This year, many families will sit down to the holiday table with an unexpected guest: the issue of aging.
Adult children and their parents may find the holidays a good time to discuss the what-ifs that lie ahead. That’s particularly true now, since recent changes in the tax law can have a financial impact on family decisions, ranging from estate planning and gift strategies to income tax planning and even certain cash management decisions.
Such conversations can help set expectations so that there aren’t any unpleasant surprises in the future. Whether it is the parents who plan to initiate the conversation or the kids who want the talk, any decisions are ultimately up to the parent. If there aren’t any children, the conversation may need to extend to nieces, nephews, trusted friends and neighbors.
This isn’t, however, a discussion to be started without some initial preparation. A little research will go a long way to make the conversation more productive. Different tasks require different skill sets. Geographical location may be important and good communication skills are critical. So start by sorting the responsibilities, which include holding the durable power of attorney, serving as health-care agent and taking on the duties of executor or trustee.
A durable power of attorney provides protection should you become unable to manage personal affairs and finances. The individual who holds this power should be both loyal and financially responsible. That may or may not be a family member. Not everyone wants this job, so make sure you check with the one you choose and discuss your wishes. He or she needs to understand what’s expected, whether it is to simply pay the bills or tackle more complex tasks such as continuation of a gifting plan?
The health-care agent role requires a different set of skills. This person should understand how to navigate the health-care system, know your preferences for care and end of life treatment, and be able to advocate for those preferences. Good communication skills are essential so that family members and other key people will be kept informed. Geography may be helpful, but shouldn’t be a determining factor. A child who lives far away but will respect the parent’s end-of-life preferences can still be phoned by treating physician and could be a better choice than the child who lives within 5 miles but disagrees with your choices due to their own beliefs.
A frank discussion of parental assets may make it easier for the kids to understand your overall planning objectives and decision-making process. That in turn will make it easier for whoever you choose as executor of your will. It is common for siblings to develop resentments over the division of assets if they don’t understand their parents’ intent. And sometimes children discover that their expectations were widely unrealistic once their parents are gone.
An understanding of parental assets can also help with long and short term planning, ranging from tax strategies and charitable giving to options in the event of a long-term care illness.
The Tax Cut and Jobs Act, for example, may require some changes in tax planning. With the increased standard deduction ($24,000 for a married couple filing a joint return, $18,000 for head of household filers and $12,000 for individual filers) many people will no longer itemize deductions. Some will find savings in using the standard deduction one year and then bundling deductions (such as those for medical and charitable) the following year.
Your gifting strategies may also need a tune up. With the increased federal estate tax exemption of $11,180,000, there may be no tax benefit for a charitable deduction at death, so the income tax benefit during lifetime may produce more savings. At the same time, the increased estate tax exemption of $11,180,000 (and twice that for married couples) may reduce the need to move money out of your estate. As such, it may make sense to have beneficiaries inherit highly appreciated assets at your death and receive a step up in basis to fair market value. This could result in significant capital-gains tax savings. But charities don’t need the step up in basis, since they don’t pay capital gains taxes.