How to ask your parents those difficult financial questions
I am one of the lucky ones. My parents were always very organised about their finances and keen to ensure that my brother and I were up to date with their plans for the family silver. We've never had to ask difficult questions about their financial affairs.
It's a great relief - not only because we know that my mum (now widowed) is well provided for, but also because their actions have made it easier now for the three of us to have calm, practical discussions about the future.
But many people find it much more difficult to broach the sensitive subject of financial planning with their elderly parents. The latest NS&I (National Savings & Investment Savings) survey focused on just this issue - and revealed some alarming findings.
Almost half of those interviewed don't know where their parents' financial documents are kept. Almost a third say they have "no idea" about their parents' financial plans, and over a third don't know whether their parents have made a will or how they intend to distribute their estate.
Why is it so difficult for children and parents to have these conversations?
Old age and death remain semi-taboo subjects: parents resist facing up to the amount of care they may eventually need, or to their own mortality," says NS&I savings spokesperson Tim Mack. Children also shy away from thoughts of losing their parents - and they don't want to appear to be eyeing up their inheritance either.
Nonetheless, such conversations need to be had. Firstly, if the children are in the picture regarding their parents' finances, they'll be better placed to make arrangements in the event that one or both parents eventually need long-term care.
Secondly, it's much easier for them to deal with the estate in due course.
Lasting Power of Attorney
Parents can use a Lasting Power of Attorney (LPA) to nominate one or more children as attorneys, to make practical decisions about their property and financial affairs once they find it hard to manage things themselves.
Chris Cole, senior client partner at IFA Towry, says setting up an LPA is typically discussed when older people talk to a solicitor about their wills. Some, like my mum, may put one in place of their own accord.
In other cases, the growing need for an LPA provides the flashpoint for children to instigate the discussion, as they see their parents' health declining and worry about how they'll manage in future.
Children need to understand how much difference having an LPA may make in due course. Mack suggests talking to a friend who has had to sort out a parent's affairs without an LPA, to see just how difficult things can become if there isn't one in place.
However, Paul Davies, a partner at legal specialist Lane-Smith and Schindler, adds that if parents just want help managing their finances, an alternative may be to put a bank account into joint names with one or more of the children so that they can sort things out if necessary. "Banks don't necessarily accept a power of attorney document at face value, so this can be less hassle," he says.
"In many cases, setting up a LPA leads on to a look at the parents' wills; if they have wills in place, they're often pretty out of date, so it's a good idea to make sure they cover all the things the parents want to do with their assets now," says Tish Hanifan, joint chair of the Society of Later Life Advisers.
If there's no will in place when a parent dies, their estate will be dealt with according to the rules of intestacy, which set out who gets what.
"For estates under £250,000 where the individual dies intestate, everything automatically goes to the spouse, so if they don't have much anyway it's not worth worrying about a will. But in larger estates, some will automatically go to the children at the age of 18, which may not be ideal," says Davies.
Wills also ensure specific parental wishes are carried out, and are important for inheritance tax (IHT) planning.
Both wills and LPAs can be sorted out by a solicitor. Alternatively, it's possible to buy the LPA documents from publicguardian.gov.uk and do it yourself (though from personal experience I'd say it's an extremely complex business). Simple wills can also be created yourself, using forms downloaded from lawpack.co.uk.
Inheritance tax planning
Since October 2007, any unused nil rate band allowance of the first parent to die can be transferred to the survivor, so a couple can own up to £650,000 of non-taxable assets before IHT liabilities kick in. As a result, says Hanifan, IHT is far less of an issue than it used to be for many families.
For the children of wealthier parents, however, there may be real concerns about how much IHT they may have to pay on their parents' estate. It makes sense for parents and children to talk to a specialist financial adviser.
They can make sure that their parents' needs are fully catered for; beyond that, though, surplus wealth can be gifted away tax-efficiently while their parents are still alive," says Davies.
Full-time residential care can cost between £30,000 and £50,000 a year; parents will have to fund their own nursing home care fees if they have assets worth more than £23,250.
"Yet families often just hope it won't happen to them, and assume they'll deal with it as and when it does; they can end up haemorrhaging funds that way," stresses Hanifan. "People worry about what they'll need for later life, so it's important to calculate the likely costs of care.
Remember, income from pensions and Disability Living Allowance will go some way to cover them," says John Kelly, a director of Square One Financial Planning.
Specialist advice will help ensure their savings are appropriately invested to help meet the balance.
Children may simply want to ensure their parents are getting all the financial help they're entitled to. There's plenty of guidance from charities for the elderly. Age UK, for example, runs the More Money in Your Pocket campaign, which helped pensioners reclaim over £100 million in 2010.
"A lot of older people don't want to talk about their finances"
When Janet Yates-Adams' mother Hilda, aged 80, was diagnosed with dementia while in hospital in Birmingham, it was up to Janet to find a care home and sort out the financial challenge of paying for it. Luckily, Janet managed to arrange a place for Hilda only a few miles from her home near Padstow in Cornwall.
"I had to get mum to agree to a Lasting Power of Attorney (LPA) - she was still deemed capable of agreeing to it when she was first in the hospital, though she wouldn't have wanted it if she'd really been herself," says Janet. "A lot of older people don't want to talk about their finances, and she was just like that."
Janet did the LPA herself: "I would have had to pay the solicitor £2,000 to do it, but the charity Care Aware was really good - it sent me all the paperwork and talked me through it."
However, it took seven months to come through; she had a lot of difficulty dealing with banks on her mother's behalf in the meantime, once her mother could no longer sign cheques herself.
Rather than selling her mother's house in the current sluggish market, Janet has rented it out to help cover the care home fees of £18,000 a year, and has invested in a holiday caravan, which she lets out.
She has also discovered that Hilda is eligible for higher rate Attendance Allowance, which, together with her pensions and rental incomes, is enough to foot the bill.
How to have the conversation
Psychologist Phillip Hodson (counselling.co.uk) says there are various strategies children can employ to broach the subject of finance with their parents - "but it's always better to do it sooner, before the parents are getting too old or confused, rather than later".
• A good relationship and regular dialogue with your parents makes it much easier to add the subject of money plans as part of wider discussions.
• Try and motivate them to make a will and consider inheritance tax planning rather than making them feel foolish for not having done anything.
• Emphasise to your parents that you're not interested in what you'll be inheriting, but simply in ensuring you do things right when the time comes to sort out their affairs.
• If you have any siblings, it can also be easier if you talk to each other beforehand and approach your parents together.
• Remember: your parents may be struggling to come to terms with their frailty, so any such conversation has to be sensitively and lovingly handled.
Age UK - ageuk.org.uk, 0800 169 8787
Care Aware - advice and helpline for all aspects of long-term care for elderly relatives: careaware.co.uk, 0161 707 1107
Society of Later Life Advisers - member IFAs have specialist accreditation: societyoflaterlifeadvisers.co.uk includes a search facility to find local member firms
Solicitors for the Elderly - national organisation of specialist lawyers: contact solicitorsfortheelderly.com, 0844 567 6173, for help finding a member
Lane-Smith & Schindler - trust and estate practitioners: lanesmithshindler.com, 0845 658 4848
Towry - towry.com, 0845 788 9933
Square One - squareonefinancial.co.uk, 01273 921990
Lasting power of attorney
Refers to the legal document which allows an individual (donor) to nominate a person or people (attorneys) to make decisions on his or her behalf should they reach a state where they no longer have the mental capacity to make certain decisions. LPA can be divided into two groups: the donor’s financial wellbeing and their health and general welfare. You can choose anyone you trust to act as your attorney provided they are over 18 and not bankrupt when they sign the form and you can appoint more than one person to act and can choose whether they can act together or independently. An LPA is a powerful and important legal document and you may wish to seek advice from a legal adviser with experience of preparing them.
If you die without making a will, your estate will be divided up and distributed according to a set of complicated procedures laid down by the law as set out in the Administration of Estates Act 1925. The more complicated your life, the more complicated the intestacy laws after your death. Given that 60% of registered deaths last year were intestate, according to Title Research, the only way to ensure your estate is divided according to your wishes is to make a will.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.