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From
E.
Frederick Petersen III
The Petersen Law Firm
One Corporate Center
10451 Mill Run Circle; Suite 400
Owings Mills, MD 21117
(443) 392-2585
I have over 20 years of experience helping my clients
and referral partners’ clients develop and enhance their
estate plans by incorporating up-to-date wealth
preservation techniques. Contact me to learn how the New
STANDALONE IRA TRUST can benefit your clients!
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Volume 2,
Issue 6 |
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Understanding
Medicaid Planning Opportunities - For Your Clients and
You
The last issue
of The Wealth Counselor addressed the significant need
for clients to plan for the possibility of disability,
and how proper disability planning more often than not
involves the coordination of financial and legal
solutions. This issue addresses a related and often
misunderstood topic, Medicaid planning.
What is Medicaid?
Medicaid (Medi-Cal in California) 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. Medicaid is a needs-based program - a person
must have a medical need for the assistance and must be
of limited financial means before he or she may qualify.
Planning Tip: Medicaid is very
different from Medicare. Medicare is health
insurance available to all persons over age 65 who
qualify for Social Security, as well as those who
are under 65 and who the Social Security
Administration determines to be disabled. Medicare
will not pay for nursing home, assisted living or
home health care on a long-term basis. Medicare will
only pay for this type of care for up to 100 days,
and only for the purpose of providing rehabilitation
following a three-day or longer hospital stay.
Unfortunately, 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 2006 Study of the MetLife Mature Market
Institute, the national average cost for a private room
in a nursing home is over $75,000 annually. The national
average cost of in-home care is between $17 and $19 per
hour. As noted in a recent Harvard University Study, 69%
of single people and 34% of married couples would
exhaust their assets after 13 weeks in a nursing home.
For those whose assets won't last 13 weeks - much less
the rest of their lives - Medicaid planning becomes an
important consideration.
Planning Tip: Most people do not
have sufficient assets to pay privately for
long-term care. Medicaid planning is most
appropriate for these individuals, a growing segment
of the population.
What is Medicaid 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 (which can be as low
as $2,000 for a single person). Although based on
federal law, Medicaid rules are different from state to
state, and even county to county, and therefore it is
important to consult with a legal expert in the field of
Medicaid. Furthermore, the transfer of assets, purchase
of financial products, or otherwise disposing of assets
has tax implications for the transferor as well as the
recipient, necessitating the advice of a tax advisor.
Finally, a financial advisor is a necessity to help
clients choose the correct financial products as part of
an overall Medicaid planning strategy.
Planning Tip: Medicaid planning
requires input and a coordinated effort from the
client's legal, financial and tax advisors, all of
whom should be knowledgeable in Medicaid planning.
Medicaid Pre-Planning
Medicaid planning can be divided into two types:
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, it
will 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 second-to-die
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-year long-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.
Planning Tip: With pre-planning
clients, life insurance owned by an irrevocable
trust, perhaps combined with long-term care
insurance or a long-term care rider, can provide
significant Medicaid planning benefits.
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. When gifting is used as
a planning strategy, the person receiving the gift often
needs advice on how to invest the money they receive.
Thus, Medicaid planning also opens the door for the
financial advisor to converse with younger family
members about the need for proper planning, including
the need for disability insurance and long-term care
insurance.
Planning Tip: Medicaid planning can
open the door for the financial advisor to begin
working with and planning for younger generations,
while establishing the need for disability insurance
and long-term care insurance.
Medicaid Crisis Planning
Even with crisis planning there are significant planning
opportunities for our clients. While transfers either
outright to a family member or to an irrevocable trust
create a penalty period for the person making the gift,
sometimes a planned strategy involving gifting and the
use of an annuity can provide a valuable crisis planning
tool. For example, assume Mr. Jones suffers a stroke and
ends up in a nursing home, and his cost of care exceeds
the couple's monthly income by $4,500 per moth. Since
the couple has assets of $450,000, they are $346,360
over the allowable limit of $101,640 for a married
couple. One under-utilized but very effective strategy
is for the couple to purchase a Medicaid Qualifying
Annuity (MQA) in favor of the healthy community spouse,
Mrs. Jones. By converting the excess assets into an
income stream, Mr. Jones can now qualify for Medicaid
and the MQA provides Mrs. Jones with extra income to
supplement the loss of her husband's income (which must
be paid to the facility).
For a single person in crisis planning, a plan of
partial gifting plus the purchase of a single premium
immediate annuity may be appropriate. Keep in mind that
any time a Medicaid applicant makes a gift, whether it
is to another person or to a trust, Medicaid will impose
a penalty based on the size of the gift. The penalty is
the equivalent of a waiting period - the larger the
gift, the longer a Medicaid applicant must wait to
obtain eligibility. Because of the severe penalties for
gifting, clients should not undertake this type of
strategy without the legal advice of a Medicaid planning
attorney.
Planning Tip: Annuities play a
crucial role in Medicaid planning, particularly with
crisis planning.
Identifying Possible Medicaid Clients
In determining which clients are appropriate for
Medicaid planning, it is important to consider the
client's age and life expectancy, monthly income,
monthly medical expenses and other assets. Take Anna, a
72 year-old woman residing in an assisted living
facility costing $3,500 per month. She has other medical
expenses, including prescriptions, of $300 per month.
Her only income is from social security, which amounts
to $1,200 per month. Anna is depleting her savings at a
rate of $2,600 per month, just for medical expenses.
Anna has $450,000 in a brokerage account, which on its
face sounds like a lot of money, given she is only
spending approximately $36,000 per year on her care. But
when we take into consideration the fact that Anna may
very well need more care in the future, which could cost
as much as $10,000 per month, and given her life
expectancy of 13.96 years, it is clear that Anna's
assets may not be sufficient to cover her long-term care
expenses for the rest of her life. Anna is not only an
appropriate client for Medicaid planning, she is a
crisis planning client.
Planning Tip: It is important to
take a client's age, medical needs, monthly expenses
and income into consideration to determine whether
Medicaid planning is necessary or appropriate.
Conclusion
Due in part to the rising costs of long-term care and
the fact that we are an aging population, Medicaid
planning is a growing area of practice for attorneys,
CPAs, financial planners and insurance professionals.
However, as evidenced by the content of this newsletter,
Medicaid planning requires that these disciplines work
together collaboratively to ensure that the client
avoids the numerous pitfalls that exist in this area.
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