Tough Love: Children Protecting An Ailing Parent

Anyone with children understands the phrase “tough love”. Doing what is in the best interest of our children isn’t always something they agree with or even understand. But love really becomes tough when the parent/child roles are reversed as our parents become elderly. Knowing how to respect their freedom, maintain their dignity and yet protect them from themselves is a tricky balancing act at best. At worst, it can become a major confrontation, involving heated arguments, broken relationships and legal action. Such is the situation facing one of our readers. She writes: “My mother is 76 and was diagnosed with Dementia a couple of years ago after the death of my father. We had assumed that her strange behavior while he was dying was from stress, when it continued after his death we had her tested. Neurology revealed heaps of mini strokes and perhaps water on the brain.

“Recently a woman who has previously milked large sums of money and a vehicle from my parents reappeared on the scene. My mother had had an aversion to this woman, and the entire family was very concerned with the renewal of acquaintance…my mother having now forgotten the things that had previously upset her. We have tolerated her occasional visits, because my mother was so angry when we suggested the woman might not be good company…but something happened this week that has badly upset us.”

Our reader goes on to describe in detail how this dubious woman, who happens to be a long-haul truck-driver, talked her elderly mother into riding along on a two-week road trip, sleeping in her 18-wheeler. The woman lied to the family about where they were going, and even bragged that the mother was thinking about changing her will. With the mother’s numerous health problems, our reader and her family were obviously concerned about their mother’s safety, especially when Mom called home from a state hundreds of miles from where they were supposed to be going.

The situation has gone from bad to worse, as this woman has managed to turn the mother against her children. These are responsible children who used to have a wonderful relationship with their mother. She relied on them for advice on everything. They even have power of attorney for assets and medical decisions. But these documents don’t give them the ability to protect their mother from herself or those wishing to take advantage of her.

And that’s the rub, not just for our reader, but for every adult child of an elderly, declining parent. Even if they have a living trust, even if they have given you powers of attorney for assets and medical decisions, even if your name is on their checking account, you still can’t protect Mom or Dad from making terrible decisions.

Yes, you want them to remain independent and you want to honor their wishes. Parents should be able to make their own decisions for as long as possible, even decisions you might not agree with. But there’s a difference between respecting their dignity and allowing them to become victims of their failing competence.

The problem is knowing how to handle this “in-between” period between competence and total incompetence. Our reader makes this point vividly: “(Mom) is vulnerable. We want to protect her, but it appears we can’t until she is drooling in a wheelchair.”

So what is our reader to do? The bottom line is that the children don’t have the legal authority needed to adequately protect their mother. They need to be legally responsible for her ‘person’. They need to become her court appointed conservator.

The thought of getting attorneys and the courts involved may seem harsh. But it may be necessary. During the process, there is an attorney appointed to represent the mother. She is given psychological and physical exams designed to determine her competance. Someone else is only granted conservatorship if the court agrees that she isn’t able to adequately care for herself. This process protects the rights of the parent even though the parent may not be in a position to protect themselves.

Dealing with failing parents is very difficult to say the least. In certain situations, though, it takes tough love to do what is in their best interest, even if they don’t agree with you or understand.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

Readers Question: A Trust For Grandchildren

Imagine what it would be like if each one of your grandchildren earned a scholarship to pay their college costs. Wouldn’t that be great? In a sense they can. Not only that, they could receive grants to help them purchase their first home, start a business and even provide additional retirement funds! Read on to find out how. You don’t have to rely on a government program or the generosity of a school to provide a college ‘scholarship’ for your children, great-grandchildren and even your great-great-grandchildren. You don’t have to rely on special grants to help them buy a home or start a business. And their potential retirement doesn’t have to depend on the largesse of increasingly stingy employers.

No. You can award those ‘scholarships’ and ‘grants’. You can take steps now that may provide such funding for generations. Imagine, your great-grandchildren growing up knowing that if they work hard and get good grades that you will pay some or all of their college education! Talk about a legacy.

It’s not as hard as you think. Recently, I received a question from a reader who wanted to set up a trust that would provide retirement assistance to future branches in his family tree.

There are several advantages to setting up a multi-generational trust. The money can pass from generation to generation without any estate tax. The money is protected from divorce, lawsuits and the claims of creditors. And you get to set the terms of how the money is administered and distributed. That means the trust can provide incentives related to things you find important.

For example, there can be educational assistance based on grades. There can be financial assistance for starting a business, for doing charitable work or for saving for retirement. The trust can own homes—even vacation homes. The possibilities are endless. You determine what they are and how they will function.

An irrevocable trust will typically be used in these situations. Once you set it up, the terms of the trust can’t be changed. So it’s important that you thoroughly think it through before signing it. Just because the terms can’t be changed doesn’t mean these trusts can’t be flexible. You can build in flexibility.

For instance, the terms can state that the trustees are able to determine the conditions upon which educational funding will be provided based on the current tax, legal and economic environment. They can take into account the financial wherewithal of the individual and their parents. You don’t have to say, ‘If this, then that’. Instead you can set guidelines for the trustees to follow. Of course, you also specify how trustees are determined and under what circumstances they can be changed. Since the trust is irrevocable, the more flexibility you can leave the trustees, the better.

Once the trust document is prepared and signed, it’s time to move money into it. Since the trust is seen as a separate legal entity, money and/or assets are gifted to it. Check with state laws to see if gifts above a certain amount are subject to tax. At the Federal level, you can gift $12,000 a year per person without tax consequences. There is also a $1 million Federal lifetime exemption, so $1 million if you’re single, or $2 million if you’re married, can be transferred into the trust all at once without incurring Federal Gift Tax.

There are many ways that trust money can be invested. It can own real estate, insurance, annuities, stocks, bonds and mutual funds. In fact, what it can own is only limited by what the person setting up the trust decides.

Many suggest annuity or other tax-deferred products so the trust doesn’t have to pay taxes on the income each year. I don’t agree. Using annuities only pushes the taxes down the road, causing them to snowball. They are still subject to tax when withdrawn and will be taxed at ordinary income tax rates.

Stocks, bonds and real estate can be managed in such a way that they generate dividends and capital gains. These are taxed at a much lower rate and provide greater control and flexibility. Life insurance on those setting up the trust and/or other family members can be used to continue to replenish the trust from one generation to the next.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

Readers Questions Term Versus Universal Life

Call me old-fashioned, but I believe as a husband and father it’s my responsibility to provide for my wife and children should I die prematurely. Life insurance is the best way to meet this need, but many people get confused when buying life insurance. A recent email from a reader will help clear up this confusion. Richard is 26 years old and in his email he tells me, “I was getting ready to pull the trigger on a $200,000 universal life policy for myself. I have 2 children and I think not preparing for a pre-mature death is irresponsible planning. I just read your article and I have a few questions for you.” He goes on to provide the details of the cost between term insurance and the cost of a universal life policy.

Based on his calculations, it will actually cost more to buy term insurance over the next 60 years than buying universal life. He wonders why the universal life policy wouldn’t be a more logical choice. To Richard’s credit, he has taken the time to research this decision. But there are a few issues that he is missing. Here’s my response.

“There are several things for you to keep in mind as you make your decision.

“First, why are you getting life insurance? If it's for income replacement (pre-mature death) then you need to take a look at the amount. $200,000 wouldn't be enough to cover the costs of housing, education, etc. for your children. You may find that $1,000,000 is more realistic based on your earnings, etc. Consider 10-15 times your salary.

“If your wife is the primary caregiver then you should consider picking up some insurance on her to help cover child care costs in the event of her death, perhaps $200,000 worth.

“As for you, the difference in cost between term and universal life on a $200,000 policy for a 26 year old isn’t that great. When the death benefit is $1,000,000, the difference in premium can be significant. If it’s a matter of cost, I would suggest using the difference in cost on the $200,000 policy to buy more term death benefit.”

Richard further discussed the difference in cost assuming he lived to age 76. Based on the minimum guaranteed return with the universal policy compared to the cost of the term insurance over the same time period, it was clear to him that the universal was a better deal. Why shouldn’t he do it?

My response continued, “Second, if you want to compare apples to apples then you have to take into account investing that difference in premiums over that same time period. Otherwise you are assuming growth in the universal policy scenario but not in the term scenario. When you do, the numbers look entirely different.” In Richard’s example, the $70 a month he’d save with the term policy may not seem like much. But over 50 years, assuming an annual interest rate of 3%, it amounts to over $90,000. That’s much more than the cash value of the universal life policy after 50 years. Plus, he has complete control over that money.

I continued, “Third, it depends on whether you anticipate keeping the policy till age 100. This comes back to the point about life insurance being primarily used for income replacement. As people near retirement and their children are grown and their wealth has increased, they no longer need life insurance for that purpose.

“Fourth, you should take into account inflation. $200,000 won't buy much in another 40 years. And since the underlying cost of insurance in the universal policy increases just like term, the growth of the cash value will slow considerably.

“Lastly, the only value associated with the cash value in a universal life policy is that you can use it. The problem is that when you borrow it from the insurance company (it’s really not your money), it will dramatically affect the policy’s performance. The ‘target’ premium may no longer be enough to keep the policy in-force.

“By the way, Richard, I don’t sell either universal or term life insurance so I don’t have any financial incentive to recommend one over the other. All things considered, I still prefer term life insurance over universal. It’s what I use. Thanks for the question!”

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

How Political Risks Affect Your Investments

Recent articles have discussed the importance of investing overseas. Political risk applies to both developed and undeveloped countries. It is important to consider the political risk associated with those investments and the effect that risk can have on your portfolio. From an investment portfolio perspective, unexpected changes in actions and policies taken by a country’s leaders can greatly impact that country’s financial markets. Nowadays, the actions taken in one country will often reverberate through other financial markets around the world. This risk is referred to as political risk.

For instance, the press reports that a Chinese government official raises concerns over how high and fast stock prices have risen. Traders around the world speculate that the Chinese government may take action to control the market. China’s stock market has a massive sell-off, erasing 10% of its value in one day.

That speculation then reverberates through the world’s financial markets. The major U.S. stock markets decline 3% in one day. At one point during the day, the Dow Jones Industrial Average drops over 150 points in one minute. The average investor loses thousands, maybe even tens of thousands of dollars in one day.

But it doesn’t stop there. The worldwide market correction causes investors to reassess the amount of risk in their portfolios. They are concerned and take action to reduce their exposure. So the markets don’t just drop one day, but a down-cycle lasting weeks or months develops.

There are many other examples that I can give. There is a coup in Thailand, which affects foreign investors. Hugo Chavez, the President of Venezuela, announces the government is taking control over various industries with substantial foreign ownership. Stocks of companies with investments in Venezuela are immediately affected.

Political changes are a risk to a portfolio, but they can also be an opportunity. Having the foresight to anticipate political changes and the effects it will have on a country will allow you to buy in before everyone else does.

For instance, countries issue bonds just like companies do. The interest rate paid on those bonds (how the bonds are priced) depends on the financial and political stability of the country. Several years ago, Brazil was in serious financial trouble. Its bonds paid a very high interest rate to reflect that risk.

The government took steps to improve the financial condition. It changed tax policies and opened markets to foreign investment. As those policies took effect, the country became more stable. As the risk associated with owning Brazilian bonds decreases, so does the interest rate those bonds pay. If you purchased one of the bonds when it was paying the high interest rate and sold it after the country became more stable you would have made a handsome profit.

For years, most industries in China were government owned and controlled. Foreign investment was restricted and there wasn’t a viable means of trading stocks. In the past several years China has made it easier for foreigners to invest. It has also been privatizing government owned companies. That process is still in the early stages. Although there continues to be significant risks associated with investing in China, there are also great potential rewards.

Remember that there is a trade-off between risk and reward. An investor’s goal should not be to avoid all political risk. If you do, you will have to settle for lower returns. Lower returns mean you will have to save more to provide for retirement. Lower returns mean that you may not get the income from your portfolio that you need to live on during retirement.

Instead, there are two things that you need to do. First, understand that political risk exists. Even if you only invest in U. S. stocks and bonds, your portfolio will still be impacted by the actions of political leaders around the world.

Second, try to identify the political risks associated with the investments you own. The risk associated with equity investment in emerging market economies is different than those of developed countries. The risk associated with bond investments is different from those of equity investments.

Third, take steps to manage that risk. Alter your investment strategy. Broadly diversify your portfolio to reduce country-specific risk. Utilize both stocks and bonds. And have an exit strategy in place in case something unexpected occurs.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.