Financial DOs and DON’Ts (Part 2 of a 2 Part Series)
/To build on last quarter’s Financials DOs when helping our aging parents with their finances, this article will cover Financial DON’Ts. All too often when we start thinking about and planning for the time when our elderly parents will
need our help in managing their financial matters, several common ideas bubble to the surface. At first glance, it seems these changes will make things easier for the child helping the parent or make for a smooth transition after our parent’s passing. However, some of the most common ideas can end up having costly consequences in the future.
One of the most common DON’Ts is don’t change the title of any asset (house, car, bank account, etc.) without consulting your parents’ estate planning attorney first. Doing so could very well open a can of worms that can have a lot of negative consequences. This means don’t add a child to a bank account or title the house in the kids’ names without talking to the attorney to make sure everyone understands the future impact. For instance, many people want to put the house
in the children’s names thinking it will make things easier at their passing. However, when you add someone to the title of an asset, you are making a gift to that person. There likely won’t be any taxes due but gifting the house to the children usually requires the parent to file a gift tax return to report the amount of the gift over the annual gift tax exclusion ($16,000 in 2022).
In addition, cost basis follows a gift. The cost basis in your parents’ home or investment account is what they paid for the asset. If they have significant appreciation in the asset and gift it to the children, they have passed a future tax liability to the kids. However, if they were to keep ownership of the asset until death, the asset can get a step up in cost basis and the kids can inherit the asset with little, if any, tax liability.
Next on the DON’T list is don’t gift parents’ money, or allow them to gift, without consulting the parents’ estate planning attorney and financial planner. Sometimes gifting makes sense, but other times it can be detrimental to the parents’ long term financial security. It’s important to know the financial plan for their future before monetary gifts are made.
Another DON’T: Don’t act on behalf of your parents without the proper authority. Proper authority is given through a power of attorney document, so make sure your parents each have one. Without this document, children may find themselves going to court to have a parent deemed incapacitated and the court assigning a guardian. A power of attorney document can avoid this.
The common theme in all of these DON’Ts is don’t neglect to get professional help when determining changes that can benefit your parents and the children responsible for helping them.
- Juli Erhart-Graves, CFP®, Worley Erhart-Graves Financial Advisors
