Author Topic: Reader Case Study - Caring for Aging Parents  (Read 4744 times)

Ybserp

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Reader Case Study - Caring for Aging Parents
« on: August 06, 2014, 07:36:55 PM »
Hi Mustachians! My question is about providing housing for older parents. Before I get to the details of that, here is the information asked for in the case study guidelines.

TOPIC TITLE: Reader Case Study - How should we house my spouse’s parents?

INCOME: $145k/yr

CURRENT EXPENSES:
$54.9k/yr lifestyle
$  9k/yr charity
$  9k/yr gifts
$  8.2k/yr short-term savings
$28.5k/yr tax advantaged long-term savings
—————
$109.6k/yr    [$72.9k/yr for lifestyle + charity + gifts]
               
EXPECTED ER EXPENSES: $25k/yr + $50k/yr pension, but not actually planning to retire early. We both like our work right now.

ASSETS:
$382.4k Spouse’s Retirement Accounts
$259.7 My Retirement Accounts
$387.4k Joint Stock Accounts
—————
$1,029.5k

~$110k cash (Emergency Fund + Short-Term Savings)
—————
~$1.1m

LIABILITIES:
$239.8k Mortgage (Property value in current market ~$350k.)

SPECIFIC QUESTION: We want to help aging parents with housing. What is a good way of doing it?

My spouse’s parents are in their 70s and have expressed interest in moving to live near or with us. Their preference and ours is for “near” rather than “with.” They are in decent if not perfect health and based on life expectancy calculators they are likely to be blessed with another two decades of life.

We plan to sell our home and move to a new part of the US in about two years. All of these ideas would happen after that move.

OPTION 1 - We could buy two houses in the same neighborhood. One for them to live in, and one for us to live in.

OPTION 2 - We could buy a duplex, and each live in one half.

OPTION 3 - We could rent two apartments, one for each couple.

OPTION 4 - We could buy a place with a mother-in-law suite.

I’m leaning towards getting a duplex (Option 2).

But maybe two houses or condos (Option 1) would be a better choice, because it would allow us to be a block or two from each other. If we did buy two properties and one day sold the property the parents had lived in, my reading of the IRS rules of taxable real estate gains implies we would have to either (A) pay taxes on any appreciation the property had or (B) move into the formerly parents’ home for 24 months to establish over 2 years of residency to be eligible to exclude up to $500k in gained real estate value.

You may have noticed our assets. We are in our 30s and don’t plan to stop earning or saving anytime soon. This means we can expect very high tax brackets in our future, and our heirs may possibly have to deal with estate taxes one day if we aren’t careful. Or even if we are careful. (Yes, we know these are nice problems to have, and we are grateful to have them.)

I think the whole duplex would be considered our ‘main home’ requiring no odd 24-month moves for tax purposes. I think we could rent out the other half of the duplex if my spouse’s parents no longer needed the space. I also have a disabled brother who isn’t really capable of living alone. He currently lives with another sibling of mine. At some point my sibling might have enough and need someone else to take a turn. I could easily see inviting my brother to move in next door.

If we were to rent two apartments (Option 3), we’d have a lot less flexibility in making adjustments to shower facilities and building in accessibility features as the parents continued to age. So while renting provides a lot more financial flexibility for the second home, it seems unlikely to be a good choice for housing the parents.

The mother-in-law suite (Option 4) is probably the best choice for fifteen to twenty years from now, but the parents are very independent so far. And of their own parents, the one they haven’t already outlived remained independent and mentally sharp enough for solo living until her early 90s.

What do you all think? What are we missing? What else do you want to know about our situation in order to advise us on the wise course of action?

ShortInSeattle

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Re: Reader Case Study - Caring for Aging Parents
« Reply #1 on: August 06, 2014, 08:34:18 PM »
Have they asked you for financial assistance?

MDM

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Re: Reader Case Study - Caring for Aging Parents
« Reply #2 on: August 06, 2014, 08:47:22 PM »
Ybserp, welcome to the forums!

Along the lines of what ShortInSeattle asked ("Have they asked you for financial assistance?"),
  - Who would buy the housing: you, the parents, or a combination?
  - If you buy, would they pay rent to you?
  - What, in rough numbers, are the parents' assets and annual incomes?
...and, have all these things been discussed among all of you?

Ybserp

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Re: Reader Case Study - Caring for Aging Parents
« Reply #3 on: August 06, 2014, 09:21:09 PM »
@ShortInSeattle Yes. They are bad with money.

@MDM My spouse and I would buy or rent the places. We would not charge the parents any rent.

The parents have ~$35k/yr from Social Security between them. Last I checked they were -$10k underwater on their combined mortgage and home equity loan. They went and bought a big car (new) with a loan about a year ago after we told them not too. I'm guessing they still owe another -$10k there or so. My spouse's mom has a Traditional IRA she is taking RMDs from. She gets about $5k a year from that. These things - meaning their financial situation - have been discussed at length among all of us. They are committed anti-mustachians.

We gift them a monthly amount in exchange for them using that gift to pay for medical care and prescriptions which they would otherwise prioritize below dining out and buying stuff. They have been good about using our gift first for medical care. After the medical stuff is covered, they are free to use whatever remains on anything else and they do.

My spouse and I have not mentioned any possibility of buying them a house or otherwise providing them with more than we already do. We would be unwilling to tie our finances too tightly with theirs. We cannot stop banks lending to them, but we can ensure we do not inherit their debts. We did check with our CPA about tax implications of gifting them enough to pay off their current mortgage, but it isn't actually a good idea tax-wise. And it isn't a good idea relationship-wise either, because they could easy take the equity right back out and spend it.

I cringe when I read this, because the financial self control issue is their worst feature. They have other very lovely characteristics not represented on a balance sheet. I have truly kind and loving in-laws. And on a purely financial level, one of the things they spent extravagantly on was my spouse's all private school education from preschool through college. At one time they had our level of income. They just never chose to have our level of savings. Ironically my spouse started saving as soon as he got his first big job after school with the thought in mind that his parents were going to need help one day.

Edited to add:
@MDM Thanks for the welcome!
« Last Edit: August 06, 2014, 09:25:33 PM by Ybserp »

deborah

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Re: Reader Case Study - Caring for Aging Parents
« Reply #4 on: August 06, 2014, 10:19:34 PM »
I think you are ignoring the effect that aging has.

You say they are in their 70's and are very independent. That's fine - my parents were exactly the same - they were even running a business. However, they are now in their 80's many of their friends are going or gone, they attend funerals just about every week, they are in poor health and life is looking grim. Dad is the last of his generation, and mum looks at her aunts, and some of their cousins, who are in (or lived into) their 100's and hopes she dies before she reaches that age. Remember your parents-in-law are not very far from average life expectancy.

You say that there is only one of their parents they have not outlived. To me, that is a warning sign that things are going to start to go wrong sooner rather than later. Remember that most people become much more dependent in the last 8 years of life - and that is sooner rather than later. Make sure that wherever they move is suitable for aging in place - has wide, wheelchair friendly passages, places for wheelchair turning circles, has no stairs... Make sure facilities are available (appropriate medical specialists, care in place, meals on wheels...) - small communities in particular often don't have these facilities, and they are necessary if your in-laws are not to move again.

My parent's live 7 1/2 hours drive away. They wanted to move here when they were in their seventies, but I wouldn't have been available all the time, and they were (and still are) part of the community. Each time I go shopping with one of them, they meet at least one person in passing who stops to talk to them. I'm sure they would have had a difficult time adjusting to a new community here. How easily do your parents-in-law mix and incorporate new friends? Each time I have seen an elderly person move from one community to another, they have become more frail, more dependent and less cognitively aware. Social change is very hard for them.

In the last 10 years both parents have become very hard of hearing. Both have developed eye problems. Dad only has sight in one eye, and marginal sight in the other and today is having a cataract removed in that eye, because otherwise he won't be able to continue driving (I am extremely worried about this, as the other eye became much worse when they removed the cataract in it a few years ago). They both have major problems moving around. Remember that they were running a successful business 10 years ago, and you will see what the next 10 years probably will mean to your parents-in-law.

ShortInSeattle

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Re: Reader Case Study - Caring for Aging Parents
« Reply #5 on: August 06, 2014, 11:36:57 PM »
Good questions being raised.

OP - here are some things I'd think about about if I were in your shoes.

1) It sounds like they are financially dependent on you largely due to bad choices rather than circumstance. Let's say you buy them a house and pay their medical. This is unlikely to keep them out of debt, and you may find the demands on you begin to escalate.  Next they need someone to buy food because they have overwhelming credit card debt... and so on.  It is admirable that you want to help, but is there a limit? How will you know you've reached it? What happens then?

2) If they are likely to need medical care over the next 10 years, is there a plan for that? If you and your wife do not want to become caretakers, it may make more sense to offer to buy them a nearby apartment in a senior community that has options for healthcare support as needed.  I believe these places often have a buy-in fee (which could be your gift) while they pay for monthly fees (room & board).

They sound like sweet people and it's good of you to want to care for them. I'm glad you're thinking about ways of doing so without getting pulled down financially.

Very honestly, I don't think I would be as generous as you are being. But that being said, it sounds like you're thinking through your options intelligently.

SIS


MDM

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Re: Reader Case Study - Caring for Aging Parents
« Reply #6 on: August 06, 2014, 11:47:19 PM »
...The parents have ~$35k/yr from Social Security between them. Last I checked they were -$10k underwater on their combined mortgage and home equity loan. They went and bought a big car (new) with a loan about a year ago after we told them not too. I'm guessing they still owe another -$10k there or so. My spouse's mom has a Traditional IRA she is taking RMDs from. She gets about $5k a year from that. These things - meaning their financial situation - have been discussed at length among all of us. They are committed anti-mustachians.

We gift them a monthly amount in exchange for them using that gift to pay for medical care and prescriptions which they would otherwise prioritize below dining out and buying stuff. They have been good about using our gift first for medical care. After the medical stuff is covered, they are free to use whatever remains on anything else and they do.
...
I cringe when I read this, because the financial self control issue is their worst feature.
Getting ~$5K/yr from the IRA RMD implies there is ~$114,500 (if she is 75) in the IRA.  That could be withdrawn and used to pay off all their loans.  Whether that is a good idea depends on the loan interest rate, their marginal tax rate (including effect on SS income), etc. - but it seems worth considering.

Would they be willing to assign power of attorney so you (and/or your spouse) could pay their bills for them?  That is related to a larger question: how is their cash flow?  In other words, what is their annual income vs. expenses (particularly including medical as SIS notes), and is that a sustainable situation (looked at two ways: with and without your gifting)?

I think it is great you are willing to help them.  The role reversal can be tricky.  Went through it with my mom and it has gone better than I might have guessed.  She was happy to stop dealing with bill payments, etc., and we have been able to arrange things so her needs are covered by income and if she wants to dip into savings for wants, she can and does.

Good advice from deborah on "aging in place" considerations, whatever you do regarding house vs. apartment vs. duplex vs. MIL suite.  You might also start looking at assisted living facilities - just to know what those options are.  Some can be wildly expensive but others can be affordable - varies a lot by location.

Ybserp

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Re: Reader Case Study - Caring for Aging Parents
« Reply #7 on: August 07, 2014, 04:12:10 AM »
ShortinSeattle, deborah, & MDM - Good points.

My spouse and I expect to pay for *all* their needs at some point. We've discussed it just between the two of us, and it seems unlikely that we could give them money and have it go for all their needs. So it seems necessary that we do the identifying and paying for needs directly. I'm actually a bit surprised at our current level of help being more than some would do. I expected to be called cheap for not doing more right away. (My spouse and I have very deliberately kept our total savings balances a secret to avoid the expectation that it should be spent immediately.) My spouse's dad does their finances and is unwilling to let that be in someone else's control at this point.

The parents do not have monthly positive cash flow. And while the addition of our monthly gift saw an improvement to their compliance with doctor's health recommendations, it did not result in an improvement in cash flow. The one parent with the IRA balance does not want to empty it to pay off debt. She believes their debt would just be back to the same level in short order. If she outlives her husband, which is statistically likely, her solo annual income from Social Security would be reduced below their current ~$35k/yr. She's spoken of dealing with the debt then when further expenses would be in her solo control.

She's also often expressed a hope for providing full-time childcare for us if they were able to live near us. We've had several pregnancy losses so do not yet have children needing care. We are guessing she'd be physically able to provide childcare for at most 4hrs/day up until she turns 75 (5 yrs from now). (My spouse and I have discussed whether we should pay her for part-time care of a potential future child and decided it would be more valuable to pay her with things like housing and groceries rather than cash which might not be used to first cover basic needs.)

@deborah - I'm sensitive to your challenge that we are not properly considering the impact of aging. I'm trying to consider it, but I may not have the right context. I'm 33 and my own parents who just turned 60 are healthy, active, and frugal. My spouse's parents have a host of medical issues, but they are all quality of life degrading instead of life threatening. My spouse's parents currently only leave the house to (1) go care for their own remaining parent in her nursing home, (2) attend their own doctor's appointments and (3) visit the high end grocery store. Otherwise they shop online and watch TV. Oh, and they make a point of eating out on days they go out.

We've considered moving to their town instead of having them move to us. If my spouse's planned job change in two years results in a job offer there, we'll probably go with that. We've also considered that my spouse might take some time off paid employment for us to move there and care for them. The reasons we've been wanting to go some third place and move them to us instead are: (1) the parents' current house is not elderly friendly--they can't age in place there (2) the job options for my spouse in his parents' town are slim (3) my spouse's parents are likely to live if not thrive for another couple decades which could make moving to a place without jobs until they pass into a decision to not work for pay for two or more decades.

There are may things we could do for a couple years that become much harder to endure for a couple decades.

There is also an OPTION 5: we find a senior care facility for them either in the town where they live now or the place we move to.


Edited to add:
ShortInSeattle's comment asking us what the limit of how much we'd provide for this set of parents has gotten me thinking. (And thank you all for this valuable discussion. It is helpful for me to have an audience and feedback as I try to work out what is possible and what is reasonable in this situation.)

I'm considering figuring out how much my spouse's college education cost and applying an average rate of return to that total to see how much they could have had if they had saved that money for their retirement instead of spending it on my spouse. I think it would be useful to have a ballpark figure in mind and then be able to run spreadsheet calculations for how that would affect our own long term financial independence. It would also be a starting point to use to talk with my spouse about what we owe them based on the opportunities they created for him by paying for a top tier college and what we owe them out of human decency and concern for an irresponsible family member in need.

Before this I was thinking the only moral option was to have no limit on how much we might spend on either of our parents, so when we didn't give them all they wanted it was with the argument that we had to preserve capital to be able to give them all they needed later. Now I'm considering more deeply what it means to honor our parents. I don't have a conclusion, but I'm thinking about it.
« Last Edit: August 07, 2014, 09:45:40 AM by Ybserp »

minimustache1985

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Re: Reader Case Study - Caring for Aging Parents
« Reply #8 on: August 07, 2014, 10:29:21 AM »
I'd lean towards option 1 AND option 4.

This would start them out in a separate house while they're still independent, and you could rent out the MIL suite.  When they are more reliant on you and your spouse they could move to the MIL suite and you could rent the first house.  I know the tax implications suck for selling with option 1, but if you find one that can be a good rental (and quite a few people rent their homes in my mothers 55+ community, where single stories and access ramps can be a plus) keep in mind you don't have to sell it.  Plus if your brother would need help you'd be in a better position to put him up since that's something you've expressed some interest in doing.

Ybserp

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Re: Reader Case Study - Caring for Aging Parents
« Reply #9 on: August 07, 2014, 11:39:24 AM »
@minimustache1985

Hmm. I'd need to run numbers and read up on real estate investing. Any advice on a place to start to learn the basics of buying property with an intent to use it primarily as a rental?

minimustache1985

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Re: Reader Case Study - Caring for Aging Parents
« Reply #10 on: August 07, 2014, 11:45:23 AM »
@minimustache1985

Hmm. I'd need to run numbers and read up on real estate investing. Any advice on a place to start to learn the basics of buying property with an intent to use it primarily as a rental?
I'm not a great resource at this point, my husband and I are just starting out and getting ready to look at rental investments.  I do read Paula at affordanything.com, though her 1% guideline might be a little stringent combined with what you may want for the parents.  Right now our only rental was H's first house, which with normal estimated maintenance and vacancy rates is really just neutral on paper at this point.

Catbert

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Re: Reader Case Study - Caring for Aging Parents
« Reply #11 on: August 07, 2014, 12:30:22 PM »
Probably the best option for them is the duplex idea.  That gives them a measure of freedom now but physically close for when they need more care.  As someone else pointed out they can go from a few nagging health issues to major problems pretty quickly.  That said, I'm not sure the duplex option is the best for you and your marriage.  My MIL lived 1200 miles away which seems about perfect to me.  (She was nice in very small doses but very different than me.)  YMMV.

I think you misunderstand the tax ramifications of these options.  If you buy a duplex and rent out one half then when you sell it's half a principle residence and half an investment property.  You'll pay capital gains of the investment portion.  Also buying a rental and then later moving into it for two years no longer solves the capital gains tax completely.  The law changed in 2009, I think.  You have to pro-rate the amount of time it was a rental in 2009 and after against the total time owned and that determines how much of the capital gains is waived for being a principle residence.  For example, if you buy a house in 2015 and use it for a rental for 5 years, then move in and live in it for 2 years, then 2/5s of the capital gains is sheltered.

I'm probably not explaining the tax ramifications well and there may be added complexities (loopholes?) because you'll be "renting" to your in-laws for free.  Definitely worth spending time with a CPA who specializes in taxes to ensure you understand the tax ramifications before taking an action. 

Ybserp

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Re: Reader Case Study - Caring for Aging Parents
« Reply #12 on: August 07, 2014, 12:51:53 PM »
@mary w - Thanks for your input.

I don't think I have the 'two years out of five' part of the tax info wrong because I went directly to IRS.gov to get it. But I'll definitely talk to my CPA about this stuff before we choose something. Would the IRS have outdated tax info on their own site? Huh. Maybe. It wasn't the actual pub, so perhaps the mere site is less definitive.

The possible marriage stress is a concern I share.

deborah

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Re: Reader Case Study - Caring for Aging Parents
« Reply #13 on: August 07, 2014, 03:57:35 PM »
She's also often expressed a hope for providing full-time childcare for us if they were able to live near us. We are guessing she'd be physically able to provide childcare for at most 4hrs/day up until she turns 75 (5 yrs from now).

@deborah - I'm sensitive to your challenge that we are not properly considering the impact of aging. I'm trying to consider it, but I may not have the right context. I'm 33 and my own parents who just turned 60 are healthy, active, and frugal. My spouse's parents have a host of medical issues, but they are all quality of life degrading instead of life threatening. My spouse's parents currently only leave the house to (1) go care for their own remaining parent in her nursing home, (2) attend their own doctor's appointments and (3) visit the high end grocery store. Otherwise they shop online and watch TV. Oh, and they make a point of eating out on days they go out.

There are may things we could do for a couple years that become much harder to endure for a couple decades.

There is also an OPTION 5: we find a senior care facility for them either in the town where they live now or the place we move to.
My parents go out a lot more than your parents-in-law. Both have a number of medical issues, but they are both members of (separate) Probus groups, do all their shopping (although this is becoming extremely hard for them - I am trying to introduce them to shopping online), and are in enough community groups that they normally go out at least once a day. In fact, it sounds like they are much more independent than your parents-in-law! I know people who are older than my parents who do child care, but these people are also more able.

Mum has this wonderful garden that takes an enormous amount out of her - she often has to be in bed for more than a day after she has spent more than an hour in the garden at a time. It is like a leech, sucking everything out of her. It has roses - I am sure there is at least one in every square foot of garden bed. When I visit, and am asked to weed, it certainly seems like there is nothing but roses to get my clothes caught in, or thorns on the ground to prick my fingers while I am weeding. It has all these small hedges , 8 inches high, that she grew from cuttings. The entire garden is like this, front and back. They are getting so that they cannot manage in the house, and when they move, it will break her heart - no-one will be able to maintain the garden, so when she sees it, it will be ruined, and any new garden will be nowhere as good, and she will always be thinking of this one.

They moved here about 10 years ago. If I knew then what would happen, I would have strongly suggested an aged care facility (probably a senior care facility in the US). Dad already had problems with his knee, and I certainly was very vocal about them not moving to a house with stairs. But they are my parents, so they didn't listen. We are currently investigating aged care facilities. One of the problems with aged care facilities here is that they are dominated by commercial operators who seem inclined to separate you and your money by something called "deferred management fees" - of course, the US might be entirely different.

mozar

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Re: Reader Case Study - Caring for Aging Parents
« Reply #14 on: August 07, 2014, 06:34:47 PM »
For other forum posts it seems best not to mix real estate and family. You should keep giving them money for bills etc. I say just save as much as possible and prepare yourself. It's hard to know exactly what kind of care they will need in the future, and it doesn't sound like you really want them to live with you and be their caretakers.

I think if you are at most 30 minutes a part you will be fine. My grandmother had live in care, I think it was about 20k a year for about 5 years. My other grandmother was independent until she got breast cancer at 84. My dad had no plan and had been paying for her apartment. He ended up doing a four hour drive every other weekend. Then he brought her to live with him when she could no longer get out a bed. My dad provided insufficient care and she died in a lot of pain.
It seems like the best thing for old people is to feel independent as possible for as long as possible. Also if they like seeing people, to visit as much as possible. 

Ybserp

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Re: Reader Case Study - Caring for Aging Parents
« Reply #15 on: August 16, 2014, 08:18:35 AM »
The actual final decision point for this remains two years away. But I did run across this post recently:

http://jlcollinsnh.com/2014/02/20/case-study-10-should-josiah-buy-his-parents-a-house/

It leads me to strength my conclusions to (1) not mention this possibility to the inlaws until and unless the spouse and I are absolutely sure we are willing to do it and (2) if we do it, under *no* circumstances charge them any kind of rent.