Elder Law Basics Part 2

If a person runs out of money, is receiving care in a nursing home, and is on Medicaid because they are poor, they will go without dentures, hearing aids, eyeglasses, a computer, TV, or a recliner.  He or she does not have a nest egg to use for those things. Their kids and other family members will have to chip in their own money to pay for additional needs.

So, the primary goal of asset protection planning is to set aside some of the applicant’s own money that to use for the applicant.  However, it is also important to many of my clients that they leave something behind to their family, and usually, that is to children. They do not want to see everything that they have worked for their whole lives be consumed paying for their nursing home care.

They are not even so much worried about themselves and creating a nest egg for themselves, and I remind them that, “That is really, really important, but we can also accomplish your goal of providing a legacy.

Sam and Rose – A Case Study

Assume Sam and Rose, are a married couple typical of what we see. They have a jointly owned residence worth $200,000. They have checking, money market, and brokerage type accounts that equal $185,000. Sam has an IRA of $200,000. Rose has an IRA of $125,000. Sam has life insurance with a cash value of $5,000, but Rose’s life insurance has no cash value. They have a car and a truck. Their total available assets are $735,000.

For Medicaid purposes, what is excluded? We are going to assume that Sam needs long-term care and that Rose is the healthy spouse. In this case, the residence is protected because Rose is living in the home. Rose’s IRA is protected because, in Delaware, the retirement account of the well spouse is off the table. The life insurance with no cash value is also excluded because it cannot be surrendered for anything that could be used to pay for Sam’s care. One vehicle of the most value is also excluded, so we use the car worth $15,000.

Even with no planning, $340,000 of assets have been excluded and protected for Rose. The remaining assets – the bank accounts, Sam’s IRA, the life insurance with cash value, and the truck – are what Medicaid considers available to pay for Sam’s care, so that is $395,000.

Here’s an illustration of what Medicaid would do if they were presented with these facts.  You have $395,000 on the table. The general rules state that $197,500 would get allocated to Rose, and $197,500 would get allocated to Sam, but there’s a cap to that general 50-50 rule, and that cap says that Rose can only keep up to $119,220.

So, Rose is entitled to keep $119,220, and everything else – $275,780 – would have to be spent to pay for Sam’s care. We reduce his amount by $2,000 because he can have $2,000 under the Medicaid rules, and we add that to what Rose is entitled to keep. Rose, in this case, would be entitled to keep the max of $121,220. The remaining $273,780 would have to be spent before Sam would be eligible to receive public benefits.

If we have $273,780 to spend down, what type of planning might be available to them in this case? First and foremost, we would advise them to make sure that their prepaid funeral arrangements have been made; those contracts must be irrevocable. In this case, let’s assume that Rose is very, very independent. She is very healthy. She has an old car. We would advise her to trade in both of her vehicles, which maybe have a trade-in value of $20,000, and an additional $10,000, and buy a brand-new $30,000 vehicle that’s going to sustain her, not require a monthly payment, and not need a ton of repair and maintenance.

Then let’s invest $15,000 in home improvements for a back porch or needed renovations to the bathroom or kitchen. She could spend money doing that because the home is protected.

Because Sam’s retirement account would have to be liquidated, we must factor in that that is going to trigger some income taxes, and we get challenged about this in some cases, whether it is from the family or whether it is from the adviser who is managing the IRA.

If $40,000, in this case, must be paid in income taxes, it is a drop in the bucket compared to what would eventually need to be paid for long-term care. In most cases, especially with numbers like this, it still makes sense to do the liquidation of the IRA. That is an available resource. Get that liquidity and pay the taxes as part of spend-down. I know that that is a lot of money in income taxes, but when we are looking at a $10,000 a month nursing home bill, it would only take four months to spend that $40,000 otherwise.

If there’s any debt, we will pay that off to reduce any monthly payments.

Let’s assume that it took us a month to do this planning, so there would be a $9,000 nursing home bill paid during that time. Let’s say there was $4,000 in professional fees that were incurred, and then there was $780 in just miscellaneous, ordinary day-to-day expenses.

That leaves $75,000 remaining to be spent. We started with $273,780, we did all the things I just listed, and we have $75,000 left. What can we do? We can purchase a Medicaid Compliant Annuity with the remaining $75,000. The annuity term could be as long as 13 years or 156 months. That is actuarially sound based on Sam’s life expectancy.

The interest rate on a Medicaid Compliant Annuity is the applicable federal rate. It usually is very low. We are not purchasing these annuities for investment purposes. They are being used exclusively to qualify for Medicaid. A $750 investment would result in a $533 monthly payment. Over the course of the term, there would have been $75,000 of principal and only $8,172.96 of interest, so $83,172.96 would have been paid out.

The annuitant owner is Rose. She is going to be the one receiving the monthly annuity payments. As I mentioned earlier, all of Rose’s income is protected, so if she gets Social Security, pension, and now this new annuity payment, she is not required to contribute any of that toward Sam’s cost of care in the nursing home.

In this case, the beneficiary designation is the State of Delaware. If Sam were to pass away during the term of the annuity, the state would have to be paid back up to the amount of benefits paid, and then the secondary beneficiary would be the kids.

Depending on Sam’s condition, we might want to set the annuity term to be fewer than 13 years. It just can’t be more than 13 years. That is a case-by-case analysis.

Top Estate Planning Mistakes

1. Omitting essential provisions in a power of attorney. A power of attorney is an essential foundational estate planning document. Unfortunately, even other attorneys are missing critical provisions when they are drafting these documents.

If we are presented with a power of attorney that does not permit gifting, or does not permit the creation of a trust, then we are stuck, and the client is left with this false sense of security that they have a power of attorney and everything is good. If the person cannot sign a new one due to incapacity, that is when we must get guardianship or conservatorship.

The most recent change in Delaware was in 2010 to our Power of Attorney Act. I know of some other states that had 2010 changes as well. Suggest to your clients that they have regular updates with their estate-planning attorney.

Also encourage them to work with an elder law attorney if they are seniors, because elder law attorneys just understand better the importance of a thorough and very specific power of attorney regarding gifting and trust creation. If they have not looked at their estate plan in decades, now is the time to do that because, without a thorough, binding power of attorney, it is going to cost them a lot more if their family must take it to court someday to get guardianship.

2. Thinking that it is too late to plan. Crisis planning can still shelter approximately half of the remaining assets, it was not too late to still do something.

3. Confusing the look-back period and the penalty period. There is a five-year look-back period under federal regulations. What that means is that any gifts made within five years of applying for Medicaid must be disclosed.

The best way that I can explain that to you is when a person applies for Medicaid, there is a question on the application that says, “Have you sold, transferred, or given away any assets within the last five years?” Ideally, you want to be able to mark that “no,” but if assets have been transferred, whether it has been part of a plan or not, within the five years, they must be disclosed, and the question on that application must be marked “yes.”

It does not mean that the person is not eligible for Medicaid for a full five years. It just means that transfers within those five years must be disclosed, and then, it is the amount of those transfers which results in a penalty period. So, the penalty divisor is divided into the total amount of the disclosed transfers, and that gives us the number of months that Medicaid will not pay for care.

4. Misunderstanding the Miller Trust. This is the device that 24 states use to satisfy the income part of the Medicaid regulations. It is only a tool to achieve income eligibility. It does nothing to shelter assets, and it always should say that any remaining funds in the trust at death must be paid back to the state. To create a Miller Trust, there must be a proper authority in the power of attorney to do that, or a guardianship might need to occur.

5. Not knowing the Medicaid exemptions. This is big because many folks never get around to doing any planning. A spouse might come into your office who is petrified she is going to lose her house. Even with no planning, a healthy spouse is protected by the spousal impoverishment rules. In Delaware, the retirement accounts are protected, and in other states too, but the house is protected for the healthy spouse in all married-couple cases, and that is regardless of the residence’s value.

It is important to know that the prepaid funeral, burial space, and burial space items are excluded, that one vehicle of any value and life insurance with no cash value are off the table. Medicaid does not make you have a yard sale. Knowing that all your household goods and personal possessions are excluded and not available to pay for care is really, really important, and can provide a great relief to people as you are talking to them.

6. Not knowing the transfer rule exemptions. This is where we can make transfers between spouses, and Medicaid does not care about that. I have a client where one of the sons is receiving Social Security disability. We can potentially transfer the assets from dad to that child receiving Social Security disability, and there will be no impact on dad’s ability to qualify for Medicaid. So, transfers to blind or disabled children sometimes provide a good planning opportunity.

We talked about the cohabitating child and how the house can be transferred to that child after two years. We talked about that unusual case with the cohabitating sibling who has an equity interest and has been residing in the home for one year; the home can be protected. There are these transfer exceptions, and it is important, if the circumstances are right, that we rely on these to potentially protect a decent amount of assets.

7. Forgetting about estate recovery can be a trap. Estate recovery is the department of Medicaid that can come after the estate of the applicant. Any assets that remain in the applicant’s name at the applicant’s death are potentially subject to estate recovery. If the state has paid out $50,000 in Medicaid benefits and then the applicant passes away, and there is a home still in the applicant’s name, then the state can recover against the home up to the $50,000 in my example.

Even if the applicant signs an intent-to-return-home statement, at death the residence is considered part of the probate estate and would, therefore, be subject to claims. If estate recovery does what they are supposed to do, they will file a claim against the estate, requiring the house to be sold and the claim to be paid.

8. Not planning for the healthy spouse. If you have a married couple, and you utilize the rules, you protect assets for the healthy spouse. Say Sam and Rose are married. Once Sam goes on Medicaid, you do not stop there. Rose’s estate plan needs to be updated because the assets we protected for Rose, we never want to go back outright into Sam’s hands.  If Rose passes away first and all the assets that we protected now are back in Sam’s hands, he would have to further reduce those to $2,000.

Updating Rose’s estate plan, removing Sam’s name from assets, and setting up a supplemental needs trust for Sam in case Rose dies first, are all things we review to make sure that everything is sealed up. In case Rose passes away first, the assets would not be potentially available and interrupt Sam’s Medicaid eligibility.

Then we look at the tax consequences of cashing out accounts and making sure that we plan and provide for that so that the well spouse is not getting hit with a big tax bill in the next year.

9. Misunderstanding the ethics related to asset protection planning. I feel strongly about doing this planning for my clients, making sure they know what’s available to them. I spend a ton of time in my community, educating the community in which I live to make sure that people are aware of this type of planning.

Remember, too, that this type of planning is ensuring payment for the services that are going to be needed and preserving a nest egg for the senior. It is just smart financial planning because the worst thing that could happen is that a person becomes destitute, dependent on public benefits, and has nothing else left to supplement what those public benefits may not provide.

10. Over-generalizing the rules. These rules are complicated. Medicaid is complicated stuff. VA is complicated stuff. There are federal nuances. There are state-specific nuances. Be careful about to who you listen. Nobody is necessarily ill-willed and pointing them in the wrong direction, but a family member who experienced Medicaid in New Jersey is not going to be able to give you advice on how things will work for you in Delaware. Alternatively, if your parent lived in Florida and qualified for Medicaid in Florida, there are going to be nuances.

Just be very, very careful about over-generalizing the rules, and understand the entire process and all the timing requirements. I have been doing this now, pretty much exclusively, for seven years, and it just amazes me how stuff still comes up that I have never seen before. As a team, we work through it, and we pull out our regulations. There are always these little nuances and things that could come up. If you miss one and dabble in this area, it could get you into hot water quickly.

Ethical Considerations

There are a couple of ethical considerations that I want to leave with you.

First, who is the client? The client is the one whom we feel we owe the professional duties of competence, diligence, loyalty, and confidentiality. In the real world, we are not working with the senior himself or herself. We are often working with the agent under the power of attorney. The family members, in this type of planning, are usually so intimately involved, and if the senior can be a part of the meeting, they bring trusted family members to the meeting. In some cases, the family members are even paying the bill.

However, who’s the client? In almost every case, it is the senior. If I have a child sitting in my office who I call the greedy child, who’s not really worried about a nest egg for mom or dad, who’s just looking out for himself, and who wants to ensure that that legacy is there for him and his sisters, I remind that child that the parent is my client. I am here to make sure that the parent is protected, and that the parent is provided for, and that the parent does not outlive his money. Because of this planning, if there is a legacy to be left, that is great, but that is not the No. 1 reason that we engage in this type of planning.

There are always diminished-capacity concerns with this type of planning when you are working with seniors. There is a fundamental difference between the kind of capacity it takes to create a will and the capacity it takes to create a power of attorney. A power of attorney is a contractual document that the senior would sign, giving somebody else the ability to make legal and financial decisions on behalf of that senior. That must be done while the senior still has the capacity. Preferably, it was done way before any incapacity issues were even a concern.

The alternative if there is not a power of attorney, or if the power of attorney is not valid or thorough enough to do the type of planning, then we must go to the court and ask for a guardianship or a conservatorship, although that is not an ideal course of action because it can be costly. It can cause great delay, which means money. In a lot of these cases, it is a very public process, and there are a lot of annual reporting requirements that go along with that.

Finally, and this will be the last I say about ethical considerations, everything that I do, in my opinion, is legal and ethical. I and everybody in my firm feel that this type of asset protection planning is smart financial planning. We often remind ourselves that we cannot confuse our political views with what our client’s legal rights are.