When a client brings me their elderly parents' portfolio for a second opinion, I'm rarely surprised to learn what's inside. In my experience, nearly every one has a short list of individual stocks, minimal or no oversight from a traditional broker, high unrealized gains (because the stocks were purchased decades prior at much lower prices), and very few cash withdrawals to provide for living expenses. The bottom line: since they don't need the money, they ignore the money.
It's understandable that managing their wealth is no longer a priority to the elderly parents, but I think it's an important opportunity for you, the children, who are newly minted as the decision-maker to get things back on track. Your parents' wealth likely will serve one of two purposes: 1.) to fund extraordinary health care expenses in a nursing home or other long-term care facility, or 2.) to contribute to your own retirement savings after you inherit the money a few years down the road. In both cases, you will be well served to have constructed a thoughtful investment plan. Here are some of the basics of elderly investing:
- Preparation for cost basis step-up. When done properly, some assets lose their high unrealized gains when the account owner dies and assume a new cost basis. This means that the you, the beneficiaries, can potentially sell the inherited investments after their death without any tax cost. Note: Positions with losses have their cost basis reset, too, so it effectively becomes a step down in basis if they're not sold before death.
- Practice death. There are two common mishaps that we can otherwise identify in advance and resolve with a little time and planning. In a practice death, we first look how probate-proof your assets are and whether you can reasonably expect the assets to have an immediate passthrough to the beneficiaries. Probate court is an incredibly annoying process (Yes, I'd still argue this in states where it moves quickly), and you have no business getting involved in it if you can avoid it. The second area of attention in a practice death is comparing the expected flow of assets to your parents' documented wishes in their wills/trusts. I often find layers of planning that conflict with beneficiary designations, and ironing out the real intention with their help is the only way to do it.
- Power of attorney. While your parents still have their mental capacities intact, you should be talking about obtaining a documented power of attorney with the help of a lawyer and then getting it on record with the investment and banking institutions where your parents have their assets. If they are to develop alzheimer's, for example, your ability to take over after the fact is far more difficult.
- Liquidity. This is also true for most investors, not just the elderly. Ensuring that the portfolio offers the ability to convert pieces of it to spendable cash is a no-brainer. Elderly investors are often the prey of annuity salespeople whose pitch is a promise of a minimum return, but the return is irrelevant if you can't access the core of the investment without stiff penalties.
- Medical expense tax planning. Current laws provide for deductions of dependent living expenses, so a well-tuned plan can leverage this opportunity. We might liquidate some additional legacy investments that we would have otherwise held.
- Proper allocation and location. Portfolios for older generations were typically built long before the science of investing developed into what it is today, so they're missing some of the basics like asset allocation (how much risk are you willing, are you able, and do you need to take?) and asset location (which accounts should own which assets to maximize after-tax returns?). Assuming they still have some insight into the changes you'll be making, this won't always be easy. But, each step you take to modernize the portfolio better aligns your likely outcome with the intended one.