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'Tis the season for families to talk about finances

These discussions are difficult, but necessary given hard financial times.

By Kathleen Connell / December 22, 2008



As families gather to celebrate Christmas this week, money could be an unpleasant subject, given pronounced declines in real estate and stock markets. But now more than ever, families should use this as an opportunity to discuss their financial situation.

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The idea may be especially difficult for aging parents, reluctant to divulge sensitive financial information. Some have managed their money more wisely than their baby boomer children and do not wish to have their decisions second-guessed. Perhaps they are even fearful that their independence is being usurped.

Yet elderly parents need to be assured that nearly everyone has experienced significant losses this year. Point out that these losses are the result of market volatility, not a lack of knowledge or poor decisions. As the conversation moves along, attempt to address these four areas:

Investments

In case your parents have done well in the stock market, ask them to share their successful practices and advice. But also be sure to talk about:

•Possible tax treatments for investment losses, including whether they should take capital-gains losses in 2008 or defer them to 2009.

•Adjusting their asset allocation to protect a portfolio's remaining value.

•How to deal with less liquidity and credit restrictions, assuming an extended economic downturn through 2010.

Action tip: Determine how portfolio losses will affect retirement plans. Parents might need to delay retirement, working longer. If already retired, talk about whether parents can stretch their budget to fund their current lifestyle. If not, siblings should discuss if they are able and prepared to contribute to their parents' finances.

Real estate

The family home generally represents 40 percent of a middle-class family's net worth. An update on neighborhood property trends will alert you to any serious erosion of home values. If no family member is familiar with recent sales activity, seek advice from a local real estate agent rather than relying solely on online resources. Home values vary widely by neighborhood, as do individual property characteristics, sales, and foreclosure activity.

Reduced real estate values could dramatically affect the ability of parents to sell their home within a five-year period with an expected profit. A delayed sale will affect any plans by elder parents to relocate to a retirement community or assisted-care facility.

Action tip: Investigate a reverse mortgage as a way to keep parents in their own home. This is not an option, unless they are willing to stay in their home for an extended number of years. Parents might also consider sharing their home with others to defray living costs.

Long-term care

According to the US Department of Health and Human Services, approximately 70 percent of Americans age 65 or over will require long-term-care services, and over 40 percent will need nursing-home care. An October survey by Metlife reveals that a private room in a nursing home costs $77,380 a year on average, and a year at an assisted living community averages $36,372.

For those with assets below $150,000, Medicaid may offer a better alternative to long-term care insurance, as they will probably exhaust their assets and be able to qualify for government support. Parents with assets above $3 million should weigh whether they have the resources needed to cover long-term-care costs themselves.

Action tip: Secure long-term-care insurance for parents who lack a policy, are in their 60s, and are unlikely to qualify for Medicaid. Customize your plan and get multiple quotes. For more information, visit longtermcare.gov.

Power of attorney and trusts

Some parents already may have a multigenerational estate plan to transfer assets. Such plans should be reviewed if investment losses have been substantial. If the estate is smaller than projected, it may be necessary to prioritize inheritance claims and possibly delete individuals or charitable foundations.

If your parents lack an estate plan, ask a financial planner or accountant to recommend an attorney. Check with the State Bar Association for lawyers who handle trusts and estates. If the estate has complicated assets, such as rental properties, make sure the lawyer has expertise in that area.

Action tip: Prepare an estate worksheet that includes the current value of all property. It's essential to share with the family the location of the will and contact information for its designated executor. Parents should create a master family file to store key documents with a complete list of all real estate, banking, insurance, and investment-account numbers and contact information.

Dr. Kathleen Connell is a professor at Haas Graduate Business School, University of California, Berkeley.

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