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When families clash over money, particularly as parents reach their senior years, there can be many issues to resolve. Hear from CERTIFIED FINANCIAL PLANNER® professional James McFall of Yield Financial Planning about how family members can plan for a peaceful transfer of wealth between generations and siblings.
Nothing is certain except for death and taxes –it’s one of our oldest clichés. Exactly how someone meets their death isn’t certain, but if you’re lucky enough to reach old age, you may need some kind of extra care. “The responsibility for care will depend on the specific family unit, but will typically fall to the healthier spouse if there is one and/or the children,”says James. “When health declines rapidly, as it often can, it requires quick decisions at an emotionally charged time, that have wide reaching implications, including financial.”
According to research from US company, Ameriprise Financial there are three main things siblings fight about when it comes to their parents’ money, and who shoulders the burden for care is one of them. “Care provided by each adult child can often be disproportionate,”says James.“This could be for practical reasons, such as proximity of the children to the parent. It may also be due to the state of the relationship. If one has a young family of their own for example, they may not end up being as involved in care as a sibling with none. This can lead to financial disagreements, while care is being given, and down the track too.”
Should equal financial treatment be expected?
If one person is feeling resentful of the time they’re taking to care compared with siblings, this could be due to loss of earnings. As voluntary primary carers aged 15-64 can expect to earn 42% less each week than their peers, it may be the case that working adults are sacrificing their earning capacity to perform their caring role. This also raises the question of whether they should expect more financial support from their parents as a sort of reward for their commitment to providing care.
Dr. Rebecca Valenzuela, an economics lecturer at Monash University identifies two concepts behind parents’ generosity towards their children – altruism and exchange. And it’s both these motivations for giving that can lead to unequal financial support for their children. “In the field of family economics, there is a well-known puzzle about parent-to-children transfers,”says Dr. Valenzuela. “Apparently, parents give very unequally while they are alive but provide to have their estates divided equally after death.”
According to Dr. Valenzuela, the exchange motive makes it more likely a child on a lower income will be the one to perform more of the care-giving. “The implicit price of home care (as) may be determined by the opportunity cost that is borne by the caretaker child,”says Dr Valenzuela. “High-income children will face higher opportunity costs of staying home to provide care. The exchange model predicts that parents are more likely to “purchase” such home care services from a lower-income child than their richer offspring.”
The best outcome for everyone
Someone who works full-time for their salary may not see a ‘carer’ payment to their sibling through this lens. To them, it can be viewed as a handout they should be getting too. If this comes up in family ‘discussions’ it may be worth reminding everyone that in-home care from a family member is often in the best interests of the parent.
Because of compassion for their parents, and their interest in preserving their parents’ wealth, few children will argue with an in-home care plan that’s made possible by the time and goodwill of their sibling. “My experience has been that children are motivated to ensure their parents receive the right care,” says James. “Good financial planning advice at this time is invaluable. It will help children develop a cohesive strategy around how they intend to care for their parents, which is typically their first priority, but then also make it in context of sensible financial outcomes for the parents and the Estate.”
Making the most of assets and benefits
Support for adult children from a planner like James is usually based on two major areas of advice – helping them take advantage of government benefits available, and maximising potential returns from their parents’ assets.
“When someone is in the role of full-time carer –whether it’s a spouse or child –they’re often so absorbed by their responsibilities they don’t make time to investigate benefits available. Eligibility to some benefits will change as health changes, and it can be hard to stay on top of it all”, says James. “A good financial planner will ensure they’re aware of the full range of payments and services for the parent and their carer too.” The Department of Human Services lists many of the payments older Australians may be entitled to, but having someone highlight which ones are suited to your personal and financial circumstances can speed up the research and claiming process.
If the time comes when one or more parents move into residential aged care, this can trigger important financial decisions, particularly what becomes of the family home. “You’re usually looking at a number of options, including keeping the residence as an investment, retaining it for a spouse who will continue to live there, or selling the home to meet aged care costs”, says James. “The right outcome will depend on many factors, and the impact on age pension entitlements of selling the home is an important one of these.”
When it comes to deciding what’s to be done with the proceeds of a home sale, a planner can also guide children towards a solution that achieves better outcomes for all concerned. “Too often people just pile money into cash at this stage”, says James. “The opportunity is to start to consider the money in the context of the parent’s life, and the children it will eventually be passed on to. A good financial strategy will include a wealth plan that is liquid and defensive enough to accommodate the parents’ income needs for the remainder of their life, but with a balanced focus on growth, for the benefit of the estate.” If children are to be making such investment decisions on their parents’ behalf when they have lost capacity, it becomes very important to have an enduring Power of Attorney in place.
What a Will can solve
As well as making timely arrangements for a Power of Attorney, James also stresses the importance of making a Will while they still have capacity. “Planning your estate as early as possible is the best course of action,” says James. “A Will can be as basic as a percentage distribution to the chosen parties, or a lot more detailed to accommodate the complexities of family relationships and individual behaviours. It’s possible to include specific clauses on things like how old children must be to receive assets, transferring money gradually as income payments rather than a lump sum, or specific investment clauses when there is doubt around the child managing the money appropriately.”
Keep communicating – and out of court
As James is usually engaged to advise one family member only, it’s rare for him to have the opportunity to offer advice in a forum where everyone is represented. So if conflict does arise, his advice is to keep talking for as long as it takes to come up with a solution. “Unless the adviser has a rapport with all the children, the best we can do is counsel the person asking,” says James. “In this case a mediator may be the best course of action. My position is to tell them to do what they can to reach a solution without, or with minimal, legal intervention. Even if just one person pursues a matter legally, the cost can make a big impact on the share of the estate everyone can expect to receive. And it can significantly delay distribution, potentially for years.”
 Forbes, The No. 1 Money Fight Among Siblings, Richard Eisenberg, 26 June 2017, “What exactly do adult siblings fight about when it comes to their parents’ finances? According to Ameriprise Financial, the top three topics are:
How an inheritance is divided (boomers are more likely than Millennials and Gen Xers to have conflicts over this)
Whether one sibling supports his or her parents more than the other siblings
Whether parents are being fair in their financial support of their children