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.
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.
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).
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.
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.
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.
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.
THIS ARTICLE IS PURELY INFORMATIONAL AND CAN NOT BE RELIED UPON AS LEGAL ADVISE OR CONSTITUTE LEGAL ADVISE FROM THE AUTHOR. To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication (including any attachments), unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.
Elder Law Attorney