Topic: J. Terrence Moynihan will be training attorneys and other probate professionals on the Proper Treatment of Assets, Tax Planning & Consequences of Probate, and successfully Closing the Probate Estate in this continuing legal education seminar. Location: San Bernardino, CA Date: 12/06/11
Topic: Maureen Lyons discusses the key components of a Strategic Plan for Safe Aging. Location: Olive Grove Retirement Resort (Riverside, CA) Date: 10/26/11
Typically, I speak to my senior clients about ways they can save money on long term care. However, a recent article in the Wall Street Journal, (“Caregiver Tax Breaks” 2/13/11), addresses another important consideration – tax breaks for those who are providing the care that keeps mom or dad living at home longer. The article cites a study by the National Alliance for Caregiving & AARP that estimates that more than 43.5 million Americans look after someone age 50 or more. These caregivers spend an average of approximately $5,500 a year on care. While there is no requirement that there be a parent-child relationship between caregiver and recipients, this is certainly the most common arrangement.
So what can I share with the adult children of my clients who are looking for a bit of financial relief?
First, if you provided more than half of your parent’s financial support during the year and your parent’s gross yearly income (excluding Social Security) was less than $3,650, you be able to claim their parent as a dependent. Those meeting these and other dependency criteria may be able to reduce their taxable income by $3,650.
If you can’t claim your parent as a dependent because he or she has too much income, you may still be able to claim a dependent-care credit up to $1,050.
You might also be able to count your parent’s medical and dental expenses that you paid along with your own medical deductions if the total exceeds 7.5% of your adjusted gross income.
Finally, you may benefit from changing your filing status to head of household if you are single.
If you think you may be able to take advantage of any of these options, be sure to talk to a tax professional to get the biggest “bang” for those bucks.
Medi-cal (called Medicaid in states other than California) planning can be divided into two types based on urgency: pre-planning and crisis planning. Pre-planning is for those individuals who have not yet begun to spend their assets on private care, but may need to in the coming years.
Crisis planning is for those individuals using their life savings for long-term care (either at home or in a facility) with a substantial risk that they will run out of money.
In pre-planning cases, life insurance can provide tremendous planning benefits when implemented correctly. The purchase of a single premium life insurance policy by an irrevocable trust, or subsequent transfer to such a trust, will not only replace a couple’s net worth, but will also protect the cash value of that policy from Medicaid.
Alternatively, if not owned by an irrevocable trust, the cash value of any life insurance policy will count against the amount of assets a person can keep and still qualify for Medicaid.
For example, assume Mr. and Mrs. Jones, both age 65 and in good health, have $450,000 of assets. At their age, a single premium of $100,000 would buy a death benefit of nearly $450,000. If an irrevocable trust owns the policy and neither Mr. or Mrs. Jones have access to the trust assets, after a certain period (most likely 5 years), their entire net worth would be protected from Medicaid, and Mr. and Mrs. Jones would still have $350,000 left to live on. Mr. and Mrs. Jones could transfer more assets to the irrevocable trust, if they desire. In fact, if the couple also purchased a five-yearlong-term care policy (or a life insurance policy with a long=-term care rider), they could protect all of their assets from Medicaid, even with a 5 year look-back period.
For those who choose to plan early, the use of an irrevocable trust combined with life insurance and /or long-term care insurance can provide optimum asset protection for an aging client.
It should be noted that when gifting is used as a planning strategy, the person receiving the gift will often need investment and tax advice regarding the best way to manage the money they receive.
In previous posts, we discussed the importance of proper disability planning for seniors. This post addresses a related and often misunderstood topic, Medi-Cal planning. (It’s also known as Medicaid in other states.)
Medi-Cal is a federal government program that provides financial assistance to persons age 65 and over, or those under 65 who are disabled and who are in need of substantial medical assistance. It is a needs-based program. A person must have a medical need for assistance and must be of limited financial means before he or she may qualify.
With the rising costs of long-term care, many people cannot afford to pay privately for home health care, assisted living, or nursing home care.
According to the U.S. Department of Health and Human Services, the average costs of care in the United States (in 2009) are:
$198/day for a semi-private room in a nursing home
$219/day for a private room in a nursing home
$3,131/month for care in an Assisted Living Facility (for a one-bedroom unit)
$21/hour for a Home Health Aide
$19/hour for a Homemaker services
$67/day for care in an Adult Day Health Care Center
The care costs for the state of California can be found here.
What is Medicaid/Medi-Cal planning?
The term “Medicaid planning” involves either spending down or otherwise protecting a person’s assets so that he or she has minimal assets and can meet the financial criteria for Medicaid qualification. Although based on federal law, Medicaid rules are different from state to state, and even county to county. It is therefore advisable to consult with a legal expert who specializes in Medicaid.
Furthermore, the transfer of assets, purchase of financial products, or otherwise disposing of assets has tax implications for a transferor as well as the recipient, necessitating the advice of someone who has tax law expertise. A financial advisor can also help seniors choose the correct financial products as part of an overall Medicaid planning strategy.
There are two issues in planning for potential disability, as it relates to long term care:
1) The senior’s estate planning should thoroughly address disability from the point of view of decision making.
2) The senior should add HIPAA language and authorizations.
Decision making. When a client becomes disabled, he or she is often unable to make personal and/or financial decisions. If the client cannot make these decisions, someone must have the legal authority to do so. Otherwise, the family must apply to the court for the appointment of a guardian for either the client’s person or property, or both.
At a minimum, clients need broad powers of attorney that will allow agents to handle all of their property upon disability, as well as the appointment of a decision maker for health care decisions (the name of the legal document caries by state, but all accomplish the same thing).
Alternatively, a fully funded revocable trust can ensure that the client’s person and property will be cared for as the client desires, pursuant to the highest duty under law – that of a trustee.
Authorizations. Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), absent a written authorization from the patient, a health care provider or health care clearinghouse cannot disclose medical information to anyone other than the patient or the patient appointed under state law to make health care decisions for the patient.
The penalty for failure to comply with these rules is severe: civil penalties plus a criminal fine of $50,000 and up to one year of imprisonment per occurrence, and worse if the disclosure involves the intent to use the information for commercial advantage, personal gain, or malicious harm.
As a result, doctors, hospitals and other health care providers now refuse to release any information absent a release from the patient. For example, hospital staff will go so far as to refuse to disclose whether one’s spouse or parent has been admitted to the hospital. The inability to receive information about a loved one could become very troubling when the information concerns treatment as part of long term care.
A “personal representative” for health care decisions has the same rights to receive information as the senior who has been disabled. Therefore, it is important that the planning document authorize an individual to receive HIPAA-protected information.
HIPAA authorization for the release of medical information to other than an appointed personal representative must also be considered, so that loved ones and others who potentially need access to one’s medical information during a time of disability.
No one likes to think about the possibility of their own disability or the disability of a loved one. However, many studies confirm that nearly everyone will face at least a temporary disability sometime during their lifetime.
One in three Americans will be disabled for at least ninety days before reaching the age of 65. Depending on their age, up to 44% of Americans will face a disability of 2.4 to 4.7 years. In fact, Americans are 3.5 times more likely to become disabled than die in any given year.
According to The National Nursing Home Survey, there were 1.5 million nursing home residents in 2004. Of this total 88.3% were aged 65 and older, and 45.2% were aged 85 years and older.
The average length of stay was 835 days. Among nursing home residents aged 65 years and older, length of stay for 19.4% of the residents was fewer than 3 months, for 24.2% it was three months to less than one year, and for 56.4% it was one year or more.
Only 1.6% of all nursing home residents received no assistance in any activity of daily living (ADL) (i.e., bathing, dressing, toiletting, transferring, or eating). More than 51% received assistance in all five ADLs.
What are the implications of these numbers?
The older we get, the more likely we will need long-term care. This is significant given that Americans are living much longer. This does not necessarily mean that we are living longer without any form of physical or mental impairment.
The cost implications can be stagerring. Not only will many of us face prolonged long-term care, in-home care and nursing home costs continue to rise. According to the 2006 Study of the MetLife Mature Market Institute, national averages for long term care costs are as follows:
- Hourly rate for home health aides is $19, higher than in 2004.
- Hourly rate for homemakers/companions is $17, higher than in 2004.
- Daily rate for a private room in a nursing home is $206, or $75,190 annually, a 1.5% increase over the 2005 rate.
- Daily rate for a semi-private room in a nursing home is $183, or $66,795 annually, a 3.9% increase over the 2005 rate.
The point of all these information is that we all need to plan how we are going to face the high probability of disability as we age. Whether we consider long-term insurance, or use the family’s hard earned assets to pay for long term care should be part of a well thought out strategy for managing the process of aging.
The prudent attitude is not thinking whether or not disability can strike, but rather preparing what we can do when it happens. This is a core concept in life care planning.
In previous posts I discussed how long term care needs of seniors can be met through self (or third-party) insurance. But what if these are not possible options?
A senior can use a planning technique called a “Medicaid” trust. (Here in California, it’s called “Medi-Cal” trust). This is part of a comprehensive wealth planning process that your legal advisor can help you with.
In this kind of trust, the trust maker retains the right to all of the trust income for life. However, the senior will irrevocably give up the right to receive or benefit from the principal of the trust. By using this type of trust, a senior can preserve capital and still qualify for Medi-Cal. This will happen only after expiration of the “look-back period” for the transfer of the trust.
This means that if assets have been transferred or given away during the period before applying for Medi-Cal, coverage can be denied. This period can be as much as 5 years.
There is a specific method to calculating this “penalty period” depending on your state’s provisions. Your legal advisor can give your the specifics of this calculation. The variables that will affect the time period are: (a) nursing home cost in your state, and (b) the dollar amount of the transfer.
What are the implications of this “look back period” in terms of the senior’s need for long term care?
For the trust strategy to work, there must be sufficient funds to pay for the long term care needs of the individual during the waiting period before applying for Medi-Cal. This can be met through insurance, an income stream, or other assets.
If a Medi-Cal trust is not desired, it is still possible to make “outright” gifts of property, wait until the look-back period expires, and then apply for coverage.
If the home is the senior’s only asset, there are still certain techniques to protect the property in the context of Medi-Cal eligibility.
What is important to note is that with any of the “advanced” planning strategies available, the senior must have sufficient funds to cover long term care costs during this ‘look back” time segment.
Its critically important that seniors consult with a qualified attorney, even when they think that they are engaging in “simple Medi-cal planning.
Long term care strategy, and specifically Medi-Cal planning is a highly specialized field. Laws are constantly changing, and there are a lot of myths and anecdotal “advice” circulating out there that can lead you down the wrong path.
In the previous post, we discussed Medicare’s limitations in covering long term care needs. There are several options available, each differing in terms of coverage and complexity. These alternatives are all part of a comprehensive life care planning and wealth management strategy.
Here are two basic options available:
Self-insurance for possible long term care expenses. This requires a close collaboration of financial planning and estate and tax professionals to ensure that there are enough assets available to cover possible costs for as long as needed. This requires a comprehensive look at the overall financial condition of the senior, as well as a thorough understanding of the person’s health and wishes regarding care in the event of incapacity. The main consideration is to create an investment strategy that will produce asset growth and income sufficient to fund the individual’s long term care expenses
When working with an advisor, detailed information will be needed for the initial analysis. This will included client assets, current and anticipated income and expenses, and other data, such as where care will occur, the level of support available from family caregivers, and any family history of incapacity. This information will provide the foundation for the planning required to maximize the value of Social Security income, fixed pensions, dividend, interest, and other income streams, as well as maximizing tax deductions for such things as medical expenses.
Long term care insurance. The majority of seniors may not be able to fully self-insure for their long term care needs. Those who cannot but are insurable and can afford the premiums should integrate a long term care policy into their comprehensive wealth plan.
There are two types of policies available: (a) cash payment, and (b) reimbursement. The former pays cash to the insured. The latter reimburses the insured for actual costs incurred.
Policy benefits to consider in a long term care policy include: nursing home and home care coverage; sufficient daily payouts; elimination periods (the number of days you must be in a nursing home before benefits begin, typically 0 to 100 days); duration of benefits; renewability; waiver of premiums (insured pays no premiums while receiving benefits); and inflation protection.
In a future post, we will discuss some of the “advanced” methods available for long term care planning, such as the “Medicaid” trust and other asset protection strategies.
Two out of every five Americans reaching the age of 65 will require some type of long-term care. Though most seniors prefer to stay at home, the staggering price tag of full-time in-home care can make this an untenable option for most families.
Is Medicare an option for financing a senior’s long-term care needs?
Many seniors think that Medicare will pay for long-term care if and when they need it. This is incorrect. It does not cover hospital costs beyond 150 days, skilled nursing home costs beyond 100 days, or any custodial nursing home or non-skilled home health care.
This is what Medicare specifically covers:
-Qualified medical expenses (80% of an approved amount for doctors, surgical services, etc.)
-Hospitalization for 90 days per benefit period with a total deductible of $1,024.00 for the first 60 days, and a co-payment of $256 per day for the remaining 30 days
-An additional one-time, lifetime benefit of 60 days of hospitalization, with a co-payment of $512 per day, for a maximum of 150 days
Medicare only pays for a limited period of “skilled” nursing home care that begins within 30 days following a hospital stay of at least 3 days. The maximum period is 100 days per benefit period.
“Skilled” care is that provided under the supervision of a doctor that requires the services of skilled professionals such as physical therapists or registered nurses. Medicare does not cover “custodial care,” which is basic personal care and other maintenance-level serices.
If the patient is eligible, Medicare will pay 100% of the costs for up to 20 days of skilled nursing home care. After that, from day 21 through day 100, the patient has a $128 per day co-payment, assuming eleigibility.
If a patient stops needing skilled nursing home care, the patient ceases to be eligible and Medicare stops paying. Home health care may be available in limited amounts, but only if “medically necessary.”
For all Medicare benefits there are deductibles and co-payments, which can be substantial. Lifetime limits can easily be reached in the case of catastrophic illness.
The bottom line is that one has to look beyond Medicare to finance long-term care needs. In our next blog post we will cover other options available to seniors to meet this basic requirement.
