Planning for Long Term Care
Studies predict that approximately 40% (2 out of every 5) of Americans reaching age 65 will need some type of long-term care (LTC). Some of your clients would prefer to stay at home, no matter what the cost. However, without proper planning, the lack of available services and the staggering price tag for full-time home health care may leave them without that option.
Medicare - Don’t Count on It for Long-Term Care
Many seniors think that Medicare will pay for LTC if they need it. That is simply not true. Medicare coverage is limited to: 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 $256.00 per day for the remaining 30 days, and an additional one-time, lifetime benefit of 60 days of hospitalization, with a co-payment of $512.00 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 never pays for any “custodial care,” which is basic personal care and other maintenance-level services. If the patient is eligible, Medicare will pay 100% of the costs for up to 20 days of skilled nursing home care. If the patient is eligible, from day 21 through day 100, the patient has a $128.00 per day co-payment. 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 be reached in the case of catastrophic illness. Plus, as the cost of Medicare rises, so does the pressure on the government to make it “means tested” instead of a universal program. There are excellent private “Medigap” insurance policies available to cover the gap between Medicare coverage and actual cost.
Planning Tip: Seniors need to understand Medicare’s limitations. 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.
Planning Tip: Those eligible for Medicare should be encouraged to buy “Medigap” insurance. However, seniors need to understand that Medigap insurance does not cover LTC that Medicare does not partially pay for.
Self-Insuring LTC Costs
Self-insuring for possible LTC expenses requires a close collaboration of financial planning and estate and tax planning professionals to ensure that there are sufficient assets available to cover possible costs for as long as needed. The collaboration requires a comprehensive look at the overall financial condition of the client, as well as a thorough understanding of the client’s health and wishes regarding care in the event of incapacity.
Planning Tip: Use a thorough fact-finding questionnaire to assemble all the information needed for the analysis. This will include 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, along with maximizing tax deductions for things such as medical expenses.
Planning Tip: For LTC self insurance to work, the client needs a qualified financial planner whose investment strategies will produce asset growth and income sufficient to fund the client’s projected LTC expenses. Armed with knowledge of the client’s assets and projections for income and expenses, the client’s advisors can assess the client’s ability to implement a plan to self-insure LTC and recommend an appropriate investment strategy.
LTC Insurance
Most clients will not be able to fully self-insure for LTC, given the current and projected costs of LTC. Those who cannot but are insurable and can afford the premiums should integrate an LTC policy into their comprehensive wealth plan. Doing so can obviate the need for Medicaid planning later.
Planning Tip: The two types of LTC policies available are cash payment and reimbursement. The former pays cash to the insured. The latter reimburses the insured for actual costs incurred.
Planning Tip: Policy benefits to look for in an LTC insurance policy include: nursing home and home care coverage; sufficient daily payouts ($200.00/day is a good start); elimination periods (the number of days you must be in the nursing home before benefits begin, typically 0 to 100 days); duration of benefits (3 years, 5 years, lifetime); renewability (make sure it is guaranteed renewable); waiver of premiums (insured pays no premiums while receiving benefits); and inflation protection. As with life insurance, the older an applicant, the more difficult it is to obtain insurance and the higher the premium for equivalent coverage.
LTC Advanced Planning Strategies
If total LTC self and/or third-party insurance are not options, other options may be considered.
The Medicaid Trust
One currently-effective planning technique is to transfer assets into a “Medicaid” trust. In a Medicaid trust, the trust maker retains the right to all of the trust income for life while irrevocably giving up the right to receive or benefit from any of the trust principal. The assets in the trust are not available to pay for the cost of the trust maker’s LTC.
Planning Tip: Retaining the right to receive the trust income keeps the trust assets in the trust maker’s estate for estate tax purposes, thereby giving a basis adjustment at death which wipes out any unrecognized capital gain or loss on the trust assets.
By using a Medicaid trust, a senior can preserve capital and still qualify for Medicaid, but only after expiration of the look-back period for the transfer to the trust (which can be as much as 60 months (5 years)).
Planning Tip: The “penalty period” starts from the date the applicant applies for Medicaid and would be eligible but for the disqualifying transfer. Its length is determined by dividing the state’s average daily private pay nursing home cost into the total of the transfers made during the look-back period.
Planning Tip: For the Medicaid trust strategy to work, insurance, an income stream, or other assets must be sufficient to pay for LTC if needed during the waiting period before applying for Medicaid.
A Medicaid trust can allow the trustee to distribute principal during the trust maker’s lifetime for the benefit of the trust maker’s spouse, children, or other designated beneficiaries, just not to or for the benefit of the trust maker. Many trust makers choose to maintain the right (called a Special Power of Appointment) to change the current or ultimate beneficiaries of the Medicaid trust by “reappointing” the assets to different family members at a later date.
Planning Tip: Retaining a Special Power of Appointment prevents the trust maker’s contributions to the trust from being taxable completed gifts at the time of contribution. A distribution of trust principal to a beneficiary during the trust maker’s life is a completed gift.
Making Gifts
If a Medicaid 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 Medicaid or use other planning techniques to qualify for Medicaid at the earliest possible date.
Protecting the Home
If the home is the only asset to protect, a deed to children or others with a retained life estate for the client will protect both the property and the client’s Medicaid eligibility upon expiration of either 60 months from the date of the conveyance or the applicable “penalty period.” As with other advanced planning strategies, because the penalty period begins only after the applicant has applied for Medicaid and is otherwise eligible, the client must have other LTC funding available to get past the look-back period, or someone willing and able to pick up the LTC costs during the penalty period.
Planning Tip: If the home is sold while the client is receiving LTC under Medicaid, a portion of the sale proceeds equivalent to the value of the life estate (using Medicaid tables that give a higher value than an IRS life expectancy table) will have to be paid to the nursing home unless protected using other Medicaid planning strategies.
Crisis LTC Planning
Even if the need for LTC is imminent or immediate, sophisticated Medicaid planning opportunities can be employed to protect a substantial portion of the client’s assets. Carefully working within the Medicaid transfer rules can allow clients to provide security for themselves and a legacy to their families, while ensuring that they will remain eligible to receive LTC under Medicaid when necessary. For example, by combining the gifting of assets with the structuring of other asset transfers as an exchange for a secured interest (much like a loan) through the use of a promissory note, private annuity, or Grantor Retained Annuity Trust (GRAT), clients can pay for expenses during the waiting period that begins upon making the gifts. This allows them to channel assets to a trust, or to children and grandchildren, while receiving sufficient income through the note or annuity payments to pay for their care until they become Medicaid eligible.
If the client can live at home with the assistance of home health care, one can transfer assets and qualify for Medicaid immediately to cover home care costs in some jurisdictions. The planning team must exercise caution, however, because home health care may be appropriate initially, but if the client’s condition deteriorates to the point where he or she cannot safely stay at home, nursing home placement may be required. If the client requires this higher level of LTC, he or she must file a new application, and the Medicaid transfer rules will then apply. Thus, when planning for home care, the client and planning team must evaluate the possible need for institutional LTC services before making transfers.
Planning Tip: Moving in with a relative or family member may be another option for seniors. It may also be advisable for the client to put in place a caregiver agreement and/or personal service contract to make a transfer to a family member as compensation for their providing home care services.
Conclusion
Counseling clients on their LTC options, including the availability of LTC insurance, is an integral part of comprehensive wealth planning. By working together, the planning team can ensure that assets are available as needed to meet each client’s unique LTC planning goals and objectives.
Ten Costly Mistakes Families Make When Planning for a Special Needs Child, and How to Avoid Them
COSTLY MISTAKE #1: Disinheriting the child.
Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. You may have been advised to disinherit your disabled child - the child who needs your help most - to protect that child’s public benefits. But these benefits rarely provide more than basic needs. And this “solution” does not allow you to help your child(ren) after you become incapacitated or die. When a child requires, or is likely to require, governmental assistance to meet his or her basic needs, parents, grandparents and others who love the child should consider establishing a Special Needs Trust.
Planning Tip: It is unnecessary and in fact poor planning to disinherit a special needs child. Families with special needs beneficiaries should consider a Special Needs Trust to protect public benefits and care for the child during the client’s incapacity or after the client’s death.
COSTLY MISTAKE #2: Procrastination.
Because none of us knows when we may die or become incapacitated, it is important that you plan for a beneficiary with special needs early, just as you should for other dependents such as minor children. However, unlike most other beneficiaries, a child with special needs may never be able to compensate for a failure to plan. A minor beneficiary without special needs can obtain more resources as he or she reaches adulthood and can work to meet essential needs, but a child with special needs may never have that ability.
Planning Tip: Parents, grandparents, or any other loved ones of a special needs child face unique planning challenges when it comes to that child. This is one area where you simply cannot afford to wait to plan.
COSTLY MISTAKE #3: Failure to coordinate a planning team effort.
It is critical that your Special Needs Planning Team include: an attorney who is experienced in this planning area; a life insurance agent who can ensure that there will be enough money to maintain the benefits for the special needs child; a CPA who can advise on the Special Needs Trust’s tax return; an investment advisor who can ensure that the trust fund’s resources will last for the child’s lifetime; and any other key advisors that may support the goals of the trust going forward.
Planning Tip: Special needs planning dictates that your advisors work together to ensure that there are sufficient trust assets to care for your child throughout his or her lifetime.
COSTLY MISTAKE #4: Ignoring the special needs when planning for the child’s benefit.
Planning that is not designed with the child’s special needs in mind will probably render the child ineligible for essential government benefits. A properly designed Special Needs Trust promotes the special needs person’s comfort and happiness without sacrificing eligibility.
Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (for example, a specially equipped van), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment & appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses: the sorts of things your clients now provide to their child or other special needs beneficiary.
Planning Tip: When planning for a child with special needs, it is critical that you utilize a Special Needs Trust as the vehicle to pass assets to that child. Otherwise, those assets may disqualify your child from public benefits and may be available to repay the state for the assistance provided.
COSTLY MISTAKE #5: Creating a “generic” special needs trust that doesn’t fit.
Even some “special needs trusts” are unnecessarily inflexible and generic. Although an attorney with some knowledge of the area can protect almost any trust from invalidating the child’s public benefits, many trusts are not customized to the particular child’s needs. Thus the child fails to receive the benefits that the parent provided when they were alive.
Another frequent mistake occurs when the Special Needs Trust includes a “pay-back” provision rather than allowing the remainder of the trust to go to others upon the death of the special needs child. While these “pay-back” provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your clients hundreds of thousand of dollars, or more.
Planning Tip: A Special Needs Trust should be customized to meet the unique circumstances of the child and should be drafted by a lawyer familiar with this area of the law.
COSTLY MISTAKE #6: Failure to properly “fund” and maintain the plan.
When planning for children with special needs, it is absolutely critical that there are sufficient assets available for the special needs beneficiary throughout his or her lifetime. In many instances, this requires utilization of a funding vehicle that can ensure liquidity when necessary. Oftentimes permanent life insurance is the perfect vehicle for this purpose, particularly if the clients are young and healthy such that insurance rates are low.
Also, because this is an ever-changing area, it is also imperative that the clients revisit their plan frequently to ensure that it continues to meet the needs of the special needs beneficiary.
Planning Tip: You should consider permanent life insurance as the funding vehicle for special needs beneficiaries, particularly when the beneficiary is young given the often staggering costs anticipated over that beneficiary’s lifetime.
If your estate may be subject to estate tax, consider having an Irrevocable Life Insurance Trust own and be the beneficiary of the policy, naming the Special Needs Trust as a beneficiary. Alternatively, in a non-taxable situation, consider naming the client’s revocable trust as the beneficiary to help equalize inheritances if that is the client’s objective.
COSTLY MISTAKE #7: Choosing the wrong trustee.
During your life, you can manage the trust. When you are no longer able to serve as trustee, you can choose who will serve according to the instructions that you have provided. You may choose a team of advisors and/or a professional trustee. Whomever you choose, it is crucial that the trustee is financially savvy, well-organized, and, of course, ethical.
Planning Tip: The trustee of a Special Needs Trust should understand your objectives and be qualified to invest the assets in a manner most likely to meet those objectives.
COSTLY MISTAKE #8: Failing to invite contributions from others to the trust.
A key benefit of creating a Special Needs Trust now is that the beneficiary’s extended family and friends can make gifts to the trust or remember the trust as they plan their own estates. For example, these family members and friends can name the Special Needs Trust as the beneficiary of their own assets in their revocable trust or will, and they can also name the Special Needs Trust as a beneficiary of life insurance or retirement benefits.
Planning Tip: Creating a Special Needs Trust now allows others, such as grandparents and other family members, to name the trust as the beneficiary of their own estate planning.
COSTLY MISTAKE #9: Relying on siblings to use their money for the child with special needs’ benefit.
You may be relying on their other children to provide for their child with special needs from their own inheritances. This can be a temporary solution for a brief time, such as during a brief incapacity if their other children are financially secure and have money to spare. However, it is not a solution that will protect the child with special needs after you die or when siblings have their own expenses and financial priorities.
What if the inheriting sibling divorces or loses a lawsuit? His or her spouse (or a judgment creditor) may be entitled to half of it and will likely not care for the child with special needs. What if the sibling dies or becomes incapacitated while the child with special needs is still living? Will his or her heirs care for the child with special needs as thoughtfully and completely as the sibling did?
Siblings of a child with special needs often feel a great responsibility for that child and have felt so all of their lives. When you provide clear instructions and a helpful structure, you lessen the burden on all their children and support a loving and involved relationship among them.
Planning Tip: Relying on siblings to care for a special needs beneficiary is a short-term solution at best. A Special Needs Trust ensures that the assets are available for the special needs beneficiary (and not the former spouse or judgment creditor of the sibling) in a manner intended by you.
COSTLY MISTAKE #10: Failing to protect the child with special needs from predators.
An inheritance from parents who fund their child’s special needs trust by will rather than by revocable living trust is in the public record. Predators are particularly attracted to vulnerable beneficiaries, such as the young and those with limited self-protective capacities. When you plan with trusts rather than a will, you decides who has access to the information about their children’s inheritance. This protects your special needs child and other family members, who may be serving as trustees, from predators.
Planning Tip: A Special Needs Trust created outside of a will ensures that information about the inheritance is not in the public record, protecting the special needs beneficiary from predators.
Conclusion
Planning for special needs beneficiaries requires particular care and the participation of all of the client’s wealth planning advisors. A properly drafted and funded Special Needs Trust can ensure that your beneficiary has sufficient assets to care for him or her, in a manner intended by you, throughout the beneficiary’s lifetime.
Free Medicaid Planning Report Now Available on My Website
In response to frequent questions about Medicaid planning, I have put together a free report titled "The Top 10 Medicaid Planning Mistakes and How to Avoid Them." In this report I cover the most common medicaid planning mistakes I run into in my practice. These mistakes can cause you to lose thousands of dollars in lost Medicaid eligibility. The 10 Mistakes are:
- Failing to Plan Ahead
- Failing to Keep Accurate Financial Records Needed to Prove Eligibility
- Not Having an Updated Durable Power of Attorney
- Not Using a Care Agreement When Eligible
- Confusing Estate Tax and Medicaid Gift Rules
- Not Considering Long Term Care Insurance
- Adding Your Children’s Names to Your Assets
- Having the Wrong Kind of Trust
- Not Having a HIPAA authorization
- Not Working with Qualified Estate Planning Attorney
To find out more about these common mistakes, and how to avoid them, you can request a copy of the Free Medicaid report by visiting http://www.myrnaearroyo.com/medicaid_planning.