Burdened By Retirees And Kids

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

But these developments are also hitting the pocketbook of another group — the children of retirees. More adult children are finding themselves helping their parents make ends meet.

Financial advisor Ray Martin gave some tips for adult children on The Saturday Early Show on how to help their parents without hurting their own financial future.

Martin says a growing number of adults find themselves as 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 often is.

The Wall Street Journal reported in April that many adult children are giving their parents regular handouts. And, some are shelling out tens of thousands of dollars to cover basic costs — from medical and credit-card bills to vacation and retirement-home expenses.

About 25 percent of all workers provide some sort of care to an elderly friend or relative, according to the Family Caregiver Alliance. They devote 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 about $659,139.

The Seattle Post-Intelligencer points out that in addition to costs incurred by individual families, caregiving is also having an economic impact on the business community.

The paper reported that two-thirds of employed caregivers say they have had to rearrange or reduce their work hours or take an unpaid leave of absence to fulfill care-giving duties.

Informal care giving costs businesses $11.4 billion annually in lost productivity, according to MetLife.

Of course, Martin says, adult children have no legal obligation to help their parents financially. But who is going to say no to their parents?

Martin says financial planners love to offer advice on this issue, often suggesting such strategies as saving for retirement and encouraging seniors to buy long-term care insurance.

Those suggestions, Martin says, are only good when the parents and children plan way in advance. Also, the children have to feel comfortable asking their parents financial questions and the elders must feel comfortable answering them.

While these suggestions aren't bad, Martin says, 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, suggests Martin, 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. You can all avoid this tax if, for example, you pay a hospital or drug cost directly instead of giving money to your parents and letting them pay the bills themselves.

Martin says 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.

You may be able to claim your parent as a dependent, reducing your adjusted gross income by thousands 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, Martin suggest reading the IRS Publication 501.

Housing

Housing and associated living expenses often prove a significant burden for retirees. Martin suggests the following to avoid 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 there will be 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: Martin says your parents may not want to accept money from you, but they 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, Martin says, 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 parent 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, he 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, says Martin, and it can easily 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, Martin says, may seem to be simply placing the child's name on the parent's account. But, he says, 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," he adds.

Instead, get a Letter of Authorization. This authorizes banks or brokerages to provide you with duplicate account statements and any account information. Martin says 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. Martin explains 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.
  • Limited Power of Attorney: This gives you the authority to make some decisions but not others. For instance, perhaps 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.

Martin says 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. All families should at least consider this, says Martin.

If your parent suddenly becomes incapacitated, he says you will regret not being able to pay her bills or see how much she has in savings.

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