By Beth Pinsker
Dear Fix My Portfolio,
We’re coming to you with heart in hand because we’re in a quickly worsening situation.
Our mother just turned 80, and in the last year and a half she has developed severe, rapid-onset dementia. She’s going fast. The same thing happened to a friend’s father, and he died within two years or so, when his brain stopped sending signals to his heart.
We worked hard to leave her secure in widowhood. We repaired her home, paid off her new car and organized all her accounts. She even went to the gym three days a week, so she was very physically healthy. However, we did not prepare for this possibility. Both her parents were almost 90 when they died and were in good cognitive health.
She has a $400,000 paid-off home, $500,000 in savings and $600,000 in stocks. We three siblings have agreed to split everything three ways: We are the beneficiaries on all her accounts and will inherit her home. We all live in Texas, and my brother has power of attorney.
She’s in a rapidly increasing downward spiral. How do we care for her and pay the least amount in taxes?
Trio of Siblings
Dear Trio,
I’m sorry you’re facing such a hard road ahead with your mom. There’s a lot of uncertainty, and I’m sure it’s very scary. It’s particularly hard to predict the trajectory of an illness like dementia. What seems like a fast downward spiral now can stabilize to a new normal. The human body works in mysterious ways.
You three siblings need to circle the wagons and prepare for a long winter in order to safeguard your mother’s resources for her care. You have a lot going for you in that her house is paid off and she has a significant amount of savings. Care is expensive, though, and families can’t always handle cognitive-impairment illnesses at home or without paid caregivers.
First off, make sure that everyone is on the same page. If your mother is still able to participate in these conversations, it’s important to have her involved, too. “It can be difficult to talk about money with anyone, and very difficult with family. But one of the first steps … is opening up a line of communication,” says certified financial planner Jim Trujillo , a principal at Cerity Partners who is based in Louisville, Ky.
When you lay all the financial cards on the table, you’ll be able to see her monthly income and spending and get a sense of how much of her savings she needs to burn through each month. This number will be changing all the time as her care needs develop. You may also have some large expenditures to think about up front, such as modifying her house or making a down payment on a care facility. If you take out big chunks of principal at the start of this process, it’s going to have a domino effect in terms of growth and what funds are available down the line.
Your immediate tax burden — which is really her tax burden — will depend on what order you spend down her assets. You don’t specify the types of accounts where her money is held. It makes a big difference, taxwise, whether her cash and stocks are in tax-deferred accounts or in taxable accounts.
You also don’t specify if she has any current income from pensions or Social Security. I’ll assume, given that you don’t mention it, that she has a small amount of Social Security income.
Required minimum distributions on $1.1 million
If most of her savings are in a tax-deferred IRA, she would take out either her required minimum distribution or whatever amount greater than that she needs to live on annually, and pay income tax as she withdraws. The RMD for an 80-year-old with $1.1 million is roughly $55,000 in 2024, according to an estimate from AARP’s online calculator .
If she withdraws more than $34,000 this year, that will push her into paying tax on 85% of her Social Security benefit . If her modified adjusted annual gross income is over $103,000, she may face IRMAA surcharges on her Medicare payments , which will come out of her Social Security checks and may cause her to need to withdraw more each year.
