family member already diagnosed at the time of the insured’s death.
• Funds for child care if the surviving spouse needs to keep working.
• Emergency funds that your survivors can keep in reserve.
  

Types of life insurance: There are six basic types of life insurance.

• Term: Term life insurance is the simplest kind of life insurance because it pays if death occurs during the term of the policy, which is usually from one to 30 years. There are two kinds of term life insurance: Level term means that the death benefit stays throughout the duration of the policy, and decreasing term means that the death benefit drops in one-year increments over the duration of the policy.
• Whole life/permanent: Whole life or permanent insurance has a level premium and pays a static benefit whenever you die. For this guaranteed benefit, whole life is usually the more expensive choice because it front-loads its costs into the early premium years of the policy so it can invest the money to pay for death benefits at the end of several years or decades. At a certain point, the policy owner will pay in enough where he or she will start accruing cash value on that money which can be withdrawn if the policy owner decides to cancel the coverage. There are four types of permanent insurance:
• Whole or ordinary life: This is the most common type of permanent insurance policy, offering a death benefit with a savings account. You agree to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.
• Universal or adjustable life: This variation offers a little more flexibility, such as the possibility of increasing the death benefit if you pass a medical exam. The savings product attached to this kind of account generally earns a money market rate of interest, and after you start accumulating money in this account you’ll generally have the option of altering your premium payments. This helps if you lose your job or have some other financial misfortune.
• Variable life: This policy lets you invest your cash value in stocks, bonds and money market mutual funds which is good if those investments go up. If they go down, your cash value and death benefit will shrink, but you need to make sure there’s a guarantee that your death benefit won’t fall below a certain level. This type of policy can be fairly risky for ordinary consumers.
• Variable-universal life: This choice allows you the flexibility of premium payments with a more aggressive investment scenario for the cash value of the policy.
  

Life insurance proceeds don’t generally go into Uncle Sam’s collection plate, which makes life insurance an attractive purchase for many individuals hoping to maximize the amount to give to heirs. Yet life insurance can also be purchased in a way to give the living policyholder tax-free income during retirement. Since we’re talking about estate issues here, getting proper advice is critically important. The federal government’s current estate tax ceilings were set to expire in 2010, and this fact alone could affect the attractiveness of this strategy for your situation.


August 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Considering an Annuity?

Managed Payout Funds Are One More Entry in the Retirement Spend-Down Picture

Insurers have long been part of the effort to help retirees spend down their nest eggs through annuity products. Now, the mutual fund industry is jumping in with a competing offering for individuals who may or may not be so keen on annuities.

Called “target distribution” or “managed payout” funds, individuals who are retired or about to retire can invest in these fund products that contain stocks, bonds or other asset classes. They are structured so investors can designate regular withdrawals and the account balance can be transferred easily at the time of the account holder’s death to any spousal or non-spousal beneficiary.

Managed payout funds have been compared to fixed immediate annuities and are also known as retirement income funds. Any distribution taken by the account holder is expected to keep pace with inflation and come from dividends, fund appreciation and a portion of principal. The rest of the assets stay invested.

For retirees who want to continue building their nest egg while generating a steady stream of monthly income, they’re worth examining. It’s estimated that some $16 trillion in retirement assets are up for grabs and looking for disciplined distribution.

These funds issue checks regularly based on the account holder’s preferences, but the amounts are tied overall to fund performance. Vanguard, Fidelity Investments and Charles Schwab have all recently entered this business. Most of these funds encourage account holders to pull out between 3-7 percent of their total portfolio annually.

As the number of retiring Americans continues to increase, there will continue to be new wrinkles in the spend-out game. It makes good sense to get some personalized advice on how to best spend down your assets in a way that fits your needs. One way would be to consult a financial planning professional a few years before you’re ready to retire to check the following:

• See how your current assets are working so you know if you have enough to retire – know what you have before you question how to spend it.
• Consider various scenarios that describe the way you’ll want to live after retirement and whether your invested assets support that plan.
• Are your long-term care needs covered? Before you start talking about locking up assets in specialized fund products, make sure you have money in reserve or long-term care insurance in place should you need to pay for temporary disability or end-of-life care.
• What are the fees on the various managed payout funds you’re looking at? Most specialized funds have some fee structure that you should compare against other alternatives. Compare the expense ratio of your chosen fund against other possibilities.
• How will your assets in these funds be invested? Do those choices match your risk tolerance and your investment goals post-retirement? You’ll still need to be making smart investing choices with what hasn’t been spent down.
  
  August 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.