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MARJO JOHNE

Wednesday, February 18, 2004

When she became engaged four years ago, Dina Arellano made one thing clear: her widowed mother, who was financially dependent on her, was going to be part of the package.

"My mom has been living with me since May, 1999, and I've been taking care of everything, from rent to food and clothing," says Ms. Arellano, a 37-year-old dental assistant who lives in Toronto with her husband, Ronald Manlangit, four-year-old daughter Jazmine, and 67-year-old mother, Nelia.

"I told my husband from the very start that she's my family and that I have to continue taking care of her."

While there has been much talk about all the baby boomers who stand to inherit large sums of money from their parents, much less discussed is a flip-side situation: Grown children who not only expect no inheritance but but are actually having to financially support their parents in their senior years.

Call it role reversal. According to a 2001 survey by Royal Bank of Canada, one in five Canadians believed they would be required to financially support their parents.

This belief was most prevalent among 18- to 29-year-olds; one in four of them said they expected to help provide for aging parents.

This reversal of roles between adult children and their parents can be a sticky situation if not properly worked out.

Not only can it strain bank accounts, it can also strain family relations, between dependant parents and their children, as well as among siblings.

To avoid family conflicts, financial and legal experts suggest taking a businesslike approach to the situation. Their unanimous advice: talk about it as openly and as early as possible, raising issues ranging from what kind of help is needed to which siblings are in a position to lend a financial hand.

"If the adult child is able to have this conversation while the parents are still in their sixties, then there's still a healthy time horizon in which to plan and implement solutions," says Ruth Bastedo, a Toronto-based investment adviser with RBC Dominion Securities Inc.

This isn't always easy. Judith Johnson, former president of the Family Caregivers Network., a support group in Victoria, B.C., for Canadians who look after sick or disabled family or friends, says parents sometimes try to hide their financial difficulties out of a sense of shame or a reluctance to burden their family.

Ms. Johnson says children should be alert for signs of money problems, such as an empty refrigerator, a house in disrepair or parent's deteriorating health.

Lisa Manuel, a manager at the Family Service Association of Toronto, a non-profit organization that helps individuals and families in crisis, says adult children should be tactful but direct about offering their parents financial assistance.

"There's a lot of dancing around this issue and, unfortunately, we don't achieve much by dancing," she says. "You just have to name the issue and let your mom or dad know that you'd be happy to help if they need that help."

For parents who just won't admit they need help, Ms. Manuel suggests more subtle forms of giving, such as grocery or clothing store gift certificates or taxi vouchers, preferably timed with a special occasion such as the parent's birthday or a holiday.

Ms. Manuel says problems often arise when several siblings are involved and not everyone can contribute financially. In many cases, the children who cannot give feel guilty and inadequate.

But she says that giving money isn't the only way to help a parent in need. Pitching in with their shopping, housework or shovelling snow are also valuable contributions.

When it comes to actual financial assistance, a good plan should take into account the different stages of retirement and how families can best handle them, say the pros. Parents who are cash-poor but have assets, such as a house, should also factor those assets into a plan.

For instance, in the early retirement years, the parents might want to stay in their own home and might or might not be able to cover a large part of their living expenses.

Later, the child and parents might decide to share a home -- either the original family homestead or a child's home -- or move the parents into a nursing home.

Whatever the plan, families need to figure out how to make the options work.

Should the kids start helping their parents while they are still living in their own home or wait and invest the money they won't have to fork over now to build for later use? Then they might have a bigger pot for the later stage, Ms. Bastedo says.

Whatever plan a family comes up with, Ms. Johnson says that whenever money changes hands, it should always be accompanied by a family contract.

The contract does not have to be drawn up by a lawyer; it could simply be a written document created by the parent and adult child or children outlining the terms and conditions of their agreement.

For instance, if the parents want to stretch their finances, or the kids want to reduce the financial burden of having their parents live separately, perhaps they'll add a "granny suite" to their child's house and have the parents live there rent-free.

The contract should describe the arrangement and specify how much money was put up by who and what each party expects to get in return.

Judith Wahl, a Toronto lawyer and executive director for the Advocacy Centre for the Elderly, says contracts should also spell out a contingency plan should things go wrong.

For instance, what happens when an adult child moves into a parent's home, takes over all or some of the expenses, and the arrangement sours?

Does the parent sell the house and use the proceeds to repay what the child has spent? Or does the child have the option of buying the house at a lower-than-market price in exchange for paying the parent's rent at another location?

For people with limited resources, Ms. Bastedo recommends putting priorities on financial goals and planning accordingly. This is what Ms. Arellano says she's been doing in the last few years.

She figures supporting her mother costs her and her husband about $6,000 a year. Although they live "from paycheque to paycheque" and Ms. Arellano has no retirement savings, she considers her daughter's education a top priority and has put $120 a month into a registered education savings plan for the last four years.

Ms. Arellano says it also helps that her husband, who works as a mechanic for a large car manufacturer, has a good salary and is willing to help support her mother.

Planning early also means that things like supplemental health or long-term care insurance can be bought earlier and at a lower rate, Ms. Bastedo says.

The latter, which covers the cost of a nursing home or home care, can be purchased with the option of getting your premiums returned if your parents don't use the coverage.

It doesn't come cheap, with costs varying depending on the parent's age, health, coverage and options purchased.

As an example, $200-a-day coverage from the Royal Bank of Canada for a 55-year-old male in normal health would cost $4,100 a year in premiums for 20 years. For a 65-year-old female in good health, the cost would be $6,700 a year. Opting for a rider to refund premiums would increase the rate considerably, to $5,700 for the 55-year-old male and $11,400 for the 65-year-old female.

For adult children who don't want to see their savings depleted, one option is to arrange an insurance annuity, which combines an annuity with a life insurance policy.

The children could arrange for the parents to receive part of the interest payments from the annuity as a regular income stream; the rest would cover the premiums for the life insurance policy. When the parent dies, the beneficiary of the insurance policy -- in this case, the child who invested in the annuity -- would get the policy payout.

For parents who own a house, some financial planners recommend freeing up some cash by borrowing against the equity of their home either through a reverse mortgage or a home equity line of credit. They can plunk this money into an income-generating investment that can supplement or replace help from their kids.

Home equity loans generally offer more attractive interest rates than reverse mortgages but they do require proof the borrower can repay and interest has to be covered regularly. By comparison, reverse mortgages, available to those 62 and over, do not require proof of income or any payments for as long as the mortgagee lives in the house.

Whichever option parents choose, experts say, it's a good idea to explain to the kids that this may mean there is no house to inherit once the parents' estate has settled the mortgage or loan.

Mary Louise Dickson, an estate planning lawyer with Dickson MacGregor Appell LLP in Toronto, says another tactic for parents is to turn the amount their kids are giving them into a mortgage payable back to the kids. That way, they can ensure the children will be repaid for their financial support.

Both parents and their adult children should have wills, Ms. Dickson says. But Ruth Magnusson, an estate and adult guardianship lawyer with Clay & Co. in Victoria, B.C., notes that many children tend not to think of their parents when they write up their wills.

"Maybe three times a year, I see children providing for their parents in their will," she says. "One of the reasons for this is people just don't anticipate they'll die before their parents."

For parents, Ms. Dickson says, a will is particularly important, when there are several children and they intend to give a larger share of their estate to the child who has been helping.

"Otherwise, the other siblings could demand that the estate be divided equally among all the children. Meanwhile, the sibling who has been helping the most may have had an understanding with the parents that she would be getting a larger share."

Leaving one or two children with a larger inheritance than their siblings can cause conflicts and even result in lawsuits after the parent's death. While there's no sure-fire way of preventing this from happening, Ms. Dickson says talking openly about who is getting how much and why can minimize friction and, at the very least, eliminate surprises in the end.

Ms. Dickson says parents should also consider assigning powers of attorney for property and personal care to the child helping them or to another trusted person. A power of attorney allows the appointed person to act on behalf of the parents. So if the parent becomes incapacitated or is declared mentally incompetent, the appointee can continue to pay the parent's bills, file taxes and make financial and health decisions on the parent's behalf.

Because a power of attorney for property usually takes effect immediately, Ms. Dickson says some parents are reluctant to assign one. To ensure a power of attorney is not misused or abused, Ms. Dickson advises parents to keep it a secret.

"The child doesn't have to know about the power of attorney," she says. "The parents can leave it with their lawyer, with instructions as to when the lawyer should release it."

Kids who help their parents may also get some tax breaks. Children whose parents live with them may be eligible for the caregiver tax credit, says Elaine Pantel, a certified general accountant with Shimmerman Penn LLP in Toronto.

If they're paying for their parents' medical expenses, including long-term or nursing care, they may also be able to claim these as a tax credit. And if more than one child is supporting the parent, they may be able to split the tax credits, says Ms. Pantel.

The eligibility and allowable amounts for these tax credits is based on a number of criteria, including the province you live in, the parents' income and whether or not they live with you, so it's best to consult an accountant, Ms. Pantel says.

Taking care of the legal and financial aspects of providing for a parent is extremely important. But what's even more important, Ms. Bastedo says, is remembering to treat your parents with respect.

"It's really important to give elderly people their dignity and to treat them as if they still have authority over their own lives," she says. "Remember that these are your parents, so treat them with the respect that parents deserve."

A plan for helping parents

Sit down as a family and talk openly about what your parents need and how you and your siblings can help.

Take into account the different stages of retirement -- and how much money your parents will have or need, the living accommodations and how these things will change -- into your planning.

Make sure your plan takes into account your parents' assets, such as a house. For instance, by taking out a reverse mortgage or home equity loan, your parents can set up an income-generating investment to supplement, replace or eventually repay the support you're giving them.

Put all agreements in writing, specifying who gave how much money to whom, and what all parties expect to get out of the arrangement.

Always have a contingency plan in case the arrangement between you and your parents doesn't work out. Have this in writing, too.

Ensure that both you and your parents have a will.

Have your parents assign powers of attorney for property and personal care.

Consult an accountant about tax credits you may be entitled to for supporting your parents.

Look into supplemental health and long-term care insurance. Keep in mind that the earlier you buy insurance, the less you'll pay in premiums.

To protect your savings, consider an insurance annuity which provides your parent with regular income and pays for a life insurance policy with you as the beneficiary.

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