Financial planners and caregiving: Helping clients manage the challenges

Providing care to parents, spouses, other family members, or friends as they age can be anticipated and planned for in many respects, but unexpected challenges also arise in caregiving. CPA financial planners can help clients and their families prepare.

Caregiving conversations with clients should start early to avoid costly last-minute decisions and mistakes. This also allows more time to involve other experts, such as attorneys, real estate and medical professionals, and insurance providers.

“The most common challenges include incomplete planning, financial illiteracy, and poor communications around money,” said Andrew Christakos, CPA/PFS, partner at Christakos Financial in Cranford, N.J. “Some clients have foresight, but many feel lost.”

Being unaware of or unprepared for the many challenges planning for caregiving entails is an added stress to already complicated discussions, especially if events are sudden and unexpected. Given clients’ individual circumstances, CPA financial planners can guide their clients and clients’ families facing life stages of greater need and declining independence, when emotions may already be strained.

Encouraging planning for caregiving

Christakos notes his is a family-owned business, and the planning process is very personal. “We provide advice to clients over the course of years and, for some, for decades,” he said. “The most important thing we can do for clients is listen and provide a safe space where they feel free to ask questions, brainstorm scenarios, and analyze a process with us. Ambiguity can be scary, so we help clients build confidence and take time to make sure they understand the steps involved.

“To get clients thinking about caregiving not just from the financial side but also from an emotional support standpoint, I use an exercise from Mitch Anthony’s The New Retirementality,” Christakos said. “I ask them to visualize what will take place later in life if they cannot do these activities themselves: ‘Who will take you to the doctor?’; ‘Who will change your lightbulbs?’; and ‘Who will take you to get ice cream?’

“Most clients will not answer these questions at that moment because of the emotional impact, but it gets them thinking about who will take care of them, and next they can consider what it will cost.”

The answers to these questions and who will be there will likely change over time.

“Our caregiving clients are usually tax preparation clients first, and generally, they have been clients for a number of years, so we understand their goals and needs and have built solid relationships,” said Matthew Kidd, CPA/PFS, president and partner at Blunden & Kidd Accounting & Consulting PC in Livonia, Mich. “The parents may be longtime clients and then involve their children in the discussion, or the adult children may be our clients and then involve the parents. Some have financial resources to provide a high level of care, while others do not and need to rely on family and volunteers.

“It is more typical that we encourage clients to think about caregiving and get families involved as early as possible because they don’t know where to start,” he said. “It can be difficult for close family members to notice aging issues, and no one wants to admit they or a close family member are aging.”

CPA financial planners facilitate open and often emotional conversations as part of their planning. Getting clients to face the needs of aging head-on can alleviate later stress. Knowing such hard questions were already asked and planned for leaves clients and caregivers free to face other matters that arise during later years.

Planning for the financial implications of caregiving

The cost of care can be incredibly expensive, and sustainable spending is a huge concern.

“When clients are at or near retirement age, the caregiving conversation comes up a lot,” said Erin Itkoe, CPA/PFS, director of Financial Planning, Tarbox Family Office, in Scottsdale, Ariz. “We discuss their assets and income, whether they have long-term-care insurance, and whether they want to age in place or go to assisted living.”

Itkoe prepares a sustainable spending analysis with all clients. It includes all liquid assets and income sources, such as Social Security, and it incorporates goals, such as travel. They then discuss options and any possible adjustments. The analysis is rerun every few years unless there are material changes in between.

“A common concern is asset depletion — how much money will be required and how it will be spent,” Christakos said. “Clients may have to quickly liquidate assets to support years of ongoing care at home and/or in private facilities. Typically, short-term plans need to be reevaluated as the situation progresses.”

For family caregivers, significant and unexpected financial considerations may arise. “They may have to reduce their work hours or take time away from their jobs to offer care, which can impact their salaries, benefits, and Social Security, along with potentially diluting personal savings,” Christakos said. “There is also the huge toll on their mental and physical health.” Another family member may be able to provide relief, but the situation may also involve the further expense of hiring an outside agency.

Asset management and tax planning considerations

Tax planning strategies and asset management change as clients age.

“Clients need liquidity and a cash flow plan to cover costs of care,” Itkoe said. “They may need to sell their house to buy into an assisted-living community, which could result in taxable capital gains. The community might require a big down payment and ongoing monthly fees, so a cash flow plan needs to be reviewed.”

There may be estate planning opportunities related to keeping appreciated assets such as real estate and securities that would be eligible for a step-up in basis upon the client’s death, rather than selling them with taxable capital gains.

Medical expenses may be deductible, subject to adjusted gross income limits. “Caregivers must keep meticulous records of all medical expenses and equipment for people aging at home,” Christakos said. Home improvements for medical purposes may increase the home’s basis. Also, there are Medicaid and long-term-care insurance considerations for caregiver compensation (family members and third parties).

“The biggest home health care oversight we see is whether direct caregivers are independent contractors or household employees,” Kidd said, noting that the IRS FAQs “Family Caregivers and Self-Employment Tax” can help with understanding the issue.

“In independent-living facilities with step up to different levels of care, for expenses to be deductible, the caregiver must be providing ‘necessary medical care,’ and rent is not medically necessary,” Kidd said.

“Facilities usually provide a year-end tax letter that indicates what portion of the payments are tax-deductible, and amounts can be significant,” Itkoe said.

Clients may set up trusts as part of their estate and caregiving plans, and they should understand any related tax or liquidity consequences. “The majority of our clients have trusts, but individuals should consult with estate planning attorneys to determine if a trust is necessary for their situation,” Itkoe said.

Preparing necessary documentation

To protect themselves and their assets, clients must plan early and prepare and sign needed documents while they are healthy. This allows clients to discuss plans with advisers and family in case the client becomes incapacitated (physically or mentally). These documents include wills, powers of attorney, and health care or medical proxies or directives.

In many cases, necessary documents are not in place. “Most of our clients have a will, but getting them to create agreements spelling out what is important to them and assigning responsibilities to others is more challenging,” Christakos said.

“As part of overall estate planning, we discuss the need for financial and medical powers of attorney with our clients, and then we refer them to attorneys to prepare them,” Itkoe said. “They can be created at any age and updated at any time while clients are still of sound mind. We advise them not to take documents off the internet.”

The experts recommend that after documents are created, they should all be reviewed and updated completely at least every three to five years for changes in circumstances and relationships, including estate plans overall (who the executor is, who will step in if the client is incapacitated, and who is involved, including backups).

Once documents exist, caregivers must know where to find them, whether online or on paper, along with the related assets, the experts said. It is better if more than one person has the information or access to it. Financial planners or third-party services can electronically store documents and provide controlled access. This process should happen while the client is healthy, and it should be kept up to date.

Another important document is a statement of records that can include account numbers; passwords; recurring automatic bank deposits and payments; contact information for family, friends, doctors, attorneys, and other advisers; and where other key documents are located (i.e., bank and investment statements; deeds; vehicle registration; asset and health insurance policies; tax returns; medical records; benefit and pension statements; and birth, marriage, and divorce certificates). And, again, caregivers must know where to find the document.

Overcoming emotional and communication challenges in caregiving

Financial planners need to listen to clients and provide emotional support. “Never underestimate the emotional toll caregiving takes on both the recipient of care and their family,” Kidd said. “Recipients may be giving up their independence, including ability to drive, for the first time. Children may become primary caregivers for the first time because of lack of financial resources or because they feel responsible. We recommend support in the form of a backup family member or third-party help.”

“We develop personal relationships with our clients and their families, and, if I had known, I would have minored in psychology because I have to deal with emotions and mediate all the time,” Itkoe said. “We must be careful about sharing information with family members, based on the client’s wishes,” she added. Generally, a financial planner needs a signed release to talk to family members. “There are uncomfortable conversations, and there is so much emotion involved. And everyone thinks they are right.”

Some clients are obstinate and afraid of leaving their homes for assisted living and losing their independence. “I have several clients evaluating transitioning to continuing-care communities, which is a very difficult decision for them,” Itkoe said. “We run various sustainable spending analyses so they can evaluate financial implications of their different options, see what they can afford and how it impacts their other goals and spending. Throughout this process, we have conversations with them to discuss the options and support them. Knowing they are not alone reduces some of their emotional stress.”

There are also significant legal and financial vulnerabilities from bringing caregivers into the home, including the possibilities of caregivers stealing assets or refusing to leave.

Christakos notes there can be a need for coordinating care in the case of both physical and cognitive decline, and frequently, a progression of care changes over time if the client moves from home to a group setting, assisted living, or hospice.

“It is better when clients can consider over time and decide, compared with when something happens and they are forced into making a choice,” Itkoe said.

“The children may not be on the same page about caregiving,” Kidd said. It is not uncommon to have blended families from multiple marriages involved. Having a plan in place, before issues arise, will help. He suggests that, when possible, different family members oversee different areas — one for medical and one for financial decisions. Having updated powers of attorney spelling out responsibilities and any compensation, signed by all the parties, can help avoid issues.

“Lack of communication causes so many problems,” Christakos said. “Often, one sibling is providing a disproportionate amount of the care and investing significant time without compensation. They may ask to be paid at market rates for their time, which sets up what it would cost if they had to replace themselves or request a larger inheritance.”

Because every situation is different, Christakos recommends that clients consult with an attorney to create a caregiver agreement. “This document covers the expectations, duties, and boundaries of those involved and provides clarity around the assets to be used for cost of care or preserved for beneficiaries,” he said.

“The caregiver agreement should be revisited periodically because we have experienced situations where the caregiver had control and took advantage of the client after a number of years,” Itkoe said.

Another challenge for caregivers is navigating medical plans and government assistance programs, including Medicare, Medicaid, prescription drugs, long-term-care insurance, and veterans’ benefits. “Understanding them provides incredible value to the patient,” Christakos said.

When to start planning for caregiving

“I have clients in their early to mid-30s working on financial plans, but many young people are not thinking about not being able to take care of themselves someday,” Christakos said. “They may have employment benefits available they should not leave on the table, and getting started early and managing contributions and asset growth will provide money to meet long-term goals, including caregiving.” He recommends that these younger clients reassess plans and the people in them for life changes, including careers, marriage, and children, at least every five years.

“For more senior clients, it is important they know what their cost of living is, what assets they have, whether they will last, and what changes may need to be made,” he said. “Some have money but have not considered caregiving needs, the quality of life they want in the future, and what that will cost. In some cases, clients are afraid to spend and run out of money, and caregivers may step in and try to increase their quality of life.”

“For clients in the planning stage, with caregiving needs 20 to 30 years out, we help them plan for the future and manage resources,” Kidd said. “Others are in the action stage and need to involve family and make decisions now about types of care. They are a little late for planning, so we need to be more reactive and direct them to the care and resources they need.”

“There is no one right answer about when to make a plan,” Itkoe said. “But it is important to remember that there can be long wait lists for assisted-living facilities. If clients wait until they need them, they may not be able to get in for years.”

CPA financial planners are not therapists or geriatric specialists. However, their ability to provide clear financial, tax, and documentation advice can help prepare their clients to move into a different phase of life and remove some of the emotional stress as clients face the challenges of caregiving.

For more on planning for caregiving, members of the AICPA Personal Financial Planning Section can watch the video “Facing the Challenges of Caregiving.” Others can listen to the podcast episode “Helping Clients Evaluate Their Housing Options in Retirement” and the podcast series Guiding Clients With Diminishing Mental Capacity.

— Maria L. Murphy, CPA, is a senior content management analyst, accounting and auditing products, for Wolters Kluwer Tax & Accounting North America and a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.