Baby Boomers' parents are often living much longer than expected. This provides fertile ground for conflict within families about how and where an elderly parent should be supported. To make matters worse, the parents themselves may make decisions that seem right at the time, but that have terrible implications down the track.
Recently I had an email from a reader I will call Sheila, whose 76-year-old mother lives in a two-bedroom apartment in a top suburb in Sydney. It is worth just over $1 million. Her only financial asset is $80,000 in the bank – her only income is the full age pension of $23,100 a year.
Mum is considering selling her place, putting the money in the bank and moving to Brisbane to rent an investment unit owned by her daughter and son-in-law, who have promised to give her cheap rent.
Sheila tells me there are other children, but Mum is worried about discussing it with them while she is so uncertain what is the best thing to do.
It's good that Mum is uncertain about the best strategy to adopt, because the financial implications of selling the property and moving to a new city are huge. First, she would be converting a non-assessable asset, the family home, to an assessable asset, cash. The immediate consequence of this would be loss of her entire pension – worth at least $500,000 over the next 20 years.
Second, the beneficiaries of her estate would be losing any capital gain the apartment might make in the next 20 years. This could easily be more than $1Â million tax-free.
There's more. If Sheila's family in Brisbane have a mortgage over their investment unit, they will be losing tax deductibility for any expenses – including interest – on that property, unless they charge Mum a fair market rent.
There is also the psychological aspect – there is an abundance of research showing that most older people are happiest with their present social network, and don't cope well with forming a new social network in a strange area. What seems a great idea at the time can quickly turn into stress, especially if Mum finds it impossible to make new friends, and puts increasing demands on her daughter's family.
I told Sheila that a much better option may be for Mum to consult with all the family members, take out a modest reverse mortgage on her current Sydney property when her money in the bank is getting low, and have the family pay the interest on the mortgage so it does not increase. This would enable Mum to keep her pension, continue living in her own home, and preserve any capital growth in the property for the estate.
Alternatively, if the main reason for Mum's move was to be close to Sheila and her family, she could sell her Sydney property and replace it with a property in Brisbane in a good growth area. This latter option would enable her to keep her pension, as well as own an appreciating piece of real estate.
The lesson here is that it is important to consult all family members when a major decision like the sale of the family home is being considered. And to take expert advice from professionals such as financial planners and solicitors to ensure everybody is aware of the financial implications of any proposed action. It's too late to say "I'm sorry" after the deed is done.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email:noelwhit@gmail.com.
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