Planning for age and / or incapacity, part 2: Creating solutions

By Barbara H. Pietrowski CPA, CFP, PFS

In Part 1 of "Planning for age and/or incapacity," I discussed some aspects of the financial problems that can be encountered when family members care for the person and/or the assets of an elderly family member. The three operative points to remember in crafting a solution for these problems are as follows:

Do an analysis of the senior's assets, income, and current and projected future expenses.
Make plans with the senior and other family members before the need for action arises.
Verify and communicate.

Having a family discussion about who is going to take care of mom or dad is about as much fun as a root canal operation. No one wants to do it — especially not the senior citizen who is the subject of concern. However, advance planning can make the difference between an outcome that might tear the family apart, and one that provides a reasonable quality of life for an elderly individual with sufficient funds to provide for his or her needs.

The preliminary step is to introduce the subject to the senior, stressing the need for advance planning and family consultation. But you cannot make plans without knowing what you have to plan with. Gather together the assets of the senior and, if possible, consolidate them in one account to make management easier. Your mom may wish to continue to get dividend checks and record them all in a little black notebook, as she has done for years, but this is probably no longer practical.

Examination of past tax returns will give you an indication of what assets exist and where they are physically located. It is time to empty the safe deposit box of all those share certificates, E bonds, etc., copy all of them and take them to a dependable stock broker for safekeeping.

You will need to create an accurate list of the available assets, complete with the projected annual income from each asset and, most important, the cost basis and date(s) of purchase. Add the annual income of pensions, social security, annuities, trusts, etc., to the list to quantify both the amount of the assets and the annual income available from all sources. Don't forget to include the personal residence in the calculation as a source of capital, a possible source of additional income and an item of ongoing expense.

The next step is to look at both present and expected future expenses. Also, it is time to take a hard look at whether the senior needs assistance immediately in managing his or her bills and other financial issues. Finding five years' worth of dividend checks stashed in a drawer along with months of unpaid bills is not a good sign. Hiring someone you trust to take care of these matters might be the best option.

As part of the financial review, the option of obtaining long-term care insurance should be evaluated if the senior does not already have a policy. Some group policies might allow coverage for parents (if they qualify and are healthy now). Cost reductions can be achieved by extending the waiting period, limiting the policy to institutional care only and limiting coverage to three years. The sooner you look at the issue of long-term care insurance, the less expensive it will be and the less likely that the senior will be uninsurable. In my opinion, almost everyone should have a long-term care policy. Long-term care policies drastically reduce the assets that might be needed to care for an incapacitated senior. They can provide care options that might not otherwise be affordable.

The next step is the dreaded family council meeting. All family members should attend, even if they are not interested now in the issues to be decided. The senior will need to be prepared for the discussion, and a list of his or her concerns should be prepared in advance. From my experience, the greatest concern of an elderly or frail person is loss of control, especially loss of independence in living conditions and loss of control over money. It is this need for control when everything else is getting out of control in their lives that motivates elderly people to postpone decisions and discussions that need to take place.

How issues are introduced to the senior will vary with the person involved. Kindness and a tactful approach are very important. At a minimum, the following topics should be discussed.

When the senior is no longer able to live independently (and how is this determined, and by whom), what is the next step? Is it independent living in a senior facility, assisted living, a nursing home or home care by non-family members, living with one of the relatives or some other care solution?
How will this option be financed? Will family members need to contribute? Who will contribute and how much? How long are the senior's assets expected to last to fund the care option selected?
Refer to my previous article that outlines issues to be discussed if the senior is to be cared for by a family member. Will this responsibility be rotated among the children? Who will be responsible for managing the assets and for paying the bills?
Set up a living trust with two family members as trustees. Family dynamics will determine who should be trustees. I strongly prefer that one of the trustees should not be the family member responsible for the care of the grantor of the trust.
Determine how and when money should be disbursed to pay the senior's bills.
Determine in advance how the caretaker family member will be compensated, both during the life of the senior and after the senior's death. Plan to apply for Medicaid if the assets are insufficient to support the senior until he or she dies. If Medicaid will be required, no transfers of assets can occur within 36 months of application.
In my opinion, gifts should not be made from the assets of the trust. This rule can be modified if the assets far exceed any reasonable expectation of the senior's lifetime expenses. An exception might be gifts to the caretaker to compensate them for their care. If Medicaid will be needed, gifts should not be made under any circumstances and the caretaker should be paid a salary, the amount to be determined in advance and adjusted periodically.

Once the senior is living with the family caretaker and/or the assets are being managed by a family member or outside advisor, oversight of the financial management of the senior's assets and verification of the expenses for the care of the senior are crucial. I recommend a quarterly review of all expenses by an outside accountant who is not associated with any family member. An annual review of the management of the assets of the trust should be done as well. Conservative management to preserve these assets is essential.

Both reports should be sent to all the relatives who are involved in decisions relating to the senior. Prompt and frequent communications are very important. If problems arise in the management and care of the senior, there should be mechanisms in place for changing the plan and appointing new custodians. This is especially important if and when the elderly individual is not competent to make such decisions on his or her own.

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