Financial expert, Andy Smith, Senior VP of Financial Planning at Financial Engines and host of the call-in radio program, Investing Sense, shares tips about how to protect your elderly parents’ estate and finances.
3 Critical Steps to Protect Your Elderly Parents’ Finances
Smith’s advice on caring for elderly parents’ finances is clear, concise and to the point: make sure your elderly parents always work with a fiduciary, build relationships with the professionals that your parents rely on and ensure that they have a will with up-to-date beneficiaries.
It is also important to understand that:
1. Build relationships with the professionals working with your parents.
According to Smith, “Building relationships with advisors and professionals while your parents are alive is extremely beneficial.” But you should try to go further than just knowing the contact information for your parent’s accountant, Certified Financial Planner professional and lawyer. Go to meetings with your parents to confirm everyone is on the same page.
“It ensures that the advisor fully understands your parents’ situation and family dynamics,” Smith points out, adding that developing a relationship with these professionals helps “children know that their parents’ and grandparents’ best interests are truly being kept at-heart.”
Another benefit to forming relationships with the professionals handling your parents’ estate and financial affairs is that it also helps to “reduce stress in a tragic or traumatic time,” Smith says. “Building this relationship over time with your parent’s lawyer or CFP practitioner is a great advantage to all.”
2. Ensure your elderly parents have a Power of Attorney and Will.
Smith says that “wills are like diet and exercise. People know they should do it but many don’t, even though people understand that there are long-term ramifications to not having a will.” In fact, according to a report, an astounding 66% of Americans don’t have wills. What will happen to the estates of these perpetual procrastinators after they pass away? If you don’t have a will, then your estate goes into probate, which is a “virtual ‘black hole’ that wastes time and money,” Smith warns. “It varies from state to state but probate can deal with huge tax bills.”
A Power of Attorney (POA), also known as a living will, is another consideration when it comes to estate planning. Should your elderly parents become ill or mentally incapacitated a POA would allow you (or someone else) to step in and care for their finances. In situations where an insurance policy hasn’t come through and children need to pay for funeral costs and other associated expenses, having a POA in place can ease the financial burden for the family once the estate has been settled. However, it’s wise to have an accessible liquid (cash) account that can be used immediately for emergency situations.
Smith also advises that you ensure your parents “keep beneficiaries updated, especially if either has any former spouses,” on wills, living wills, insurance policies and financial accounts like IRAs and 401Ks.
3. Know that not all financial professionals are created equal.
Many people assume that bankers, brokers and other types of financial professionals must put client interests first. This is often the case, but not always. According to Smith, there are important differences between a fiduciary-like a Certified Financial Planner (CFP) professional and a financial broker.
Most brokers are only bound by “suitability standards,” which means they need to make sure the advice they give is sound for the client at the time they give the advice. The suitability standard gives advisors a lot of leeways because “you can satisfy the suitability standard by recommending the least suitable of the suitable options,” says Barbara Roper, Director of Investor Protection for the Consumer Federation of America. The suitability standard does not require advisors to disclose, manage or minimize conflicts of interests. “So what that means is often the products that are best for the broker have higher costs for the investor,” she says.
On the other hand, fiduciaries are bound by a code of ethics called the fiduciary standard, which requires advisors to always put their clients’ best interests ahead of their own. For example, in a situation where two identical financial products are sold with different fees a fiduciary would have to recommend the product with the lower fee, even if it meant less commission. A broker or financial advisor who is not a fiduciary is not upheld to this same fiduciary standard.
“Make sure you and your elderly parents work with a fiduciary who is legally bound to always put client interests first in each action throughout the client’s life,” Smith advises.
Ask the professional if they are a fiduciary. Generally, CFP practitioners or registered investment advisors are fiduciaries and are bound to a code of ethics.
These three tips all share one common thread — they require some forethought. Once you’re in the middle of a crisis there is little you can do. Working with a fiduciary, building relationships with financial and legal professionals and ensuring a living will and will are in place and up-to-date are excellent ways to help protect your parent’s financial interests.
Note: A Place for Mom and Andy Smith are not attorneys and recommend that you always talk to your attorney or CPA to determine what is best for you in your unique situation.
Which steps have you taken to protect your elderly parents’ finances? Share your stories and suggestions with us in the comments below.
