Multiple factors influence whether financial decisions are discussed or ignored. Much of this can be traced back to our parent’s generation. They were raised at a time when a lot of decisions were kept private and financial planning wasn’t what it is today. Yes, there were professionals in various fields of banking, law, accounting, and insurance but rarely, if ever, did these professionals work together. It was more common for each professional to “stay in their own lane” and stick with what they know. This has been compounded by the baggage our parents inherited concerning the methods for handling these financial decisions from their own parents. We are all a product of our parents and tend to have decisions on money, debt, and spending hard-wired into our brain from an early age. Living a long, productive life, through various events, has made our parents who they are and we can’t expect their views on money to change now. We can work with them and share ideas with the hope that they will consider them to ensure their legacy and that those values are passed to the next generation.
At some point our clients find themselves in various decision-making capacities for their adult parents. Often, these decisions involve some level of financial decision-making. Talking with your adult parents about money is not easy. Every family is dynamic, and some families are more open to the idea of having a discussion than others.
The following offers a list of planning points that may better prepare you to have a conversation with mom and dad about financial matters:
- Do mom or dad have a plan in place for their income and care needs? This is a great place to start a conversation. To whom do your parents turn to for financial advice and planning? Often an advisor or planner is a part of this equation; what exactly is this professional doing for mom and dad’s financial decisions today and tomorrow? What role do they play and how are recommendations communicated with adult children?
- Does an updated balance sheet exist? A balance sheet is the foundation of the above-mentioned plan. It will list all accounts and liabilities that mom and dad own, including current values. This includes valuables such as jewelry, a residence, and other collectables that are important to the family. Where do all these assets live? Asset location is important when creating a balance sheet, so you know what’s where. Adding the financial institution name and account number on the balance sheet will prevent duplicate reporting of accounts. It’s common for a safety deposit box to exist with important documents or collectables. As banks continue to consolidate, where exactly are these important documents now? Can a key to the box be easily located or would it require a significant investment of time?
- If a balance sheet exists, how accurate is the basis reporting on the various statements? Too often accounts are merged with other institutions over decades and basis information becomes lost in the transition. Today, basis tracking is required on all after tax accounts, however that was not always the case. Why is this important? Basis represents what was paid for the investment and typically is not taxed when returned. Gains are amounts above and beyond what was paid (basis) and will be subject to taxes when the accounts or investments are liquidated, depending on the account’s tax environment. When investment basis is not tracked properly it may be reported that everything is a gain which increases various taxes when liquidated for mom and dad’s income needs. You can avoid overpayment of taxes once you begin to understand basis.
- How does reviewing a current tax return identify taxable income and charitable giving? This will provide insight into the tax efficiency of mom and dad’s investment portfolio. It’s not uncommon for mom and dad to have held various investments in their accounts through decades of saving. These investments may be held outside of an IRA and generate taxes each year. The frequency of buying and selling investments to generate current income often increases short term capital gains taxes. This, in turn, can increases taxable income and move them into a higher tax bracket. Medicare premiums are determine based on taxable income so it is very beneficial to understand the relationship that current investments play in supporting income for mom and dad.
We’ve covered a number of planning points that may help start a conversation with your adult parents about their approach to financial decision-making. We’ll cover more next time, including unique planning opportunities in 2020.