How Assisting Elderly Parents Can Fit Into Your Financial Plan

May 21, 2024

As U.S. life expectancies increase, our nation’s population is expected to skew increasingly older in the next several decades. A significant number of individuals who are actively working toward their own strategic goals may face challenges as their parents become elderly and require more costly healthcare in the coming years. Healthcare costs, specifically long-term care and elder care, have increased nearly 5% annually over the past 10-20 years. This has led to large increases in Long-Term Care insurance costs which has caused many Americans to forego the insurance altogether.

This landscape has created an overwhelming responsibility for younger generations and will force many adult children to make both emotional and financial decisions when it comes to the care of their aging parents.

Caring for an Aging Population 

In the current landscape, the United States confronts the challenge of an increasingly aged demographic, with nearly 20% of its populace aged 65 or above, a figure that escalates daily. Moreover, longevity is reaching unprecedented levels, with many living well into their 90s and even surpassing 100 years. This demographic shift, coupled with the dispersion of families across the nation, prompts the need for discussing the potential pitfalls in caring for elderly parents and relatives.

Professional home care, assisted living facilities and continuing care communities are most often paid for out-of-pocket. With less than 10% of the population having long-term care insurance, many adult children are left to make difficult decisions when it comes to assisting aging parents with their long-term care needs. Financial planning is essential for adult children who are responsible for the care of their aging parents.

Open Family Communication 

While many of our clients have parents who have taken the necessary steps to ensure their long-term care needs are covered, some have not. For those who have not, an open line of communication between all family members is important to ensure the parents' needs are met without squandering their remaining assets unnecessarily and risking the need for the adult children to shoulder the cost of care.

If possible, having an open conversation with the parents about how they’d like their ideal care to look, is a good place to start. Make it clear that your intention is to help, not to limit their independence. This would be a good time to have a realistic conversation about what fits within their budget and potential alternatives to certain care they’re seeking.

Many times there are family dynamics that will allow certain family members (spouses and siblings) to assist in different ways to delay the largest expenses like full-time home care or nursing home costs. Therefore, communication between siblings and other decision makers is important for organizing the different stages of care that are to come as parents age. Should it be possible for a family member to take the parents in, it is a good idea to have a conversation around any compensation to avoid complications and disagreements in the future. Designating roles and working with an estate planning attorney is key to having a strong understanding of how assets will be used for care and how the remaining assets will be passed to the next generation.

Organizing and Using the Parents Remaining Assets  

Organizing the parents' current assets is critical to understanding what type of care can be provided without the need for financial help from the children. While many children may look to assist financially from the start, we recommend this to be more of a last resort than a first step, as straying from your own financial plan may do more harm than good and can impact future generations. We also recommend organizing the assets into taxable and non-taxable assets as well as liquid and illiquid assets. Ideally, assets with the greatest liquidity and least tax consequences would be used first, with retirement assets and illiquid assets being sold later to continue to fund the care.

The goal is to stretch the remaining assets to cover as much of the long-term care needs as possible. This means using all of your parents assets prior to outside assistance from other family members, including selling their home and other assets that may not be productive any longer (i.e boats, cars and other personal belongings).

Protecting Your Own Financial Plan 

While it may be difficult at times, protecting your own financial plan must be top of mind. It may be tempting to agree to take on your parents' healthcare costs; however, this can cause undue stress on your own financial future. Any assistance provided should be with excess cash flow, while selling your own investments or assets should be avoided. This includes reducing savings amounts as it is important to stay on track with your own financial goals prior to agreeing to any sort of financial assistance.

If you come to the realization that you can afford it, and you’d like to assist financially, it is better to provide assistance in smaller amounts on a monthly basis rather than in a lump sum to ensure proper expense management. This will help smooth out your own expenses in addition to helping your parents understand their own budget. We also recommend offering assistance in a step by step approach instead of agreeing to cover all expenses from the start. This will give you an idea of how the assistance fits into your own financial plan in smaller pieces without you having to make major alterations to your lifestyle all at once.

Maximize the Assistance You Do Provide 

So long as it fits into your financial plan, providing financial assistance to your parents can be great. However, there are a few things to keep in mind to maximize the financial assistance provided to your parents. The annual gift tax limit for 2024 is $18,000 annually per recipient, if you’re single, or $36,000 annually per recipient, if you’re married, so you can offer monthly support that falls within these annual limits. These federal gift limits include cash or assets – like stocks, land, or vehicles – given to any individual during the current tax year. If you exceed the annual gift tax limit, you will be required to file a gift tax return with the IRS and could potentially be subject to tax liability. More importantly, this does not include covering medical expenses. Therefore, you can pay medical bills directly for your parents and avoid having to file any sort of gift tax form with the IRS.

Additionally, if you paid a healthcare aide or another professional to care for a dependent parent you claim on your federal tax return, you may qualify for the Child and Dependent Care Credit (CDCC), which includes expenses related to eldercare, like in-home care or adult daycare. The amount of this tax credit depends upon the total number of dependents you claim on your tax return as well as your adjusted gross income. The maximum credit is 35% of expenses up to $3,000 per year for one dependent, or $6,000 if you paid expenses for more than one dependent.

In certain instances, the IRS considers nursing home costs to be deductible medical expenses, if you, your spouse, or your dependent is in a nursing home primarily for medical care. If so, the entire nursing home cost, including meals and lodging, may be deductible as a medical expense. Additionally, you can use your HSA fund to pay for dependent care on a tax free basis. As always, consult with a CPA to check if your parents qualify as dependents and if the expenses you are covering are tax deductible and HSA eligible.

We Are Here To Help

At The Fiduciary Group, we are committed to helping you and your family manage and grow your wealth strategically, with a focus on long-term results. At every stage of life, we are here to help you make sound financial decisions that will help you achieve your goals.

If you would like to update your financial plan to help care for aging parents or to review your options when it comes to assisting family members in need, please reach out to us for assistance.