Some Boomers Make Big Mistakes Managing Their Parents Money

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As members of the senior market age, they often look to their baby boomer children for help with their finances. This is a time when seniors need their retirement accounts managed, long term care issues addressed, andfor those with larger estateslife insurance and estate planning strategies monitored.

But boomers, in their good faith attempt to do things themselves, are making some big mistakes, according to planners who are working in this market.

Often, the steps boomers take to gain control of their parents assets are “really erroneous,” says Kendall Blunt, regional director for MassMutual out of Portland, Ore.

“You see mistakes every time you turn the corner,” adds Dennis Cobb, a financial planner with Waddell and Reed in Dudley, Mass.

Cobb explains that hes seen many instances where boomers have taken their parents investment accounts and placed them in a low interest checking or savings account. “They take away the growth of their money because theyre trying to protect their inheritance,” he continues.

Usually, boomers will move money into an account with their name on it; this is also an attempt to help their parents qualify for Medicaid if the need for long term care should arise, Cobb explains.

“They want the money out of their parents name,” he says.

But this type of strategy can cause a number of other problems for boomers, adds Blunt. A common strategy that boomers use is to simply add their name to their parents investment accounts. But, Blunt adds, “technically thats a gift to the children and can create some negative tax consequences.”

Rather then move all the assets into their name, Blunt recommends that boomers keep highly appreciated assets in their parents name. The result is a better step up in basis at the time of their parents death, he says.

Otherwise, he continues, if the boomers name is on the account, only half will qualify for the step up in basis. “Thats going to expose a lot more of that account to potential capital gains to the children.”

As an alternative to re-titling assets in their name, boomers should consider working with an attorney to draft a durable power of attorney document. This would effectively give the boomer control to make financial decisions for the benefit of his or her parents.

But even this strategy has its potential pitfalls, depending on how the document is drafted, Blunt explains. “Ive seen circumstances where life insurance programs were set up, and the power of attorney document did not allow gifts to be made,” he says.

This would have a huge impact on life insurance programs that were designed to be funded with annual gifts from the parents. The document may restrict the children from making annual exclusion gifts to themselves or to an irrevocable life insurance trust that names them as beneficiariesresulting in an insurance policy that requires premiums that cannot be paid by gifts from the parents.

“Im sure at the time of the drafting the attorney assumed that would solve the problem of the kids potentially abusing the ability to gift to themselves,” he says.

Blunt recommends boomers seek legal counsel before making any planning decisions that could result in this type of bad situation.

“Its rarely a mistake to step up and pay for competent counsel, but many people are very averse to writing checks to attorneys,” he says.

However, it may be much more costly for boomers who fail to pay attention to these potential issues than any legal fees they may have incurred while planning to avoid them, Blunt says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 20, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.