Becoming Aging Parent’s Financial Power of Attorney
Maybe you're an only child, or the most trustworthy, or simply the closest, whatever the reason may be: you now have power of attorney over your aging parent(s). Congrats! You now have a limited window of time to act on the below time- and money-saving strategies, or lose these legacy optimizing opportunities forever.
Most families don't have estate documents. Of those that do, an even smaller portion actually uses them to proactively maximize the family's wealth. Welcome to Family Wealth Resources. I'm Chad Holmes and I specialize in financial planning for families with aging parents in their sunset years. My 2023 book, The Inheritance Playbook: Helping Your Parents Pass the Torch, Not the Tax, became a #1 best seller on Amazon and has helped thousands of readers. I've created this blog as a free resource for families who want to learn even more.
As I stated before, the strategies listed here have a deadline (insensitive pun): they MUST be completed before the sun sets on your parents. Once Mom and Dad are gone, the estate settling process begins and, as the saying goes, "you get what you get."
These proactive maneuvers reduce 1) the burden of going through probate with your parents' estates (a very public, very expensive, very time-consuming, very mandatory months-long process), and 2) the total tax bill between two generations.
Sound too good to be true? Think I'm about to sell you some annuity or life insurance policy? Nope. These are just smart strategies that advisors aren't discussing because they don't work with both generations (HUGE PROBLEM for another blog).
#1 Review ALL Estate Documents
Having a copy of the power of attorney document is simply not enough for you to truly be capable of adding value to the situation. You want to have copies of the will and trust as well. Now is the time to ask questions about things that don't make sense or seem unusual. When your parents are gone, anything that is unclear can become a nightmare.
Once you have ALL the documents, review them. Take notes in plain English. Also, now is the time to ask about their intentions behind assigning you power of attorney. What are they hoping you do? What powers do you truly have, both now and if they become incapacitated?
#2 Communicate
Communicate with your parents what they want. If any natural heir (child) has been excluded from any inheritance, communicate with your parents to learn why and ensure this is still accurate. This exclusion needs to be airtight because estranged children tend to come out of the woodwork when their inheritance is on the line. You'll want to be very confident with their wishes because things can get ugly quickly and you want to know you're doing the right thing (easier said than done).
With their permission, it might make sense to let the excluded heir know ahead of time so they're not planning on anything and hopefully reduce the likelihood of them suing the estate (which can apparently be done even with perfectly executed estate documents, although they're not likely to win).
#3 Map It Out
Make a map of the estate - who gets what? You need a complete list of all their assets and liabilities. What assets pass outside of probate and are the beneficiaries accurate (IRAs usually have their own beneficiary that supersedes the estate documents)? How do you access these assets? If an asset is listed and you don't know how to get it (location unknown or password protected), find out immediately.
#4 Current Cash Flow
Review their cash flow by gathering bank and credit card statements. Any ongoing bills need to be cancelled? Any items need to be marked as "cancel immediately" once they pass? Note that it may be helpful to keep paying their cell phone bill until the estate is settled (many online accounts send text messages to verify identity - if you are the executor/executrix, you represent their estate).
#5 Digital Access
Do they have email, cell phones, or social media accounts? How can you get into these? Password-protecting software that grants access to a named heir at death may be helpful if they're not willing to share access now.
#6 Tax Planning
This topic is more advanced, but there is a unique opportunity for major value add if done correctly. Consider your parents’ tax rate - is it higher or lower than their heirs? If lower, does it make sense to make annual advanced IRA distributions, or even partial Roth conversions now? In doing so, your parents will pay taxes on their IRA money at their lower rate, and the beneficiaries will receive a tax-free asset.
Separately, if they have an asset (home) that they purchased many years ago that has appreciated - it may not make sense for them to gift it to their heirs during life. Instead, let it go to their estate and receive what's called a step-up in basis so that the heirs can avoid capital gains taxes.
#7 Charitable Planning
Do your parents regularly gift to charities? If so, make sure they're gifting in a tax-efficient manner. By giving cash to a qualified charity, they are likely missing out on some great tax-saving opportunities. Using a donor-advised fund allows them to gift appreciated assets (stocks) and they can avoid paying capital gains taxes. Or maybe it makes sense for them to make gifts directly from their IRA? This approach allows them to satisfy their Required Minimum Distribution AND avoids ordinary income.
Separately, I suggest reviewing the will to learn if any gifts to charity are included in the estate documents. If so, consider the tax benefits of such an approach. If their estate is under the limit to be a taxable estate, their charitable gift does not create a tax benefit. If however, the language is changed so that YOU make the gift with your inheritance, now you can get a tax deduction!
#8 Family Gifting
Do your parents kindly include the grandchildren in their estate documents? An alternative to this gift could be making those gifts now (assuming there is plenty left over in their accounts to last them the rest of their life). By making gifts during their life, your parents get to see the smiles and hear the gratitude of a grateful generation. And they may even get to have influence over what they're hoping the grands do with the gift. Not to mention, this approach could be lowering the estate's value away from being taxable. Remember, no taxes are due on gifts until someone gifts more than their lifetime amount (currently more than $13M).
Some of these are straightforward. Some of these may have you second-guessing that stock-picking "advisor" you hired. If you think you could benefit from a free discovery meeting, click below to book a call and find out if I may be the right advisor for your family. Yes, I'm a CPA. Yes, I'm a CFP®. Yes, I'm a fiduciary. And as a bonus, I'm one of the very few flat fee advisors in this country so you know I'm never trying to sell you something.
