By Thomas D. Begley Jr.
WHAT SHOULD YOU KNOW ABOUT LONG-TERM CARE?
Long-term care is an area of growing concern to older Americans and their families. Approximately 70% of individuals age 65 or older eventually require some form of long-term care. Whether that consists of home healthcare, assisted living or nursing home care, the costs can be substantial. Without adequate planning, long-term care costs can quickly deplete a lifetime of savings. That, in turn, can jeopardize the financial security of a surviving spouse and undo any plans for transferring wealth to children.
Given the complexity of long-term care planning and the potential for costly errors, it is important to retain an experienced Elder Law attorney to guide you through the process.
HOW CAN YOU PLAN FOR LONG-TERM CARE NEEDS?
Generally, the long-term care planning process involves:
- Identifying and prioritizing goals.
- Tax planning.
- Considering funding alternatives.
- Choosing appropriate planning tools.
- Applying for Medicaid, as necessary.
WHAT ARE YOUR GOALS?
The first step in long-term care planning is identifying goals and priorities. Typically, individuals want to:
- Obtain the best quality of care for the person in need.
- Maintain financial security for the healthy spouse.
- Avoid becoming a burden on children.
- Preserve a legacy for children.
- Avoid Medicaid lien on homes.
- Understand and plan appropriately for taxes, including:
- Income tax.
- Gift tax.
- Federal estate tax.
- New Jersey estate tax.
- New Jersey inheritance tax.
- Capital Gains tax.
WHAT SHOULD YOU KNOW ABOUT TAX PLANNING?
As you consider which assets might be used to fund long-term care and which you would like to leave to your children, it is important to understand the income tax ramifications of the following:
- Medical deductions. It is possible to take a medical deduction for qualified long-term care costs. For nursing home care, the deduction usually is equal to 100% of the cost of care. For assisted living and home care, it usually is a portion of the cost of care.
- Carryover basis. If a parent transfers assets to a child, the parent’s cost, known as the basis, carries over to the child, becoming his or her cost basis. This exposes the child to substantial capital gains taxes when the asset is sold.
- Step up in basis. If a parent leaves a child an asset that has increased in value, the child’s cost basis “steps up” to the fair market value of the asset at the parent’s death. This saves the child a significant capital gains tax bill when the asset is sold.
- Retirement plans. The tax treatment of qualified retirement plan assets makes them a good source of funding for long-term care, if funds are needed. While distributions are taxable (since the funds have grown on a tax-deferred basis while in the account), taxes are at least partially offset by the medical deduction, provided the funds are used for long-term care. Since there is no step up in basis on these assets, passing them to children would have capital gains as well as ordinary income tax consequences.
- Deferred annuities. Annuities in which the income has been deferred provide another good source of long-term care funding. When the income is withdrawn, it is taxable at ordinary income tax rates. But those taxes can be at least partially offset by the medical deduction if income is used for long-term care. If the annuity is transferred to a child; however, the entire deferred income is immediately taxable, and there is no step up in basis.
- Interest on E, EE, H, and I bonds. Long-term care costs also may be funded with these types of bonds. To the extent that the bonds have deferred interest, which has not been taxed, that interest is taxable when the bonds are redeemed. But those taxes can be offset, at least partially, by the medical deduction, as long as the funds are used for long-term care. If these bonds are passed on to children, there is no step up in basis.
- Gain on the sale of a home. As a general rule, if you have resided in a home as your principal residence for two of the five years preceding the date of sale, you are entitled to a $250,000 exclusion from capital gains tax, if single, or a $500,000 exclusion if you are married.
- Capital gains tax. There is a federal capital gains tax levied at the rate of up to 20% on profit from the sale of appreciated assets, such as homes and securities. There is also New Jersey income tax on this profit.
HOW WILL YOU PAY FOR LONG-TERM CARE?
There are five ways to pay for long-term care: private pay, long-term care insurance, Medicare, Veterans Administration benefits, and Medicaid.
Private pay
Paying for long-term care privately is the least desirable option since few families can afford the $100,000+/- annual price tag over an extended period of time.
Long-term care insurance
While long-term care insurance is an excellent way to pay for care, only 6- 8% of the elderly have this type of insurance. There are four reasons people don’t buy long-term care insurance:
- Lack of awareness. The industry has not done an adequate job marketing this product.
- It is estimated that only 10- 20% of the elderly can afford the long-term care insurance.
- At age 65, 25% of long-term care insurance policy applicants are rejected for health reasons.
- Since most people are optimists and prefer not to consider unpleasant outcomes, they don’t think they’ll need it. This proves to be the wrong decision 60% of the time. Unfortunately, the consequences of this mistake can be financially devastating to individuals and their families.
When buying long-term care insurance, it’s important to consider these factors:
- The type of care covered.
- The amount of daily benefits.
- Elimination periods.
- Inflation riders.
- Pre-existing condition clauses.
- The length of coverage.
- Guaranteed renewability.
- Waiver of premiums.
- The financial strength of the insurance company.
Medicare
If you expect to have Medicare cover long-term care costs, you should know that it:
- Offers extremely limited payment for home care and no payment for assisted living.
- Will pay for a nursing home stay only under certain conditions. The patient must have had a Medicare-covered stay in a hospital lasting at least three days and must have entered a nursing home to obtain skilled care within 30 days of discharge from the hospital.
- Will not pay for custodial care. The patient must receive skilled care to qualify for Medicare. If that level of care stops, the Medicare payment will stop. Examples of needs requiring skilled care include insertion of a feeding tube, five day per week rehabilitation, and insulin dependence.
- Will pay for a maximum of 100 days. That amount of coverage is not guaranteed and is a maximum, not a minimum. There is a co-insurance from day 21 through day 100. For 2015, the co-insurance rate is $157.50 per day. That may be covered if the patient has the appropriate Medi-gap policy.
Veterans’ benefits
If you believe you are eligible to have Veterans’ benefits cover long-term care costs, you should be aware of the following:
- Federal VA nursing homes. A veteran whose disability is 70% or more service-related is entitled to free lifetime nursing home coverage, regardless of means. These individuals are given priority for admission to federal VA facilities. Veterans who do not have a service-related disability are means-tested to determine eligibility for payment. As a practical matter, these individuals are unlikely to gain admission to a federal VA facility.
- VA Aid & Attendance benefits. Veterans Aid & Attendance benefits are available to certain veterans. These individuals must have served for at least two years of active duty and one day must have been during a war. There are income and resource eligibility tests. Aid & Attendance is available to veterans and to spouses of deceased veterans. For 2015, the monthly benefit for a veteran with dependents is $2,120, for a single veteran $1,788, and for the spouse of a deceased veteran $1,149.
- State VA benefits. The New Jersey Veterans Administration operates three Old Soldiers’ Homes for New Jersey veterans and their families. They are located in Paramus, Edison and Vineland. Veterans, spouses of veterans, surviving spouses, and, in some cases, parents, may be eligible to enter these facilities. Space is limited, and there is often a long waiting list. The monthly rate for Veterans who are not financially qualified is much lower than that for private nursing homes. Financially-eligible veterans qualify for a subsidy, which further reduces the cost dramatically. In some instances, a spouse remaining at home is entitled to retain a portion of the resident’s income for certain expenses.
Medicaid
If you may need to rely on Medicaid to cover long-term care costs, you should be aware of the following:
- Income limits. For 2015, there is an income cap of $2,199 per month for Medicaid eligibility. However, if an individual’s income exceeds that cap, a Miller Trust can be established to obtain income eligibility. Under a Miller Trust, a portion the Medicaid applicant’s income is deposited into a trust to bring the remaining income under the income cap. This is a legal fiction that makes no sense, but it enables many individuals to obtain Medicaid in nursing homes, assisted living facilities, and at home who would not otherwise be eligible.
- The Minimum Monthly Maintenance Needs Allowance. Medicaid regulations provide that if the applicant is married, the spouse remaining at home is entitled to a minimum monthly allowance. In some situations, if there is a shortfall, the difference can be retained from the income of the spouse requiring care. For the period of July1, 2014, through June 30, 2015, the Minimum Monthly Maintenance Needs Allowance is $1,966.25 and the Excess Shelter Allowance threshold is $589.88 per month for certain housing expenses.
- Resource limits. Persons receiving Medicaid generally can have assets of no more than $2,000. Certain assets are excluded, such as a home (occupied by a community spouse or child who is under age 21, blind or disabled), an automobile, personal effects, prepaid funeral expenses, medical equipment, inaccessible resources (such as an estate in probate), term life insurance, whole life insurance with a maximum face value of $1,500, and a $2,000 personal needs account.
If there is a joint account owned by the applicant “or” another individual, Medicaid takes the position that the entire account is a countable resource for the Medicaid applicant. If the account is owned by the applicant “and” another individual, Medicaid assumes that there was a transfer of assets when the applicant(‘s/s’) child was added to the account, but that each joint owner owns a pro rata share of the account. If the child contributes the assets and later withdraws them, there is no transfer-of-asset penalty. The child bears the burden of proof regarding whether he or she made a contribution to the account.
- Pooling of assets. If a Medicaid applicant is married, the resources of both spouses are pooled to determine Medicaid eligibility. A snapshot of the couple’s resources is taken as the first moment of the first day of the first month in which one of the spouses receives an institutional level of care, even if that care is delivered at home. The well spouse is entitled to a Community Spouse Resource Allowance, but the remaining assets must be spent down prior to Medicaid eligibility.
The Community Spouse Resource Allowance is 1/2 of the countable resources with a maximum of $119,220 and a minimum of $23,844 for 2015.
- Transfer-of-assets rules. Medicaid has strict requirements regarding the transfer of assets from an applicant to his or her children or other parties.
- Medicaid imposes a 60-month (five-year) lookback for transfers of assets. This means that Medicaid will review the applicant’s relevant financial records going back five years to determine whether funds have been transferred during that time period.
- If assets were transferred during the lookback period, Medicaid imposes a penalty. That penalty, which is a period of ineligibility for Medicaid, is calculated by dividing the amount transferred by the average cost of a nursing home in New Jersey determined by the Division of Medical Assistance and Health Services. Unfortunately, this divisor is always less than the actual cost of care.
Penalties may be for a period of months or partial months. The larger the transfer, the longer the period of ineligibility. The penalty does not begin until the applicant is eligible for an institutional level of care, is otherwise financially eligible for Medicaid (i.e. has spent down assets to $2,000) and has no other period of ineligibility outstanding.
For example, assume that a person transferred $50,000 within the lookback period, triggering a seven-month penalty or period of ineligibility for Medicaid. The penalty period would begin when that person was already in a nursing home, had spent down assets to $2,000 and had no other period of ineligibility outstanding. Consequently, the individual would have no money with which to pay for the nursing home care for seven months.
- Acceleration strategies. There are many strategies available to accelerate the date of Medicaid eligibility. These strategies fall into two categories spend down and transfers.
Spend Down. It is possible to spend down assets through:
- Repayment of debt.
- Payment for services.
- Purchase of personal effects.
- Making home improvements.
- Prepayment of funeral expenses.
- Purchase of an automobile for a healthy spouse.
- Purchase of a home for a healthy spouse.
- Purchase of a life estate.
- Establishment of a care agreement.
Transfers. Despite the five-year lookback, in many instances, it is still possible to transfer assets. For example, some transfers are exempt from Medicaid transfer-of-asset penalties. In some cases, tax advantages can be achieved by transferring assets. Additionally, assets may be transferred from one spouse to another through divorce.
Transfer alternatives. There are several ways to transfer assets.
- It is important to consider whether a transfer should be made outright to children or to a trust. Outright transfers have many risks. They can expose assets to the children’s creditors or make them available in a divorce settlement. If grandchildren plan to apply for college financial aid, the transferred assets will need to be disclosed on the application, potentially resulting in a reduction of elimination of aid. Additionally, when assets are transferred to the children, they will lose the step up in basis they would have received if the assets were passed after the parent’s death. The principal residence exclusion on the sale of the home will be lost as well.
If assets are transferred to a grantor trust, the trust can be designed so that, at the parent’s death, the assets will receive a step up in basis. That will result in significant tax savings for the children. The trust also can stipulate that the income tax on the trust assets will be paid by the parent. If a home is transferred to a trust and later sold, the trust can be established to preserve the $250,000 or $500,000 exclusion from capital gains tax on the sale of a principal residence. Additionally, trusts can eliminate risk factors associated with outright transfers to children. Even if a child is serving as trustee, the assets would not be subject to the claims of that child’s creditors or become involved in an action for divorce. These assets would not need to be disclosed on a grandchild’s application for college financial aid.
Several types of trusts are used when Medicaid planning is at issue. All of these trusts are irrevocable.
- Children’s trusts. Assets are transferred to a trust, and the parent does not reserve the right to receive income from those assets. If the parent receives Medicaid and transfers assets out of the trust, there is the risk that there may be a transfer-of-asset penalty. That penalty would be imposed by multiplying the parent’s annual income by his or her life expectancy and dividing the sum by the state divisor.
- Donee trusts. This type of trust is appropriate when a parent transfers assets to children, outright, but the children plan to later establish a trust to hold the transferred assets.
- Disability annuity trusts. If a parent has a disabled child, assets can be transferred to a disability annuity trust for that child’s benefit.
- Disability annuity special needs If a parent has a disabled child who is receiving SSI and Medicaid, assets must be transferred to a disability annuity trust wrapped within a special needs trust in order to preserve the child’s benefits.
Care agreements. In many cases, a child provides care to a parent. To accommodate such an arrangement, the child may move into the parent’s home or the parent may move into the child’s home. Alternatively, the child may provide care while retaining a separate residence from the parent if the parent resides in a nursing home or assisted living facility. It is possible for the parent to compensate the child for this care, effectively transferring assets to the child. This can be done without triggering a penalty, provided that three requirements are met:
- There must be a written care agreement.
- Payment can be made only for care provided after the date of the agreement.
- Compensation must be reasonable.
Note that the income paid to the child is taxable because it is for services. In some circumstances, the parent must withhold from the child for FUTA and FICA. Withholding from income tax is not required unless both parties agree. Medicaid resists these care agreements and great caution must be taken in properly drafting the documents and in delivering appropriate services.
There are several ways to transfer a home.
- Transfer outright to children. A common mistake is for parents to transfer a home outright to children. This results in a number of negative consequences.
- Loss of control. The parent loses control over the home.
- Gift taxes. Since the home is worth more than $14,000, it exceeds the allowable annual exclusion gift.
- Carryover basis. The parent’s cost basis in the home carries over to the children. In some cases, the parent purchased the home many years before, and there has been significant appreciation. Eventually, the children will have to pay capital gains tax on that appreciation.
- Loss of principal residence exclusion. The $250,000/$500,000 principal residence exclusion is lost since the parent no longer owns the home.
- Loss of real estate tax benefits. The homestead tax rebate, Veteran’s deduction, senior citizen’s deduction, tax freeze, and ability to itemize deductions are all lost.
- Transfer, reserving a life estate/right to use or occupy. When the home is transferred to children, but the parent reserves a life estate or right to use and occupy it, the following occur:
- The parent retains control. The children cannot sell or mortgage the house without the parent(‘s/s’) signature on the deed or the mortgage.
- Gift tax exemption. A gift tax exemption can be filed as long as the value of the home does not exceed $5,430,000. In most cases, there will be no taxes due.
- Step up in basis. At the parent(’s/s’) death, the children receive a step up in basis on the value of the home, which reduces their capital gains tax liability.
- Real estate tax benefits. The homestead tax rebate, Veteran’s deduction, senior citizen’s deduction, estate-tax freeze, and ability to itemize deductions on income tax returns are all retained.
- Loss of principal residence exclusion. The principal residence exclusion is lost. This is an important consideration if the home is sold during the parent’s lifetime.
- Transfer to a grantor trust. The home also may be transferred to a grantor trust, with the following outcome:
- Control of the home vests in the trustee rather than the parent.
- Gift tax exclusion. There is no gift tax due when the gift is to a grantor trust.
- Step up in basis. The children receive a step up in basis at the parent(’s/s’) death.
- Loss of real estate tax benefits. The homestead tax rebate, Veteran’s deduction, senior citizen’s deduction, estate tax freeze, and ability to itemize deductions on income-tax returns are all lost.
- Principal residence exclusion. This can be maintained.
- Sell a remainder interest. A parent can sell a child a remainder interest in the home and retain a life estate. It is likely that Medicaid will require the parent to live in the home for one year for this strategy to be effective. The value of the remainder interest is determined by tables published by the federal government. The older the parent, the greater value of the life estate. At age 75, the life estate is worth approximately 52% and the remainder interest is worth approximately 48%. If the parent had a home valued at $200,000, the child would pay approximately $96,000 for the remainder interest. At the parent’s death, the child would own the $200,000 home.
- Purchase a life estate in the child’s home. The flip side of the sale of a remainder interest is for the parent to purchase a life estate in the home of the child. Again, the federal government’s life estate tables are used. If the child has a home with equity of $200,000 and the parent is age 75, the parent can pay the child $104,000 in exchange for a deed granting him or her a life estate in the home. The parent must actually move into the home and reside there for at least one year. If there is a mortgage on the home, this would reduce the equity purchased by the parent. Consideration also must be given to the “due on sale” clause in the child’s mortgage and to capital gains tax liability.
- Reverse mortgages. In many instances, children provide financial support to their parents to bridge the gap between the parent(’s/s’) income and the parent(‘s/s’) expenses. In order to ensure that these funds will be repaid if the parent ever requires long-term care, it is good practice to record a mortgage against the parent’s estate to secure the funds advanced by the children.
Medicaid estate recovery
At the death of a Medicaid recipient, the state is entitled to recover from his or her estate. In New Jersey, an estate includes all assets in the name of the decedent, as well as assets in which the decedent had an interest through joint tenancy, tenancy in common, right of survivorship, a living trust, or another arrangement. Effectively, this means that if a husband and wife own a home together and the husband is a Medicaid recipient, at his death, Medicaid can file a lien on the home. If the home is owned as tenants by the entirety, which is the usual way married couples own homes, the lien will be for 100% of the value of the home. In Pennsylvania, estate recovery is limited to the probate estate. The recovery will be for all Medicaid benefits received after age 55. No recovery will be made if there is a surviving spouse or a surviving child who is under age 21, blind, or permanently and totally disabled. Life estates established during the parent(’s/s’) lifetime are exempt from estate recovery. Recovery cannot be made against the estate of the surviving spouse. If a lien is placed against the home, the spouse will not be forced from the home, but Medicaid will want payment if the home is sold or the spouse dies.
WHAT TOOLS ARE AVAILABLE FOR LONG-TERM CARE PLANNING?
- Asset protection plan. An asset protection plan is designed to help you achieve your goals despite the barriers erected by Medicaid and tax laws.
- If you are married, you and your spouse probably have reciprocal wills, through which you leave everything to each other. When one spouse requires nursing home care, it is important to review existing wills. Generally, it is best to leave unchanged the will of the disabled spouse. However, the will of the other spouse should be revised so that, if he or she dies first, assets are not left to the disabled spouse.
- Living will. Your living will should be reviewed to ensure that it contains appropriate instructions regarding end-of-life decisions. Specifically, it should state the types of treatment you do or do not want in the event that you are either brain dead or terminal, and two physicians and a family member have agreed that there is no hope of your recovery.
- Power of attorney. Your powers of attorney should be reviewed for adequacy. Often, powers of attorney are missing such elements as the right to make gifts or do banking in accordance with the New Jersey Durable Power of Attorney Act. Additionally, many powers of attorney fail to include a reference to real estate that is to be sold. Prior to the sale of real estate, many title companies require that the street address and block and lot of the property be included in the power of attorney.
- Children’s trust. Establishing a trust for the benefit of children often offers tax advantages. It also can help to avoid the risk of making outright transfers to children, such as the risk of creditor actions or the loss of assets in a divorce.
- For most clients, the primary goal of long-term care planning is to protect their home. While many clients feel they should deed their home outright to their children, this often is not a good solution because of the risk factors and adverse tax effects. There are; however, a number of other strategies available to achieve this goal.
- Care agreement. If a child cares for a parent, it is possible for the parent to pay for that care, effectively transferring assets in a manner that will not trigger a Medicaid penalty. This must be done pursuant to a written care agreement.
WHAT SHOULD YOU KNOW ABOUT APPLYING FOR MEDICAID?
Medicaid applications are filed with the Board of Social Services for the county in which the care is being provided even if the applicant lived in a different county. Applicants must report all assets under penalty of perjury. The Board of Social Services has 30 days to approve or deny an application, but typically, the process takes about 60 days. Applicants have a right to appeal in the event of a denial. Medicaid can be granted retroactively for three months prior to the date of application if the Medicaid applicant was eligible at that time. Otherwise, eligibility begins on the first day of the month following the Medicaid application.
Medicaid eligibility rules are complex, and it is possible for errors to result in a delay in eligibility. In such cases, the facility must be paid by the family on a private-pay basis until Medicaid eligibility is granted. Given the potential for this outcome, many applicants choose to have an elder law attorney represent then during the application process. An elder law attorney also can help with periodic redeterminations for Medicaid eligibility. These occur annually for recipients on the Medicaid Only program and every six months for those on the Medically Needy program.
WORKING WITH BEGLEY LAW GROUP
For over 70 years, the attorneys of the elder and disability law firm Begley Law Group have been dedicated to helping clients plan for long-term care concerns. We have expertise in all aspects of elder law and provide clients with the most up-to-date information and advice. The firm participates in the formulation of legislation related to elder law issues. We also advocate for the rights of seniors on both national and state levels.
Clients requiring long-term care planning can benefit from our Asset Protection Planning program, designed to help identify goals and find the best strategies and solutions for achieving them. At the initial meeting, we will discuss your situation and ascertain your needs. We will then advise you of our fee, which is a flat rate that covers everything within the scope of the service.
LONG TERM CARE SELF-DIAGNOSTIC TEST
Many clients involved in long-term care planning find it useful to complete the following Self-Diagnostic Test. Please take a few minutes to answer these questions.
1. Am I willing to risk all that I have accumulated through a lifetime of hard work and disciplined saving, including my home, my car, and all of my liquid assets, rather than take the time to plan for the future? □ Yes □ No
2. Do I understand that the cost of planning is insignificant when compared to the cost of paying for long-term care? □ Yes □ No
3. Do I understand that the risk of my needing some form of long-term care (e.g., home care, assisted living, nursing home care) is roughly 70%? □ Yes □ No
4. Do I know what long-term care will cost? $________________
5. Do I know how I will pay for that care if I need it?____________________________________________
6. Do I know what the impact will be on my spouse and children if I spend $100,000 ± per year on long-term care?__________________________________________________________________________
7. Should I explore the possibility of buying long-term care insurance? □ Yes □ No
If no, why not?___________________________________________________________________________
8. Should I hope this problem never arises and ignore it? □ Yes □ No
9. Should I take steps to try to protect my life savings now? □ Yes □ No
What are my reasons for these decisions?____________________________________________________
________________________________________________________________________________________
10. Do I understand that if I become sick, it may be impossible for my spouse or children to care for me, regardless of how much they are committed to doing so? □ Yes □ No
11. Are my wills, trusts, living wills, powers of attorney and other legal documents up to date? □ Yes □ No
