Increasingly as we work with people of retirement age, we’re hearing a new concern: What happens when my mother runs out of money? This is something relatively new. Those in their middle ages used to be called the sandwich generation, because they were in the middle, caring for both their children and their parents. But this is something new . . . we’re speaking of people in their 60’s and 70’s caring for parents in their 80’s and 90’s.
By the time we hit our latter 60’s, most of us hope that the retirement nest egg is firmly in place, children are married off, and grandchildren are a joy. But since we’re all living so much longer, caring for one’s very elderly parents is now a large financial planning topic.
Too often we see a client who is concerned about his parents outliving their assets. A parent with a long and debilitating illness is a common story, which can lead to an impoverished spouse. This is a heartbreaking circumstance. Who wouldn’t give everything to care for a beloved spouse of many years?
Ideally, there is long-term care insurance (LTC) in place to pay expenses when needed. Medicare does not pick up the tab! (See my Medicare blog.) It only pays for recuperative care after a hospital stay of 3 or more days. It does not pay for palliative care (maintenance care), which is precisely the care that LTC policies pay for.
1. Look into a reverse mortgage.
A common misconception is that homeownership is relinquished with a reverse mortgage. Not true. The owner retains title to the property, just as with a traditional mortgage.
Many people have what look to be sufficient assets on their balance sheets, but the assets are not liquid – not spendable. A reverse mortgage gives spending access to a home’s equity. There are no credit qualifications. You borrow out a portion of the home’s equity, and no repayment is due until the mortgage holder permanently leaves the home – either by death or by moving to a nursing home. At that point, the mortgage would need to be repaid. When the loan is due at death, and the home sale proceeds are not sufficient to satisfy the outstanding mortgage, the balance isn’t payable. This is an important point.
For example, say your mother took out a reverse mortgage for the full value of her $600,000 home in 2006. She locked in this pool of income for herself, regardless of future changes in home value. In 2015, your mother passed away while still living in the home. As the beneficiary, you then sell the home for $400,000. What about the remaining $200,000 loan? You are not on the hook for the balance of the loan, nor is this difference taxable to you.
2. Buy your parents’ home from them, and rent it back to them.
The major plus here is that there is no disruption to them. As a landlord, you’ll do all the maintenance, which you’re probably doing already. At their death, you can renovate the house and maybe sell it for a profit, or take in a new tenant. Meanwhile, you may be able to take some passive loss against your active income if your Adjusted Gross Income (AGI) does not exceed $150,000 (2021). Your parents receive the price of the home in cash at the closing table, so they have a lump sum to invest and draw upon, thereby maintaining both their independence and their dignity. They can then pay you some minimal rent.
If your parents don’t own their home and they run out of money, the options really are few. You and your siblings may very well need to chip in to help out. Depending on your parent’s health, this may or may not include paying for managed care at home. Another option is for family members to combine residences. One of you can take the parents into your home. If providing over half the support, you may be able to take a dependent care credit.
If either of your folks is a veteran, look into this benefit. It is available to certain veterans and their surviving spouses who need assistance in the activities of daily living. There are lots of forms to fill out, and a waiting period of some seven months (at this writing) before the benefits begin. $1100/month or thereabouts is the maximum benefit.
The primary point of this post is to give some helpful suggestions to those who find themselves caring for very elderly parents. The secondary point is to urge readers to anticipate longevity. We’re all living longer — please plan for it financially.
Check out Glenn's piece on Dependent Care FSA. Questions? Feel free to get in touch with us at [email protected] Also follow us LinkedIn, Facebook, Instagram, and YouTube for more personal financial information relevant to you!