Your top (financial) priority is your nuclear family.
I cannot overemphasize this enough. Please do not jeopardize the financial health of your nuclear family (your spouse + kids) or else you'll be that parent asking your kids for money. It's cyclic, so breaking that cycle by prioritizing your family's financial health is the first step in ending that cycle. If you decide that you are willing and able to help those outside of your family, you have to get your affairs in order first. It's that airplane analogy of putting on your oxygen mask first.
If you and your spouse agree to help, set some guidelines and boundaries
One of the terms and conditions should be complete transparency into their finances. You should be able to see how they are spending their money . You should have access to their credit card statements, bank statements, and other financial documents. I strongly recommend not giving them cash. Pay for things directly. For example, pay the bank directly for their mortgage or have groceries delivered. Helping financially irresponsible parents can wreak havoc on a marriage. This is definitely a topic to discuss with your partner before getting engaged. Remember – you made a vow with your spouse, not your parents.
Do not enable financially ill-prepared parents
It is very important that you do NOT give them straight cash or enable any poor financial behavior. It is akin to giving cash to a drug addict–they will just buy more drugs. In the case of your parents, getting cash from you will only help them in the short term. Eventually, they will run out and make their next financial mistake. This is the concept of economic outpatient care discussed in the Millionaire Next Door. Basically, when people get money freely, they often do not spend it wisely. Ironically, it's the folks that don't get money so easily that often do better in life. This situation can easily be reversed–having adult children who are fiscally irresponsible. All the more reason to start their financial education early.
You may be able to get a tax break by supporting your parents
Your parent does not have to live with you to be claimed as your dependent. Generally, if your parent’s taxable income is less than his/her personal exemption ($4,050 in 2017) and you provide more than half of your parent’s support, you can claim your parent.
Other requirements are:
- Your parent must be a citizen of the U.S., Mexico, or Canada, and
- Your parent cannot file a joint income tax return unless s/he has no income
On the other hand, if your parent lives with you and you pay for adult day care services while you work, you may qualify for the Child and Dependent Care Credit of up to $600 per person. If your parent qualifies as your dependent, you can deduct expenses you pay for their medical expenses, also. But let’s not kid ourselves – if you are a doctor reading this article, it’s likely that you’re going to get very little deduction for your dependents or for any medical expenses you pay because you earn too much!
You may be legally required to support your parents
This may come as a surprise to you but there is something called Filial Law in 29 states. Traditionally not enforced, it may be on the rise due to rising costs of long term care. A landmark case in Pennsylvania in 2012 set the tone when a nursing home successfully sued a son for his mother's care after she fled the country. Some states impose criminal penalties, or as in the case above, financial penalties. All states require that the court find that the parent is indigent or unable to financially provide for his/her support. The two main defenses against filial law are your financial circumstances and if there is evidence of parental neglect, abuse, or abandonment. Different laws define these terms differently. This is a law that we should all keep our eye on as the cost of long term care rises. Unfortunately (fortunately?), most of my readers won't be considered financially incompetent. If there is any concern you may need to foot the bill for an aging parent, definitely let your financial adviser (FA) know so they can help build scenarios and a plan for this.
Your parent might be suffering from abuse, even though s/he’s perfectly healthy
According to Nolo.com, the fastest growing form of elder abuse is financial fraud. If the fact that your formerly financially-secure parent is running out of money seems “off”, it is possible that a scammer has become involved. Read this article. If you don’t live nearby, your parent’s FA might be the best source of information you can have. (Note – a FA or CPA must get permission to report to another family member if we believe the client is being scammed. Client information is confidential, even to family members. Some FAs include a clause in their agreements for clients to list who we can contact if we notice unusual withdrawals.) If you don’t see your parent(s) often, consider talking to them and their FA to see if you can get written permission to share information.
Final Thoughts on Helping Financially Ill-Prepared Parents
Lots of things to consider here! Again, this is a difficult and emotionally charged topic. Take your time and know the laws that may apply to you. You may want to consult with an attorney that specializes in elder law for help when dealing with financially ill-prepared parents. The following books may help:
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