February 23, 2022 – Life events are occurrences experienced during a lifetime. For us all, it always starts with our birth and ends with our death. There are countless events in between, many of which we celebrate, but some we do not look forward to. Yet in all cases, these events can be planned for, a preparation of sorts, to enhance the celebrations and minimize the impact of loss. Such is the case with the inevitable aging process and deteriorating health sometimes referred to as the “Sunset Stage” of life. Clients often wonder “what should we be thinking of if my parents or loved ones are facing this life event?”
There is always a way to be prepared for life events. Here are some ways to ease the transition during the “Sunset Stage,” and financial strategies that will preserve remaining assets.
Here are three key “structural” considerations to keep in mind:
- An Estate Plan is In Place: This plan is critical for the administration of one’s health and finances, both while alive and upon death. The plan should be supported by up-to-date estate documents including a will, trusts, powers of attorney, health care proxy, and advanced medical directives.
- You Can Access Important Documents: You will need access to tax returns, insurance policies, estate documents, deeds, and mortgages. These documents could be filed as paper or managed online. It will also be crucial that you are able to find websites and passwords to obtain access to any information maintained online.
- Protect the Memories: A person’s lifetime of memories, either their own or those passed on to them from prior generations, may be the most valuable asset that needs protection. First, document your memories. Share them with others and ask for their thoughts and remembrances. Spend quality time with those in the Sunset Stage, inquiring about their memories, especially those that brought joy to the family. Review/relive the experiences reflected in old photos, movies, or even a diary/journal if maintained. Consider a formal interview of your loved one which will provide an unbelievable video and audio keepsake. There are services that will help you organize and execute this undertaking.
Here are three key “financial” strategies to keep in mind:
- Reduce Capital Gains Tax: The IRS allows the recipient of appreciated assets in the hand of a decedent to obtain a “step-up” basis which means that the cost basis of assets received is the value at the date of death. That “step-up” significantly reduces the probability of a beneficiary paying any capital gains tax on the sale of inherited assets despite the appreciation experienced. It would be advised to retain (i.e., not sell) appreciated assets prior to death to preserve the “step-up” basis. Additionally, if one spouse is deemed to have a short longevity profile, consideration should be given to holding appreciated assets in the name of that spouse rather than jointly taking full advantage of a stepped-up basis at the first death.
- Upstream Gifting: In certain circumstances, children of “Sunset Stage” parents who have highly appreciated assets could begin a program of tax-aware gifting to their parents. The strategy contemplates an initial gift of assets that retain the cost basis of the donor. Upon death, those assets are transferred back to the initial donor along with a stepped-up basis and positioned for sale with the avoidance of capital gains.
- Reverse Mortgage: A financial agreement in which you relinquish the equity in your home in exchange for regular payments, typically to supplement retirement income. This program is meant to provide solutions for senior citizens who would benefit from additional cash flow to maintain their standard of living.
Without a doubt, the most effective way to ensure an effective transition through the “Sunset Stage” is to maintain an open line of communication with all interested parties. Unfortunately, money can be viewed as a “taboo” topic. Avoiding a current discussion precludes a level of clarity and understanding which would often prove to be invaluable to the extended family.