How to Financially Prepare for the Death of a Parent

Despite how anxious it makes everyone involved, talking about death and the related end-of-life financial planning actually isn't the hardest conversation most of us will ever have with our parents. (And no, the birds and the bees talk isn't it, either.) Surprisingly, nearly 40 percent of us find talking to an elderly parent about permanently parking the car more difficult than talking about death [source: Rosenblatt].

Car discussions aside, 24 percent of adults consider final arrangements the worst topic of conversation imaginable [source: Rosenblatt]. This is the kind of sensitive conversation for which you want to set aside time. As you begin, be sure anyone who should be part of the conversation is involved, including any siblings you have. Tread cautiously and gently. Offer your help, rather than dictating what will be (or should be) done, and consider bringing in a third-party adviser (such as an attorney, financial adviser or medical professional) for support and facilitation.

Don't be afraid to acknowledge that the conversation is difficult and uncomfortable, but don't lose sight of your goals. There are four important things you're trying to learn about your parents' finances and records: their current expenses and income; their current financial situation and financial records; their legal documents (and attorney information); and where everything can be found.

First, look at the big picture. Before you can dig more deeply into the nuts and bolts, try to learn about the current financial landscape by asking about their budget. Talk about how much their monthly income is and where it comes from (such as a pension or investments), in addition to what their monthly expenses and debts are (such as their mortgage, car payments and credit cards). Creditors have a limited amount of time to collect unpaid debts after a passing, and some debts won't need to be repaid, but it's better to know what debts you'll be facing before you face them.

Review all financial account and investment information, and the contact information for your parents' accountant or financial planner, if applicable.

You want as much information and as many specifics as you can get in answer to your questions, or going through the exercise won't be as beneficial in the end. Working together, take inventory of everything. Now is also a good time to organize. Keep copies of important documents in a safe deposit box (rather than a strongbox) and make sure you know where the key is kept. Retain recent records, but shred all those old utility bills your mom's had boxed up since the '70s — your parents don't need them now, and you won't need them later.

Make copies of important financial information and legal documents, including:

At the very least, you're looking for policy numbers, names of institutions (such as banks or mortgage companies) and important associates (such as your parents' attorney and financial adviser), and contact information for each. At the very least, learn where important documents and other information is stored, and be sure you have access. If, for instance, a bank account is in one person's name and that person dies, the funds then are considered part of the whole estate, and you can't access them.

This is also the time to consolidate and simplify. Over time, people tend to accumulate bank accounts. Consolidate your parents' accounts, including credit cards, checking/savings accounts and investment accounts — and be sure someone else will be able to access the remaining accounts if your parents are unable. Also consider simplifying their financial affairs by using tools such as automatic bill pay (just be sure you know the password).

Once the necessary documents are gathered, review them before they're stored to be sure they're current. Double check the details, such as beneficiaries and authorized decision-makers. Are documents original, and do official papers such as wills, trusts and health care directives (such as a living will) reflect your parents' current wishes?

Putting financial affairs in order before a parent's death isn't something you do alone. Lawyers, financial advisers, doctors and others are available to help, whether it's to fill in the gaps (for example, finally sign a will), refresh documentation (such as double checking that the house is properly deeded), explain policies and directives or just to help you work your way through this process.

Let's talk about the most important pieces of estate planning. First, who gets what. A will is a legally binding document that explains how your parents wish to distribute their assets, including not only any inheritance but also debt repayment. If your parents have a will or after-life trust, make sure it's current, legally binding and that it's the original document. Take this time, too, to learn about estate taxes and whether they impact your parents' estate. As of 2014, estates worth $5.34 million or more are taxable upon death [source: Nolo].

If there is no will or trust, there is no legal instruction regarding what to do with your parents' assets upon their death, and their estate will go through probate court. For most of us, though, a will and durable power of attorney are sufficient.

Durable power of attorney (POA) gives a person the authority to act as a proxy for another person. There are two types: first, the health care power of attorney, which authorizes a person to make medical decisions on another's behalf, and, second, a financial power of attorney, which authorizes a person to make financial and legal decisions on another's behalf.

Depending on how the POA is written (you'll want to write this up with your attorney), you may have the authority to manage your parents' assets, pay their bills and otherwise make financial decisions if they become unable to do so themselves. Without a POA, making decisions or simply paying the bills on behalf of an incapacitated parent is impossible unless a court establishes guardianship. Some families may want to also establish either a living or revocable trust. Both trust funds are intended to be used while your parents are alive but incapable, along with the POA.

In addition to a health care power of attorney, consider setting up health care directives, such as a living will or a medical privacy release. It's also worth noting now if an aging parent receives Medicaid, Medicare or Social Security benefits, rather than waiting until illness, disability or dementia arises.

And speaking of illness or the need for long-term care, now is also a good time to discuss medical insurance. In addition to understanding your parents' health insurance plan, determine whether they have long-term care insurance, designed to cover costs of assisted living, home care and nursing home care. If your parents are comfortable with the idea, invite their health care providers into the conversation.

It's a big project, but having fewer accounts and a central storage location for all the financial and legal information, insurance policies, titles and proof of ownership documents, medical information and health directives will simplify not only today's records for your parents (and you), but also will streamline the process for those who will need the documents in an emergency or as needed.