Older clients often face the decision of whether they should continue living on their own. Conversely, a client may have an older relative who can no longer live alone. In these cases, creating a combined, multi-generational household may be the solution.
Forest Dutton, owner of Brightworks Financial Planning in Lexington, South Carolina, is in the midst of assisting a client with this scenario. The client has both parents living under her roof, Dutton said, and has a dual role of day-to-day caretaker and financial manager.
"The parents have little wealth, but the client is doing very well," he said. "However, they own their own business, so there is a strain on their ability to provide for both parents and sustain a viable business."
Clients who reach retirement age often take on caregiving responsibilities directly or plan for institutionalized care, said Dutton.
"I advise clients who are in the caretaker role to have open communication with the older relatives who are under their roof," she said.
While such an arrangement may be beneficial for both parties, there are legal and tax implications to consider, experts say, before committing to doing so.
Get it in Writing
If the older relative is not well off and the younger relative is having difficulty supporting them now with no plan, Dutton said it can be helpful to talk with an estate planner or elder law attorney about Medicaid planning and possible long-term care.
Evan H. Farr, a certified elder law attorney and retirement planner at Farr Law Firm in Fairfax, Virginia, said he deals with this issue every day.
One of the largest errors made by families, he said, is treating these arrangements in a casual manner rather than as formal agreements.
"If an elderly parent provides monetary contributions towards household expenses, then there should be a written agreement regarding the caregiver's duties and/or cost-sharing agreement," Farr said. "Without such documentation, Medicaid authorities may view monetary exchanges between a family member and the elderly parent as 'improper transfers' or 'gifts' during the Medicaid look-back period of five years."
Tax Implications
Darcy Gonsalves, senior wealth advisor and partner at Maia Wealth in Austin, Texas, said many of her clients fall within the "sandwich generation," caring for children while also supporting elderly parents.
One tax planning issue that often gets overlooked, Gonsalves said, is the ability to claim an aging parent as a dependent. This may also open the head of household tax filing status for single individuals, allowing for a larger standard deduction. Claiming a parent as a dependent also creates the possibility of additional tax credits, including the family tax credit and the dependent care credit.
"Specific qualifications apply, including an income threshold that the elderly parent must fall below," she said. "As long as the adult child provides more than 50% of the parent's financial support, for food, housing and medical bills, this might be a possibility. This opens up the ability to deduct medical expenses paid in support of the elderly parent."
Additionally, Gonsalves said, clients can take tax-free health savings account distributions to cover medical expenses for a dependent.
"This is one of many reasons we often advise our clients to max out their HSA if they have access to one," she said.
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