Help Mom and Dad enjoy retirement like millionaires
By Jay MacDonald • Bankrate.com

Who wants their parents to live in retirement like millionaires?

You do, of course.

Heck, only the greediest, most ungrateful child would want Mom and Dad to scrimp and save into their golden years, denying themselves the fruits of their hard-earned labor just so they can bestow a king's ransom on their heirs.

But the fact is, many parents -- and especially those who lived through the Great Depression and World War II -- find it hard to kick their thrifty ways despite incessant pleas from their grown children to loosen the purse strings and live a little.

"In America, many of us believe that we are measured by the amount we leave and that it's a measure of how we lived our lives," says Stephen M. Pollan, author of the best-selling Die Broke. "That is total bull. What the kids can do is say, 'Mom and Dad, we don't need it. We want you to spend it.' "

And that will be easier if it's actually true, adds E. Glenn Tucker, estate planner for Rhodes & Tucker of Marco Island, Fla.

"No. 1 is to be self-sufficient ourselves, so they don't have this guilt feeling about us needing their help," says Tucker. "That's a primary thing. Be independent and don't put a burden on your parents."

Retirement Camelot
Before considering the ways you can help Mom and Dad retire like millionaires, it's important to understand how retirement came to be in the first place. During the Depression, when things were looking none too bright for the working American, the government offered up the vision of a leisurely retirement as a morale boost to a beaten-down work force.

"It was a fiction created by Franklin D. Roosevelt as a social experiment that did not work," says Pollan flatly.

Or rather, it worked once -- sort of like Camelot.

Following World War II, U.S. economic expansion, fueled in part by the demand for goods and services created by the post-war baby boom, made widespread retirement possible for the first time in history.

Today, those 76 million baby boomers born between 1946 and 1964 are on the receiving end of the largest transfer of wealth in history -- an estimated $1.4 trillion -- much of it the result of having been one of the extra 17 million Americans who put the boom in the post-war economy.

In all likelihood, Americans will never again be able to retire as early -- or as well -- as they can today.
Let's face it, Mom and Dad went through a lot to raise you. Here are some ways to help them live like millionaires, even if they're not.

Home moves
Homeownership gives seniors a variety of attractive "millionaire" options, including downsizing, purchasing income property, establishing a personal residence trust and drawing their equity out with a reverse mortgage:

• Downsizing: "I see a lot of downsizing," Tucker admits. "We've got properties here that people paid $100,000 for in the '70s that are worth $500,000 now. Those people could move into a townhouse for $200,000, reinvest the $300,000 equity, and avoid paying taxes on it because of their lifetime exclusion. Let's face it, they're better off putting it in a CD than they were with the money not being used and the higher tax and insurance bills they had on the house. But no matter what the investment is, they've improved their spendable income situation."
  
  
• Income property: If a duplex or townhouse appeals to your parents, consider putting them into one unit and renting out the other. You take the tax benefits and give them the rental income to play with.
  
  
• Personal residence trust: If they want to keep the old homestead, consider a personal residence trust. It allows your parents to transfer ownership of their home to you via an irrevocable trust for a set period (say 10 or 15 years). They retain the right to live in the home during that time, while in effect deeding the place to you, thus saving the estate tax on the property. The gift is also discounted, thus using less of their lifetime federal gift and estate tax exemption.
  
  
• Reverse mortgages: Just as the name implies, a reverse mortgage allows the owner to draw equity from their residence. "For people who don't have other assets, a reverse mortgage is a good option," says Tucker. "What I recommend is setting one up with a combination of a credit line and a fixed income each month, and that they not touch the equity line unless they have a serious problem."
  

  Here's how it works: If your parents are 80 years old and have a $200,000 house, they might arrange to have a $1,200 monthly income and a $20,000 equity line.

  "If they die before they've used up all the money, or if they sell the house before the mortgage has to be paid off, they just pay what has accumulated on the mortgage," Tucker says. "If the mortgage exceeds the market value of the house at the date of death, the mortgage company then can only look to the collateral."

Estate management
Most people want to avoid probate at all costs while still retaining control over how their assets are managed in the here and now. Various types of partnerships and trusts are the best way for parents to transfer assets to children while retaining some control of them.

• Family limited partnership: If your parents are worried that the family business or home might have to be sold to pay the estate taxes upon their death, they may want to check into a family limited partnership. They can then give $11,000 in shares annually to each child without paying gift tax, while retaining majority interest.
  
  
• GRATs and GRUTs: Like personal residence trusts, 'grantor retained annuity trusts' and 'grantor retained unitrusts' let your parents remove any asset from their estate and put it in trust. If they receive a set dollar amount from it each year, it's a GRAT; if the dollar amount fluctuates, it's a GRUT.
  
  
• Reverse gifting: You've heard of the $11,000 federal gift tax exclusion where parents can give each child up to that amount without eating away at their gift and estate tax limit? It also can work very nicely in reverse for those baby boomers who are financially able to get creative with it for their parents. What's more, it might ultimately benefit their own kids, as well. In super-simple terms you give your parents the money, and when they die they leave what's left to your kids, their grandchildren. In the meantime you benefit by removing your gift amount from your taxable income.
  
  "You could set up a trust for your parents, make those annual exclusionary gifts, and make your own children the successor beneficiaries of the trust," says Tucker. "What might happen is, your parents may die and your children may come into the picture at about the time they're starting into college or starting to raise their families. If you are fairly well off, you can dissociate from those assets with no estate tax consequences, bestow a benefit on your parents and your children, and take that income out of your reportable income every year."
  

  Another fairly straightforward gifting method is to open a joint savings or money market account at your bank. You transfer money into it, which your parents could then use to purchase mutual funds or open individual retirement accounts if they still qualify. But keep in mind: You are limited to $11,000 annual giving ($22,000 if you're married) to avoid federal gift tax.

• Irrevocable trusts: Families of more modest means might want to consider this variation, an irrevocable trust in your parents' name that reverts to your children upon their death. It's a good way to improve your income tax liability while contributing to a carefree retirement for your parents.

Medical coverage
Gather a group of senior citizens and you'll quickly find that the main topic of conversation is health. To hear them tell it, if old age doesn't kill you, the cost of medical care will.

Want to give the folks bragging rights around the canasta table? Help them get a good long-term health-care policy.

The younger and healthier your parents are, the better deal they'll get on coverage, which should be ample incentive to do this first. The key is research. There are a lot of plans out there, read every letter of their fine print.

If affordable long-term coverage is out of reach, Tucker says there are still steps you can take to give them peace of mind.

"Once they reach Medicare age (65), at least their catastrophic needs are going to be met. But because of the percentage participation of Medicare, they are going to be impacted by their medical expenses," he says. "I think they should look into a Medicare supplement. Stay away from HMOs and look for PPOs, because HMOs are so rigid that they take away the person's dignity."

Planning is everything
Both Pollan and Tucker agree, no matter what your age or the age of your parents, planning can be worth a million should-haves for all concerned.

"If they haven't done any estate planning, they should do it now," says Pollan. "The most important thing the kid can do is to say, 'You do not owe us a penny. We want you to stop going to the 'early bird.' We want you to live the most wonderful life you can.' "

Tucker agrees.

"It's never too late to exercise a little sound investment and planning judgment. If they haven't had the advice of a professional planner before they retired, there is little doubt that they're going to have some things they haven't done that can maximize their income and minimize their tax consequences."

So here's to you, mom and dad! Thanks for everything, now live like millionaires because you've earned it.

Jay MacDonald is a freelance writer based in Florida
To comment on this story, please e-mail the Bankrate.com editors.

-- Updated: June 10, 2002