The Parent Trap

Aging parents can be quite a problem. Its not uncommon for meetings to digress from the topic at hand to centre on elderly parents, financial obligations thereto, and how the tax system can be used to soften these obligations.

Some ideas for financially ailing parents include:

(i) buying a home in family trust and renting it to your parents for an arms length rent. Despite the familial feel, the courts will accept this as predominately an investment strategy and the interest on any loan used to buy the property will be tax deductible, as will depreciation on plant and equipment (ie hot water service, curtains and blinds, carpets and a dishwasher) and depreciation on furniture and fittings (ie tables, chairs, couches, beds etc). The net tax loss can be offset against other income in the trust, creating a tax benefit for the dutiful child. Tax losses can easily be $20,000 a year;

(ii) if your parents just miss out on an old age pension, encourage them to up-grade their family home and then re-apply showing more assets in the exempt home category and less other assets. We kicked a goal here today and Grandma and Grandpa will enjoy a tax free pension plus fringe benefits, and the view on the new home, forever after. That can add up to $20,000 a year in cash, plus the extra capital gain on the extra CGT exempt home;

(iii) if you are one of several siblings but the only one prepared to help out financially, encourage your parents to use a reverse mortgage to augment their cash flow. This takes the strain off you and means your miserly brothers and sister will end up paying their share via a pro-rata depleted inheritance;

(iv) consider superannuating your parents before 30 June 2007 and then starting a pension for them after 1 July 2007. The superannuation benefits can be invested tax free, and your parents' pensions are exempt income. Remember that the aged based deductible contribution limit is $106,000 per paren this year. That's potentially $212,000 of super contributions and up to more more than $64,000 of tax benefit. This sure beats subsidising their living costs out of your after tax income;

(v) providing your parents with a tax deductible company car. They are defined as "employees under the FBT rules and there is no limit on the number of company cars your practice entity or service entity can have (may be you can do a deal and they can have your old car and you get the brand spanking new one?); and

(vi) so obviously it almost went without saying, if you use a family trust consider distributing net income to your parents.

Contact Adrian McMaster on adrian@mcmasters.com.au or 03 9592 9888 if you wish to discuss any of these ideas or need further inspiration for dealing with your parents. Specific advice considering your specific circumstances is needed before implementing any of these strategies.

And keep smiling. It could be worse. It could be your parents in law.