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Volume 3,
Issue 4 |
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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.
A prior issue of The Wealth Counselor provided an
overview of planning for Medicaid (Medi-Cal in
California). This issue of The Wealth Counselor examines
additional LTC planning options. Like so many others,
this is an area where the planning team needs to work
together to develop and implement a unified plan to
accomplish each client's LTC goals and objectives.
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.
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