Typically, an estate plan includes accommodations for your spouse, children, grandchildren and even future generations. But some members of the family can be overlooked, such as your parents or in-laws. Yet the older generation may also need your financial assistance, perhaps even more so than Millennials who are off to successful starts in their careers.

5 step action plan

How can you best handle the financial affairs of parents in the later stages of life? Incorporate their needs into your own estate plan while tweaking, when necessary, the arrangements they’ve already made. Here are five critical steps:

Identify key contacts. Just like you’ve done for yourself, compile the names and addresses of professionals important to your parents’ finances and medical conditions. This may include stockbrokers, financial advisors, attorneys, CPAs, insurance agents and physicians.

List and value their assets. If you’re going to be able to manage the financial affairs of your parents, having knowledge of their assets is vital. It would be wise to keep a list of their investment holdings, IRA and retirement plan accounts, and life insurance policies, including current balances and account numbers. Be sure to add in projections for Social Security benefits. When all is said and done, don’t be surprised if their net worth is higher or lower than what you (or they) initially thought. You can use this information to formulate the appropriate planning techniques.

Open the lines of communication. Before going any further, have a frank and honest discussion with your elderly relatives, as well as other family members who may be involved, such as your siblings. Make sure you understand your parents’ wishes and explain the objectives you hope to accomplish. Understandably, they may be hesitant or too proud to accept your help, so some arm twisting may be required.

Execute documents. Assuming you can agree on how to move forward, develop a plan incorporating several legal documents. If your parents have already created one or more of these documents, they may need to be revised or coordinated with new ones. Some elements commonly included in an estate plan are:

• Wills. Your parents’ wills control the disposition of their possessions, such as cars and jewelry, and tie up other loose ends. (Of course, jointly owned property with rights of survivorship automatically passes to the survivor.) Notably, a will also establishes the executor of your parents’ estates. If you’re the one lending financial assistance, you’re probably the optimal choice. 
• Living trusts. A living trust can supplement a will by providing for the disposition of selected assets. Unlike a will, a living trust doesn’t have to go through probate, so this might save time and money, while avoiding public disclosure.  
• Powers of attorney. This document authorizes someone to legally act on behalf of another person. With a durable power of attorney, the most common version, the authorization continues after the person is disabled. This enables you to better handle your parents’ affairs.
• Living wills or advance medical directives. These documents provide guidance for end-of-life decisions. Make sure that your parents’ physicians have copies so they can act according to their wishes.
• Beneficiary designations. Undoubtedly, your parents have filled out beneficiary designations for retirement plans, IRAs and life insurance policies. These designations supersede references in a will, so it’s important to keep them up to date.

Spread the wealth. If you decide the best approach for helping out your parents is to give them monetary gifts, it’s relatively easy to avoid gift tax liability. Under the annual gift tax exclusion, you can give each recipient up to $14,000 without paying any gift tax, doubled to $28,000 per recipient if your spouse joins in the gift. Any excess may be sheltered by the generous $5.45 million gift and estate tax exemption in 2016.

Be wary, however, of giving gifts that may affect eligibility for some government benefits. Generally, availability of these benefits varies from state to state. (See “Are strings attached to family gifts?”)

Seek professional help

Estate planning for elderly parents, which is complex in its own right, is intertwined with your own finances. Contact your estate planning advisor to help develop a comprehensive plan that addresses your family’s needs.   

Sidebar: Are strings attached to family gifts?

Medicaid is one form of assistance for the elderly that is based on financial thresholds. Therefore, large financial gifts to a Medicaid recipient can have negative implications. For instance, an elderly parent frequently can’t have more than $2,000 in assets to become eligible for Medicaid. Other potential benefits that may be cut if a person has too much income are Supplemental Security Income (SSI) payments to some elderly, blind and disabled people, Social Security Disability, food stamps, and certain forms of clinical services.

Thus, giving large gifts to a relative may increase the value of his or her assets for these purposes. Similarly, the law discourages parents from gifting to other family members so they can squeeze under the threshold for Medicaid. Under a “look-back rule,” gifts made within five years of the application are subject to penalties, which would cause a delay in Medicaid eligibility. Bottom line: Consider all the angles when giving gifts.