Bailing Out The Folks

There's no question that low interest rates and retirement funds lost to the bear market have hurt seniors.

But these issues are also hitting the pocketbooks of another group - the children of retirees. More and more adult children are having to help their parents make ends meet.

The Early Show's financial adviser Ray Martin offers some tips on how to help your parents, without hurting your own financial future.

A growing number of adults find themselves part of the "sandwich generation." They are stuck between caring for their children and their parents. While the emotional and financial strains of raising kids comes as no surprise, helping Mom and Dad is - in many cases - an unexpected expense.

According to the Family Caregiver Alliance, 25 percent of all workers provide some sort of care to an elderly friend or relative, devoting an average of 20 hours a week to caregiving. Another study estimates that by 2008, 54 percent of the workforce will be caring for an older adult. A 1999 study found that the average person caring for an aging family member over their lifetime will spend or lose $659,139.

Of course, adult children have no legal obligation to help their parents financially. But who is going to say no to their parents? Financial planners love to offer advice on this issue: have a heart-to-heart conversation with your parents to find out how much they're saving for retirement, encourage them to buy long-term care insurance, etc.

Suggestions like this are only going to work if parents and children plan way in advance, and if children feel comfortable asking these questions and parents feel comfortable answering them. While these suggestions aren't bad, they simply aren't realistic. And they certainly don't help families hit by the recent bear market and accompanying interest rate cuts. So what's a member of the sandwich generation to do?

Three Tax Basics
First, if you plan to give your parents money for expenses, it may make sense for you to pay the service providers yourself. Cash you give your parents will be seen by the IRS as gifts. Any gift in excess of $11,000 will be subject to federal and state gift taxes. Everyone will avoid this tax if you pay a hospital or drug cost, for example, directly instead of giving money to your parents that they then give to the hospital or pharmacy.

You can deduct medical expenses you cover for your parents from your taxes. But first, the expenses must exceed 7.5 percent of your adjusted gross income. However, these costs can add up fast. See IRS Publication 502 for details.

Finally, you may be able to claim your parent as a dependent, reducing your adjusted gross income by $3,050 and resulting in some tax savings. To qualify as a dependent, your parent must earn less than $3,050 in income for the year, and you must pay more than half of your parent's support. For complete details, see IRS Publication 501.

Housing and the associated living expenses often prove a significant burden for retirees. Here are Martin's suggestions for how you can help without going broke.

  • Reverse Mortgage If your parents apply for a reverse mortgage, they can receive a monthly or lump sum payment from a lender. Basically, they are borrowing against the equity in their home. The more money the homeowner borrows, the less equity left in the home. This is a loan against a home that does not have to be paid off until the occupant dies or moves, or the house is sold. The amount of the loan depends on the homeowner's age and the home's value. The loan is repaid, with interest, with money from the home's sale.
  • Parents As Tenants Your parents may not want to accept money from you, but might let you buy their current home. If you choose this route, consider an installment sale. You will make regular payments to your parents, which will lower their tax bills while giving them a regular source of income.

    Another option is to build an addition to your home for your parents, or move into a larger house, and then charge your parents rent. Once you start investigating this option, you will probably come across the term "accessory unit." An accessory unit is a living space within your home that includes a private entrance, bath and kitchen. No matter if you choose to house your parents in a single room or a separate apartment within your house, be sure to charge a fair market rent, Martin says.

    "The rent they pay is rental income to you and is reported on your tax return on Schedule E along with the related deductions against this source of income," Martin explains.

  • ECHO If you want to have your parents close by but they don't want to live in your home, consider ECHO: Elder Cottage Housing Opportunity. Authorized as part of the Older Americans Act, an ECHO unit is a small, separate home, in the side or back yard of a single-family home. Constructing one may be cheaper and easier than permanently altering your home; once you no longer need the unit, it can be disassembled. Zoning regulations vary in different parts of the country so check your local laws.

Financial Management
Adult children often need or want to help parents manage their financial accounts. The easiest way to do this may seem to be simply to place the child's name on the parent's account, but this can backfire. If your name is on your parent's account, any bad financial move they make will also reflect poorly on you.

"Assets titled jointly are subject to the liability of all joint owners and, these assets will pass on only to the surviving joint owners, possibly disinheriting other family members," Martin says.

Instead, get a Letter of Authorization. This authorizes banks or brokerages to provide you with duplicate account statements and any account information. It allows adult children to be in a position to help parents without taking control of the accounts or subjecting them to liability.

Another term that pops up a lot when discussing financial management is power of attorney. Basically, this authorizes you to make decisions or be privy to certain information on behalf of another person. There are three different types of power of attorney, and you and your parent need to decide which type will work best for you both.

  • Durable Power Of Attorney - Durable is the most common type of power of attorney. It's "durable" because the power to make decisions remains in your hands at all times, from the moment the power is granted.
  • Springing Power Of Attorney - This grants you the authority to begin making decisions once a certain event occurs. For instance, you and your parent can decide that you will take on duties once she goes into a nursing home or has a stroke, etc.
  • Limited Power Of Attorney - Just as it sounds, this gives you the authority to make some decisions but not others. For instance, maybe your father wants you to be able to help him make investment decisions but not touch his checking/savings accounts. You and your parent determine what decisions you have the authority to make.

Power of attorney should not be seen as you taking control of your parents' lives. Instead, it's allowing you to help them, to work through the financial system on their behalf. Martin believes all families should at least consider this. If your parent suddenly becomes incapacitated, you will regret not being able to pay her bills or call and see how much she has in savings, etc.