Parent-child roles change with age, disability
(Editor’s Note: Jay R. Hunt, an American Express financial planner, provided the following information.) In the back of your mind, you always knew the day could come when the parent-child roles might be reversed, and you would need to become your parents’ caregiver. Although you may have been expecting it for a while and might have even prepared emotionally, if you are like most Americans, you are not ready for the financial challenges of caring for your aging parents.
According to Senior Link, an elder care management company, 25 percent of the U.S. work force is providing care to an aging relative. Furthermore, since the fastest growing segment of the population is people over age 85, the number of children providing support for aging parents is due to rise significantly.
The extraordinary costs for long-term needs of an aging parent can quickly deplete your finances. The average price of a long-term care facility can exceed $50,000 per year, and many Americans have the misconception that Medicare will cover these costs. Medicare may actually cover a short-term hospitalization for rehabilitation needs at a nursing home but not the full amount of costs you would likely incur. Additionally, Medicare currently does not cover the high cost of prescription drugs.
Below are a few tips to help you and your family plan ahead:
Open up a dialogue: Talking to your parents about their financial stability; medical, health and long-term care insurance; wills; living trusts; and power-of-attorney privileges is not an easy task. Starting this conversation early, before there is an immediate need for any of these items will allow more time for you and your parents to work toward mutually desired goals, to assess current budgets and to review finances together. Including siblings in these conversations also can be helpful. In some cases, parents feel they need to speak with someone outside of the family, and this wish should be respected. Help them find a trusted financial advisor or attorney who will be able to assist them with their finances and estate planning.
Understand the differences – Medicare, Medicaid and Medigap: There is a lot of confusion about Medicare, Medicaid and Medigap and what they cover, so take the time to learn about each. Following is a quick explanation. For more in-depth information, log on to www.medicare.gov:
Medicare: Medicare is a federal health insurance program for people 65 years of age or older. Medicare Part A covers hospitalization, current deductible of $840 and Medicare Part B covers treatment.
Medicaid: Medicaid is a joint federal and state program that helps cover medical costs for some people with low incomes and limited resources. Medicaid programs vary from state to state, but much of your health care costs will likely be covered if you qualify for both Medicare and Medicaid.
Medigap: Medigap is Medicare supplemental insurance, it is a health insurance policy sold by private companies to fill gaps in Medicare, such as the cost of prescription drugs.
Keep liquid emergency reserves: Another good rule of thumb, as in any comprehensive financial plan, is to have a cash reserve of at least three to six months’ worth of expenses in case of emergency. This will come in handy not only if you are laid off, but also if either Mom or Dad should need long-term care or assistance sooner than you expected. Save emergency reserves in accounts that are easily accessible, such as mutual funds, short-term bonds, CDs and money market accounts. This will allow you to draw upon these funds quickly and without a penalty for early withdrawal, as with IRAs and 401(k)s.
Paying for long-term care: When paying directly for your parents’ care, whether it is for qualified home care or at a qualified nursing home provider, you should be aware of important tax considerations.
Any payments exceeding $11,000 per year per person are subject to federal gift taxes. One way to avoid the federal gift taxes is to make the payments directly to a qualified medical service provider rather than to your parents. (Note: While the portion paid for medical services qualifies for the gift tax exclusion, any portion paid for non-medical services, such as food and lodging, may not qualify.)
This financial support also may contribute towards meeting IRS guidelines allowing adults to claim their parents as dependents. If they meet IRS guidelines they can file an additional personal exemption and reduce their adjusted gross income by $3,100, for 2004.
Use resources: Many useful resources and organizations are available to adults caring for their parents.
Eldercare.gov helps find local services for seniors, the National Alliance, for Caregiving (www.caregiving.org) is dedicated to providing support for family members and professional caregivers, and Children of Aging Parents (www.caps-4caregivers.org) is non-profit, charitable organization dedicated to assisting family caregivers.
Find the balance: While baby boomers are preparing for and taking care of their aging parents, and in many cases, simultaneously supporting and saving for their own children, they should not forget to plan and prepare for their own retirement needs and long-term financial goals. Which may include planning for long term care.
Seek help: This is a prime opportunity for people with aging parents to reflect on their personal economy and take time to calculate, plan and save for their own retirement goals. Seek the assistance of a qualified financial advisor who can help you create a comprehensive financial plan.
(This information is provided by American Express for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation.)