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How to Plan for Your Parents’ Health Care Needs

Today's legislative uncertainty may have you wondering how your parents will cover their health care costs in the future. Here are the next steps to consider.

A woman and her daughter take a walk in a park.

Today, the legislative outlook for Social Security, Medicare, and even health insurance provisions is uncertain, to say the least. Recent proposals reveal that lawmakers have not come to consensus on how they want to proceed with reform. Shalencia Ibeji, Wealth Planner at Wells Fargo Private Bank, says, “Any of these proposals could create issues for millions of Americans at any level of wealth,” she says, “including those preparing to face their parents’ health care needs.”

In addition, taxpayers are often mistaken in assuming Medicare will cover their long-term care needs. For those who qualify, Medicare will cover long term care costs only for a maximum of 100 days, with only the first 20 of those being fully covered. This severely limits options for many individuals.

While high-net-worth individuals may feel they’ll be able to cover whatever expenses arise, Ibeji points out that simply pulling from savings or liquidating assets is not always the best strategy. “I believe there are more efficient ways to use your money,” she says.

Ibeji recommends these steps that can help you create a sound strategy for meeting your parents’ health care needs.

1. Start a family discussion

Ibeji recommends talking to parents about the steps they have taken so far to prepare for their future health care needs. Consider including your siblings in those discussions so everyone clearly knows the parents’ wishes along with what role everyone should play.

Two questions to be certain to ask:

  • How would you like to be looked after if you’re incapacitated?
  • Who will take care of your financial and health care needs?

You should also try to make your parents feel comfortable enough to reach out for help. “Stress to your parents that there’s nothing to feel guilty or ashamed about if they need assistance,” Ibeji says. “It’s often a matter of the adult children saying, ‘I want to help you—how can I?’” (For more advice, see “Four Questions to Help Make the Money Talk Easier.”)

2. Pay the health care facility instead of gifting money

Gifting money, either to parents or siblings to cover parents’ medical bills, can pose unexpected financial consequences because anything more than $15,000 per recipient annually ($30,000 for married couples) could be considered a taxable gift, Ibeji says. But there is a gift-tax exemption for medical payments made to a licensed caregiver or institution.

“Family members can make unlimited payments directly to the medical institution and not be concerned about gift tax consequences or even limiting the amount,” she says. Payments can also be made directly to a long-term care facility, as long as the payments are for medical costs.

Even though there’s an exemption, she recommends contacting your tax preparer to ask if any of the costs you’ve covered for your loved one would require that you file a gift tax return (Form 709).

3. Consider buying long-term care insurance

Ibeji talks to her clients about the potential benefits of long-term care insurance, as it lets them prepare for parents’ extended care needs without disrupting their cash flow. “You can obtain policies on your parents and use that $15,000 annual gift exclusion to cover the premium,” Ibeji says. She adds that you could also use some of the $11.4 million lifetime gift exemption, or $22.8 million for married couples (with proper planning), to cover a one-time premium on the policy. (Keep in mind that the IRS typically announces rate changes for the following year in mid-November, so be sure to confirm the annual exclusion and exemption numbers.) Another option Ibeji discusses with clients is obtaining and retaining ownership of a policy on their parents, which does not require using any annual exclusion or lifetime gifting.

Ibeji also notes that more complex strategies are possible, including combining long-term care insurance with trusts and life insurance. She recommends contacting your relationship manager to learn more about these strategies.

4. Set up a Power of Appointment Support Trust

For clients whose parents have modest wealth, Ibeji recommends setting up a Power of Appointment Support Trust (POAST). POAST is essentially an irrevocable grantor trust that lists a senior-generation family member as a beneficiary who also holds a “power of appointment” over a predetermined amount of assets in the trust upon their death. (Learn more about these trusts by reading “Should You Consider a Power of Appointment Support Trust?“)

POAST, according to Ibeji, is a planning technique that can provide support for aging parents during life and give them the resources needed to help shelter more family assets from taxes when they pass away.

Under the terms of a POAST, a trustee may distribute funds to older family members for their current needs.

Ibeji says it’s important to seek experienced legal counsel to draft the document so it aligns with the donor’s goals, uses all relevant exemptions, and potentially provides the most tax-efficient result.

Suzanne Bopp is a freelance journalist whose work has appeared at Salon.com and in Utne Reader. Images by iStock

What can Wells Fargo do for you?

Creating a plan for every generation of your family can be a challenge. Schedule time with your team to get started.

This information is provided for educational and illustrative purposes only.

Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors is not a legal or tax advisor. Please consult your tax or legal advisors to determine how this information may apply to your own situation.

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