net worth
When Aging Parents Need Money
You can help alleviate your parents' financial woes without jeopardizing your own retirement security.

Question: What happens after you've spent years dreaming and planning for a comfortable financial future and you get that phone call from your aging parents who say that they've outlived their money? This month, we'll try to provide solutions to this alarming and growing problem.

Like many baby boomers saving like mad toward retirement, you may discover that saving for your own retirement isn't enough. Your aging parents, because of financial reversals, debilitating illnesses, or just poor planning, could leave their money problems on your doorstep. You must recognize how difficult it must be for a parent to address this sort of problem with an adult child, but you must also understand how to creatively solve the problem while not jeopardizing your own retirement security.

Here are some constructive ways to help ease the situation:

Be Creative

Purchase your parents' home. If your parents have a home, chances are it's appreciated substantially over the years. You may be able to unlock that equity by purchasing the family home and renting it back to them at a low but fair market rental rate. With today's low interest rates, you can either borrow the money or issue your parents an installment note (secured by a mortgage or deed of trust) so that your parents can receive regular monthly "mortgage" payments.

You've now acquired an asset that should maintain (or increase) in value, and your parents can use the cash to pay living expenses and medical bills, and generally provide for a better quality of life. And an installment sale will preserve your parents' dignity because the mortgage payments are assets of the parents, not a handout. After all, a financially challenged parent needs cash flow, not net worth. At your stage in life, you probably need net worth more than you need cash flow. This could be a win-win strategy for all of you.

Deduct their medical bills on your taxes. A parent's most expensive illness will probably be his or her last. If you are providing more than one-half of a parent's support, you may deduct medical expenses you paid on his or her behalf, even if you don't claim your parent as a dependent.

Take the dependency exemption for a parent. You may be eligible to claim the dependency exemption for a parent on your individual income tax return, which results in a $3,050 deduction from taxable income.

If your parent has income (including social security benefits) of less than $3,050 and you provide over one-half of his or her total support, you're entitled to claim the dependency exemption, even if your parent doesn't live with you.

Take care of their financial and legal paperwork. While you may be financially responsible for an aging parent, in the eyes of the law, they're responsible for themselves. Therefore, discuss with your parents the need for a durable power of attorney that will allow you to represent them in financial matters should they become unable to manage their affairs.

Likewise, you should discuss their giving you a medical power of attorney (also called a healthcare proxy) to allow you to make decisions about all sorts of healthcare issues that could arise while they're alive but not able to make their own medical decisions.

Have a Long-Term Plan

In the final analysis, this isn't a very pleasant topic to discuss with a needy parent. However, it pays to talk. If your family discusses these issues long enough in advance, you can develop long-term solutions that will take care of an aging parent's needs while not jeopardizing your own retirement.

Richard J. Alphonso, JD, CPA/PFS, M.S.T., is president, and Anita S. Frank, CPA, is tax manager at The Financial Advisory Group, Inc., in Houston. The Financial Advisory Group {(713) 627-7660} provides personalized, fee-only financial planning, investment management and business consulting services.