Markets & Finance

Getting Your Parents' Finances in Order


The upcoming Thanksgiving holiday can be more than a chance for families to get together over turkey and mountains of mashed potatoes. It's also a reminder that while Mom and Dad may still be very much a part of the celebration, they might also be worrying about their nest egg. With the holidays approaching, the best gift of all for your parents might be to help them achieve peace of mind by making sure their finances are in order.

Parents of all ages have a host of complex financial needs, from managing their retirement accounts to estate planning. Such sensitive subjects shouldn't be broached with a mouthful of stuffing. Try setting aside some time on one of the other 364 days of the year to make sure these needs are all met. "Most parents want the gift of time, so planning the time to help them is the real value and what they'll appreciate most," says Patricia Konetzny, a financial planner in Maynard, Mass.

It's a two-way street. Being financially secure also happens to be one of the best gifts parents can bestow upon their children, financial planners say. "If we give them everything they want but become a burden in the future, we haven't really given them anything," says Linda Leitz, owner of Colorado Springs-based Pinnacle Financial Concepts and author of The Ultimate Parenting Map to Money Smart Kids.

Here's what parents should have in place to simplify their financial lives for themselves and their loved ones.

1. Prepare for the worst.

Wills may never be a pleasant subject, but they are a must-have for all adults. Find an attorney to put together a will as well as trust and power-of-attorney documents for your loved ones. Without a will, assets get distributed based on state law rather than according to wishes of the deceased.

If your parents already have wills and other estate-related documents, be sure you and your folks know where they're located. Also ask your parents when they last had their wills reviewed. If it has been more than three to five years or there has been a major change in their financial situation, it's time for a check-up, says Susan Elser, a fee-only financial planner in Indianapolis.

In addition to the typical estate documents, your parents should also have a letter of intent. Courts may look to such letters for guidance, though they typically aren’t legally binding. If your parents don't have a letter of intent, help them make one. It should use simple, everyday language that will make it it easier to have their wishes carried out in case the formal documents are unclear. "Sometimes an individual's desires are muddled in the legalese," points out Adam Leavitt, president of Red Rock Financial Advisory in Tulsa.

2. Name names.

What's in a name? Quite a lot, it turns out. It's a good idea to double-check who is designated as beneficiary on retirement accounts and insurance policies. "Qualified retirement account beneficiary designations cannot be overridden by a will," says Don Martin, owner and founder of Los Altos (Calif.)-based Mayflower Capital. "So if the owner forgot to change the name of the beneficiary to the desired person, then the funds will go to an unintended beneficiary,"

Such a review is particularly important for parents who have divorced and remarried, Martin says. And if someone who was widowed forgets to update beneficiary designations, then their previously deceased spouse's estate would inherit the retirement account. That adds an extra layer of taxes, fees, and hassles.

Trouble can occur even when both parents are still alive and have remained married. Parents who name as a beneficiary in their wills a trust for a child must also change the beneficiary forms for their retirement accounts and life insurance policies. "Otherwise, upon their deaths, the trust won't get funded," says Elaine Scoggins, president of Tampa-based Scoggins Financial.

3. Collect Records.

Many people can barely keep their own files straight, so imagine the challenge of sifting through someone else's during a time of crisis. "Frankly, the administrative specifics after death are more time-consuming and emotionally draining than the 'official' topics," says Mary Clair Allvine, a financial planner with Chicago-based Brownson, Rehmus & Foxworth and author of The Family CFO.

Ask your parents to provide a list of their investment, bank, and insurance accounts, along with contact information and account numbers. Also find out where they keep important documents and assets. Dave Ragan, a financial planner at Denton (Tex.) -based Grunden Financial Advisory, recommends every family have an "I Love You Book." This binder or notebook would include such information as all bank accounts, credit cards, liabilities, assets, and doctors.

What about parents' safe deposit boxes? Parents should "consider giving an adult son or daughter a second key and access privileges to the box," says Mathew Gelfand, president of Bethesda (Md.)-based MDG Financial Advisors. He cautions that this may require a visit to the bank. Moreover, many financial planners suggest moving securities out of safe deposit boxes and into brokerage accounts.

The Internet era has brought with it a proliferation of passwords. These, too, should be kept in a safe place where children can find them if necessary. "Since many people have a variety of online accounts, access to passwords may become critical in a time of emergency," says Penny Marlin, president of Delray (Fla.)-based Marlin Financial.

4. Ensure they've got the right insurance.

Insurance needs differ from person to person, but it's worth a moment to check whether your parents have the policies they need. Parents who qualify should sign up for the new Medicaid prescription drug benefit plan (see BW Online, 05/05/06, "New Medicaid Complications"). Some planners also recommend picking up supplemental health-care insurance.

Long-term care insurance (LTC) may be right for many parents. "Parents over 60 should certainly consider themselves candidates for good LTC coverage," says Wexford (Pa.) financial planner Robert Choiniere. He suggests children think about funding the LTC, because it can help prevent the erosion of the estate they will presumably inherit.

As for homeowner's insurance, make sure the properties your parents think are covered actually are. Mark Gleason, a financial planner with Burbank (Calif.)-based Wescap Management Group, recalls a recent case of fire on a property with two dwellings. "It turned out the insurance only covered the one dwelling that didn't have the fire," he says. Planners also recommend owning an umbrella policy, which offers extra liability insurance in case of auto accidents or lawsuits.

Then there's life insurance. Older parents who don't need their policies should either give them to their children or sell them to a third party, Gleason says. Both options are typically better than simply surrendering the policy and cashing it in, which given the lowest expected value.

5. Check their retirement accounts.

After talking about wills and beneficiaries, asking your parents about IRAs and such should be a snap. Parents over age 70 need to be making their required distributions from IRAs and pension plans. If they're still working, they should fully fund their 401(k) plans up to the level of the employer match. Many planners also recommend Roth IRAs for those who qualify.

Just as with insurance, investment needs will vary. "The main question is: Do they need income from their investments to live on?" asks Argyle (N.Y.)-based financial planner Marjorie Randles. If so, they need to invest in income-producing securities. She uses iShares exchange-traded funds, like the iShares Dividend Index Fund (DVY), which has a relatively low 0.4% expense ratio.

Still, even older parents should be sure their portfolios are not too conservative. As with any investor, their assets should be diversified across a number of different asset classes. "They may still live a very long time, and growth above the inflation rate should be a part of the portfolio objectives," says Gleason.

Many planners also suggest keeping a cash account for emergency expenses. It should contain at least three months of living expenses, they say. Depending on the economic environment, it might take too long to sell off real estate or other assets, so ready cash can be used to help pay debts, taxes, or deal with any other unexpected costs.

Talking with parents about important financial matters can be easy to put off. But get over your discomfort and sit down with them. You'll be thankful you did—and they will, too.


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