Your retirement and your spouse’s retirement might not be the only ones you have to pay for. More than 20% of Americans age 40 to 59 are providing financial support to an aging parent, according to a recent Pew Research Center report. Many of these adult children will continue providing support well into their 60s, delaying or curtailing their own retirement plans.

If your parents need your financial help, don’t assume that handing over cash is the only solution. There often are wiser options (these strategies also can be used to help other older relatives, except as noted)…

  • Help the parent investigate programs that provide financial assistance to the elderly. It is important to investigate assistance programs before giving your parent significant cash gifts, which could make him/her ineligible for means-tested programs. The best-known of these is Medicaid, which covers long-term-care and medical costs for those who have very limited assets and income (www.Medicaid.gov).Another is the Aid and Attendance and Housebound Improved Pension benefit offered by the Department of Veterans Affairs, which provides about $2,000 per month to veterans (or about $1,000 per month to their surviving spouses) who served during wartime and now cannot afford caregiver assistance. Visit the VA’s Web site for eligibility requirements and other details (www.Benefits.va.gov/pension).The paperwork for benefits such as these can be challenging, so your parent might value your assistance. Or help your parent find a local nonprofit Council on Aging or Agency on Aging that can provide guidance on these and other assistance programs.
  • Offer your parent a private reverse mortgage. This is a loan from you to your parent that’s secured by an interest in the parent’s home. It can provide the parent with cash in a lump sum, monthly income or a line of credit. The home is sold upon the parent’s death to pay back the loan. This strategy allows you to provide your parent with needed cash without him having to give up the home…pay the potentially steep costs of a commercial reverse mortgage…or feel like a burden for taking your money. The parent must have significant equity in the home for this to be a viable option. The strategy even could turn out to be a reasonable investment for you—if the home gains significant value—compared with the low interest rates currently offered by other safe investments.Don’t do this informally—the reverse mortgage should be written up by an estate-planning attorney and recorded with the Registry of Deeds in your parent’s county to ensure that the funds from the sale of the home go back to you after the parent’s death, rather than to other creditors or heirs.
  • Pay your parent’s bills. Rather than hand cash to your parent, consider making payments directly to his service providers and creditors. This keeps you in control of how the money is spent, eliminating the risk that it might be squandered if your parent can no longer manage his finances effectively or spot con artists, which can happen with age. It also prevents your money from winding up in your parent’s estate upon his death, where it might have to pass through the court-supervised probate process or be divided among multiple heirs.Money paid directly to your parent’s medical providers does not count against your $14,000 annual gift tax exemption or your lifetime estate tax exemption. It even could be tax-deductible for you if you can claim your parent as a dependent and your total medical spending for the entire family, parent included, exceeds 10% of your adjusted gross income (7.5% if you or your spouse is age 65 or older).If you pay this parent’s nursing home or assisted-living-facility bills, the cost of care is a deductible medical expense, but the cost of room and board is not. Ask the facility to break down the bill.

    Helpful: For your parent to be your dependent, you generally must provide more than half of his support and the parent must not earn more than $3,900 in 2013 (excluding Social Security benefits but including investment income). If the parent lives in your home, you can include in your calculations the fair market value of food and housing that you provide. IRS rules limit you to claiming only certain relatives as dependents, but the list of who is allowed is lengthy and includes siblings, aunts and uncles, grandparents, great-grandparents, stepparents and others in addition to parents. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information, for additional details.

  • Lend money to your parent. A parent who is too proud to accept your money as a gift might be willing to accept it as a loan. As with a private reverse mortgage, this improves your odds of recovering any remaining funds after the parent dies—as a creditor, you’ll be paid back before any remaining assets are divided among the heirs. However, the loan must be properly documented for you to be treated as a creditor by the estate. Write down the loan terms, and have both parties sign this document.Warning: Consider charging your parent interest if the loan is larger than $14,000. If you don’t charge interest, the IRS will treat the loan as a gift, which could have tax consequences. Search online for “Applicable Federal Rates” to find the IRS’s minimum qualifying interest rates for loans. These minimum rates currently are quite low, and you even can forgive the parent’s interest payments if you like, essentially making a gift of the interest payments as they arise.
  • Have an “in-law apartment” added to your home. In-law apartments allow older parents to have some privacy and independence, as well as assistance from family just steps away.Having a parent live on your property also increases the odds that you will be able to claim him as a dependent—assuming that you pay for the housing and food, you can include the fair market value of room and board in your calculations. Alternately, if your parent has assets remaining, those could be transferred to you in the form of rent, increasing the odds that he later will qualify for means-tested programs such as Medicaid (see box on page six). When your parent passes away, the in-law apartment will already be part of your property, so it won’t face probate, state estate tax issues or disputes over ownership from other heirs.

AVOID TRIGGERING MEDICAID LIMITS

When helping a parent financially, be careful not to let his/her assets grow to the point that they could disqualify him from Medicaid health coverage in the future. Generally, a person with total “countable” assets (including cash and investments but typically not a home) of no more than $2,000 can qualify for Medicaid coverage, although the limit is somewhat higher in some states. In addition, the person’s spouse cannot have countable assets that exceed $115,920. (For more information, go to ElderLawAnswers.com.)

What to do…

If you put money into a trust for a parent and the parent, as the beneficiary, has access to the principal in the trust, that principal would count as part of total countable assets. Instead, you could set up an “income only” trust that would provide access to only the income, not the principal.

Reverse mortgages and loans (see the main article) also could push someone beyond the allowable asset limit. To avoid exceeding the limit, you could provide income for a parent through a “Medicaid annuity.” The principal transferred into the annuity would not count toward total countable assets, although the income would. These annuities have strict requirements and are available from only a few specialized insurers.

Go to LongTermCareLink.net for links to companies offering Medicaid annuities, among other resources (click “Links,” then “Insurance Products,” and search for Medicaid annuity options and information among the annuity providers listed).

Unlike trusts, Medicaid annuities provide a guaranteed amount of monthly income. They are likely to provide the parent with more income each month than a trust could, assuming that a similar amount of cash is placed in each. On the downside, the parent’s heirs will not receive any remaining principal upon the parent’s death.