Legal, tax, and financial issues for helping parents.
As parents age, they may become unable or unwilling to handle their financial affairs or make certain personal decisions. In order for an adult child or a third party (e.g., accountant, attorney) to take over paying the bills, managing investments, and making other financial decisions, certain legal authorizations must be in place. Legal authorization is also necessary to discuss and decide upon healthcare matters. Several mechanisms for legal authorization follow, all of which vary from state to state.
Durable power of attorney. This is a document wherein the principal--the parent in this example--authorizes an agent--the child--to handle various financial matters. Because the power of attorney (POA) is durable, it continues to be effective after the parent becomes incapacitated. The POA will become effective once it is executed by the principal and the agent.
Those who are not ready to have their POAs come into effect immediately should consider a springing POA that becomes effective only upon the parent's incapacity. When executing the springing POA, the parent includes the name and contact information of a physician who will be charged with making the determination that the parent lacks capacity.
Living trust This is a revocable inter vivos (lifetime) trust that the parent can revise or revoke while legally able to do so. Once the parent becomes incapacitated, the trust becomes irrevocable and the person named as trustee takes over. The authority of the trustee is limited by the terms of the trust and state law. For example, a trust cannot give the trustee the authority to write or change the parent's will.
A living trust can be a dispositive document to supplement or supplant a will, thus avoiding probate, which can be costly and time consuming in some states. The possibility of avoiding probate (to the extent all of the grantor's assets have either been transferred to the trust or are subject to beneficiary designations), coupled with the ability to protect against detrimental decisions being made when the grantor becomes incapacitated, is a very attractive aspect of a revocable living trust.
Account authorization. In order to pay the parent's bills, it is helpful for the child to have signatory authority over the parent's bank account. This can be accomplished in several ways:
* Joint account. Adding the child's name to a bank account gives the child lull access to the funds. This arrangement is simple, but can be fraught with problems. The funds may become subject to the child's creditors. When the parent dies, the remaining funds will pass, by operation of law, to the named child, often to the displeasure of other siblings.
* Authorized signer. This merely gives the child the ability to access funds in an account, such as signing a check or withdrawing money from a savings account. The bank provides the necessary form.
* Authorization under legal documents. A living trust or power of attorney usually gives the agent the power to access the principal's bank account. It is advisable for the child to discuss this power with the bank; certain forms may be necessary.
Healthcare proxy. In order for the child to discuss the parent's medical issues with a physician or other healthcare provider and make healthcare decisions on the parent's behalf, the child must have authority under a healthcare proxy. The parent may also want to execute a living will, which describes the type of care he does or does not want under certain conditions. A living will, which may be combined with a healthcare proxy, acts as a guideline with respect to the parent's healthcare decisions.
The documents described above all require that the parent have the physical and mental legal capacity to give the child authorization. If the parent is unable to do so because of circumstances, then a guardianship or conservatorship may be necessary. The legal process for these can be costly and time-consuming, so planning ahead is the best course of action.
A child caring for an elderly parent must see that the parent's tax obligations are met; this may include paying property taxes and filing income tax returns. The child may also have to see that a fiduciary income tax return (Form 1041) is filed if a parent is the grantor of certain trusts.
Tax breaks for caregivers. At present, there is no deduction or credit under federal law specifically for caregivers. A caregiver may, however, be eligible for certain tax breaks related to providing assistance to a parent:
* Medical expense deduction. If the child provides more than half the parent's support (including the payment of a parent's medical expenses), the child can add any amounts paid for the parent when computing their own itemized medical deduction [Internal Revenue Code (IRC) section 213(a)]. This increased medical deduction is permitted, even though the child cannot claim the parent as a dependent, because the parent's gross income is over the exemption amount ($4,050 in 2016 and 2017). If the parent pays the child to provide long-term care services, however, the parent generally may not treat the costs as a deductible medical expense [IRC section 213(d)(11)], although there are certain exceptions.
* Dependency exemption. A child who is supporting a parent--in the child's home or elsewhere--may claim a dependency exemption for the parent (IRC section 152). The parent's gross income cannot exceed the exemption amount listed above. The parent's Social Security benefits count as gross income only to the extent they are includible in gross income.
* Head of household status. A child who is unmarried and supporting a parent may qualify for head of household filing status [IRC section 2(b)], The child must maintain a home for the parent by providing more than half of household costs, but it need not be the child's home; it may be the parent's home, an assisted living facility, or a nursing home. To claim head of household status, the child must be eligible for a dependency exemption for the parent (i.e., the parent's gross income may not exceed the exemption amount). The child cannot claim head of household status, however, if the dependency exemption is claimed through a multiple support agreement (e.g., three children together provide more than half the parent's support, with one designated to claim the dependency exemption), even if the child provides more than half of the household costs [IRC section 2(b)(3)].
* Dependent care credit. If a child pays for the care of a parent so that the child can work, the child may be eligible for a dependent care credit [IRC section 21]. The maximum amount of costs taken into account in figuring the credit for the care of a parent is $3,000. The maximum credit is $1,050, but scales down to a maximum of $600 for AGI over $43,000.
IRS POA. A living trust or durable power of attorney may give the child the authority to handle the parent's tax matters, but the IRS is not a party to the trust or POA. The IRS may accept a non-IRS power of attorney if it contains essentially the same information as the government's form.
Nonetheless, it is advisable for the parent to sign Form 2848, Power of Attorney and Declaration of Representative, to authorize the child to prepare and sign tax returns, negotiate refund checks, and perform other tax-related actions on behalf of the parent. This will avoid potential confusion and delay.
It is a considerable burden on a child to handle a parent's financial affairs. Paying bills and maintaining a residence requires diligence. It also requires some financial savvy to oversee investments.
Accessing retirement plans. Parents may have the funds needed for their support in their IRAs or retirement accounts. In making withdrawals for this purpose, taxes on distributions should be factored in. The child should also make sure to take annual required minimum distributions on the parent's behalf to avoid a tax penalty.
Living arrangements. Where will the parent live? In his own home? The child's home? An assisted living facility or nursing home? The decision obviously depends on the parent's wishes and physical/mental condition, as well as the child's abilities to accommodate the parent. If the parent wants to stay in his current residence but does not have the financial ability to continue ownership, a reverse mortgage may be a solution. A reverse mortgage unlocks the equity in the home without requiring monthly repayments. The impact of this arrangement should be fully understood by all.
Medicaid. Extensive custodial care for a parent that a child is unable to provide personally can become very costly. Unless the parent has substantial resources or long-term care insurance (which in many instances may not fully cover costs), it may be necessary to qualify for Medicaid. The rules with respect to Medicaid eligibility, including the five-year look-back period, are complicated, and in most cases the help of an elder law attorney is advisable. Moreover, advanced planning is crucial if the child wishes to protect and preserve the parent's assets.
Protecting against scams. The elderly are a prime target for scammers, who may pitch their scheme on the phone, by mail, or even through e-mail. Parents should be cautioned not to give out personal information, for example (e.g., birth date, Social Security number, credit card number). Depending on the situation, taking away a parent's credit cards or screening phone calls and mail may be called for.
Making a Difficult Time Easier
The ability of a child to care for an elderly parent depends on many factors, including the child's proximity, the child's financial resources, and the family dynamics. To facilitate a beneficial arrangement, communication between parent and child, as well as among other family members, is vital. The help of legal and financial experts is also essential, which is where CPA financial advisors can provide much-needed security.
--Have the parent and child discussed arrangements for care (financial matters, living arrangements)?
--Have the parent and child discussed concerns with other family members?
--Has the parent signed relevant documents (e.g., powers of attorney, living trusts, healthcare proxy)?
--Has the parent authorized the child to handle banking matters?
--Has the parent authorized the child to handle tax matters?
--Do the parent or child have the proper advisors (e.g., an elder law attorney, CPA, financial planner)?
Sidney Kess, JD, LLM, CPA, is of counsel to Kostelanetz & Fink and a senior consultant to Citrin Cooperman & Co., LLP. He is a member of the NYSSCPA Hall of Fame and was awarded the Society's Outstanding CPA in Education Award in May 2015. He is also a member of The CPA Journal Editorial Board. James R. Grimaldi, CPA, and James A.J. Revels, CPA, are partners at Citrin Cooperman. Elizabeth Forspan, JD, is the managing attorney of Ronald Fatoullah & Associates, New York, N. Y.
|Printer friendly Cite/link Email Feedback|
|Title Annotation:||COLUMNS: the financial advisor|
|Author:||Kess, Sidney; Grimaldi, James R.; Revels, James A.J.; Forspan, Elizabeth|
|Publication:||The CPA Journal|
|Date:||Feb 1, 2017|
|Previous Article:||Assisting individuals with analyzing an investment manager's proposal.|
|Next Article:||401(k) plan service provider selection and retention.|