People who don't prepare to care for sick and aging parents could fall victim to what economists call "negative inheritance."
The term, likely coined by Boston University professor Laurence Kotlikoff, describes the situation when the costs to children of caring for aging relatives outstrip any gifts or bequests they might receive.
To protect against the havoc a negative inheritance can wreak on a financial plan, financial advisers such as Bryan Wisda have developed detailed strategies for hedging these risks. These methods typically include a combination of family dialogue, long-term care insurance and proactive management of aging parents' assets.
"We kind of plan for inheritance as if it were an asset class," says Wisda, a senior financial planner at Summit Wealth Management.
Researchers long ago projected a large portion of boomers would one day find themselves in what Barry Kohler, an adviser at BDMP Wealth Management, calls "the uncomfortable position . . . of becoming parents to our parents."
They become the primary caregivers who usher parents through old age and, very often, through chronic and debilitating diseases such as Alzheimer's, diabetes and cancer.
Yet as taxing as caring for declining parents can be — both to the pocketbook and the caregiver's emotional health — 91 percent of boomers report being "generally pleased to be helping their parents," according to a survey by Putnam Investments, a unit of Power Corp. of Canada.
But where most Americans see a family obligation, a growing number of financial advisers see lurking risks, analogous to those carried by an asset class such as commodities futures, which can destroy their clients' financial plans.
"If you planned to withdraw 5 percent from your portfolio every year to support your lifestyle," says Joe Birkofer, a principal at Legacy Asset Management Inc., "and then you increase that to 50 percent" to care for ailing parents, "your financial plan's a mess."
While advisers say planning far ahead can pre-empt much of the emotional and financial duress, the most crucial, and also most elusive, ingredient is proactive family discussion.
To motivate clients who are otherwise reluctant to broach the subject with siblings, let alone with mom and dad, advisers say it is most effective to target specific scenarios.
For example, "What happens when mom can't drive?" is a question Kohler will pose to his clients. He says it's one of many that can get the families talking.
In families that don't address these scenarios before they arise, a body of work by researchers suggests the bulk of caregiving responsibilities almost invariably falls to one child.
And when the job of caring for mom and dad does fall on certain siblings, the ensuing tension and resentment "can tear families apart," says John D. Smith, a wealth manager at Balasa Dinverno & Foltz.
To help clients who are at higher risk of supporting and carrying their aging parents alone, advisers such as Wisda say they request permission to speak with the parents directly
Once Wisda has the parents' information in hand, he runs a series of projections "to see if there's any chance they will run out of money." If that likelihood is high, the simplest first step is to buy long-term care insurance, even if the children end up writing the check for the premiums.
Smith says clients can "hedge away some of the risk" by purchasing a policy that would cover half of the cost of in-home or nursing home care.
When clients can't qualify their parents for long-term care insurance, due either to age or pre-existing medical conditions, advisers say it can be even more important to proactively manage a parent's remaining assets, even up to and including what Birkofer calls "unwinding the family home."
But Birkofer and other advisers are quick to caution that liquidating the ranch to manage or diversify the assets can be stressful.
When push comes to shove, selling the homestead may be the only option. After all, says Birkofer, "you can't eat the guest bedroom."
Apart from the financial strains of caring for aging family members, recent research suggests that middle-aged caregivers who are caught off-guard by an ailing parent may suffer almost as much vocationally and emotionally.
According to Dr. Ken Langa, a physician and associate professor at the University of Michigan's Institute for Social Research, caring for an elderly relative can require as much time as a full-time job.
The result, says Beth Segers, Putnam's director of market planning and development, is a middle-aged child who probably gets "a lot less sleep, and has a lot less time to spend with peers."
The reality of these heavy costs may be starting to hit home.
Once every semester, Birkofer tackles the issue of negative inheritance in the Rice University financial planning class that he teaches. He shows his students an image from a medieval wood carving that depicts a grisly scene of moaning, anguished skeletons.
He then asks: What's the Black Death for a financial plan?
"More and more, I hear people get it right the first time," he says. "It's your parents."