Estate Planning: The Basics

/Home/b. Planning for Nursing Home Care/Estate Planning and Nursing Homes

Estate Planning: The Basics

by Rich O'Boyle, Publisher

What happens to your hard-earned savings when you need long-term care? How are you going to protect your house, your doll collection, and your heirlooms when you or your spouse has to move into a costly nursing home? People of modest means find out, sometimes painfully, that they are required to foot the bill for long-term healthcare. Medicare only pays a very limited amount of nursing home expenses. And Medicaid is difficult to qualify for since you have to already have spent away your hard-earned savings.

Most people assume that either they will not have to enter a nursing facility, or that once they do, "The Government" (i.e., Medicare or Medicaid) will pick up the tab. The first assumption is a form of denial, and the second assumption is only true in the worst scenarios. The fact is, as people age, they have a greater and greater probability of requiring some form of skilled care. Fortunately, more and more skilled care can be provided in the home, but nursing homes are still a reality for millions of elderly,
especially those with dementia. The Government helps to pay for short-term care through Medicare, but only pays for people with very limited finances through Medicaid.

In some states, nursing home costs can exceed $8,000 per month (not a typo!). That means that if you are paying for it yourself, it can run to almost $100,000 per year out of your own savings. If you have even modest assets of about $4,000 in the bank, you will NOT be able to receive Medicaid. There are some exceptions, but the vast majority of people are not eligible for Medicaid due to existing assets (such as bank accounts and property) and monthly income (such as pensions and Social Security benefits).

"Estate planning" includes techniques and considerations that individuals and families use to make sure that their assets are disposed of in the way they desire near and at the time of their death. Proper estate planning uses legal methods to assess the value of one's estate, acquire insurance (such as life insurance and long-term care insurance), prepare the appropriate legal documents (such as wills, healthcare proxies and powers of attorney), provide gifts to family members and charities, and minimize taxes. The proper coordination and execution of all of these matters should be conducted with the guidance of a qualified (and specialized) elder law attorney and other financial and care
management professionals.

Options for Financing Long-Term Care

So what is the vast Middle Class to do about paying for long-term care expenses? Our health insurance system in the US is a patchwork of private, federal and state programs. But as with any "patchwork," there are areas where the stitching has come apart, or where the seams were never sewn properly. We have serious gaps that often turn into gaping holes for many people.

This article provides a very brief overview of the primary options for paying for long-term care. More detailed articles and resources are available at the end of this article.

Private Pay

This is generally the first line of defense for healthcare expenses. People pay out of pocket for prescription drugs, co-payments, deductibles, additional services, and non-healthcare expenses (such as respite, housekeeping, care management, and companion services). Most caregivers become acutely aware of how expensive many services are once they start paying for them out of their own checkbook. When faced with the prospect of these expenses for years on end, then the awareness turns to fear and loathing. Increasingly, people are purchasing healthcare benefit cards that provide discounts for prescription drugs, some services, eyeglasses, and some other eldercare expenses, but
these provide some modest savings, not the kind of relief that most are seeking.

Medicare

Medicare is the federal government-run health insurance program for those over age 65. It covers hospital and doctor expenses, as well as some preventive procedures such as mammograms. Medicare also covers home healthcare and hospice services when ordered by a doctor. Individuals may purchase private "Medigap" insurance to help pay for those services that Medicare does not cover. Medicare will only pay for short-term skilled nursing such as when you are recovering after a hospital stay or surgery.

Medicaid

Medicaid is a federal-state program that is run a little bit differently by each county in the country. It is designed to provide healthcare to the medically and financially needy. It is not politically correct to call it a program for "poor" people, but the key eligibility requirement is that you have very limited financial resources and income. It is primarily for women with children and the elderly in nursing homes. Unlike Medicare (which everyone over 65 gets), Medicaid requires that you apply for benefits.

Long-Term Care Insurance

While long-term care insurance is gaining popularity, the rules and fine print can often be confusing, the policies prohibitively expensive, and/or your pre-existing conditions limiting. However, for many people, this form of insurance can provide the financial means to stay at home when illness leaves them debilitated or in need of skilled nursing care. When shopping for long-term care insurance, it is best for you to speak with an impartial third-party (such as a lawyer) to help explain things – not because insurance salespeople are dishonest, but because you should see how the policy fits in with your other plans and what some of the fine print really means.

Issues and Techniques in Estate Planning

Individuals and families wishing to plan for possible long-term care expenses and the dissolution of their estates at death should understand and explore several areas with qualified legal and financial professionals. Estate planning is not just for "The Rich" – people with a lot of property, warring children (a la Dynasty), mansions, and yachts. The Middle Class should consider many of these techniques and use the appropriate ones that help them achieve their goals of minimizing taxes and leaving an inheritance to their family.

Families should always consult with trusted legal advisors. It's no secret that many unscrupulous people are out there, waiting to prey on concerned Baby Boomers and seniors. Use your best judgment and NEVER allow someone to pressure you into buying anything (be it insurance, legal assistance or management services). You are well-advised to get a second opinion when making your estate plan. A few hours with another lawyer (helping you understand some documents or legal issues) may cost a few hundred dollars, but when you are dealing with tens or hundreds of thousands of dollars, that will be money well spent.

Trusts

A trust is a legal device that gives a person (or group of people) the right to hold and manage specific financial assets. This is a very simple definition that avoids a lot of legal language. Be aware that trusts are usually quite complicated. Some trusts can be thought of as a new legal entity (much like a corporation or another person) that is required to spend its assets for specific purposes that the creator spells out ahead of time. People often establish trusts to avoid the costs and delays that can be associated with probate, to minimize or avoid taxation, to provide resources for individuals determined to be incompetent, to control how and when assets are distributed, as well as many other uses.

There are several different types of trusts that people use for estate planning. While most fall into specific categories, it is important to understand that trusts are highly individual creations – one size does not fit all. Be wary of firms who offer a cookie cutter approach or a "kit" to create your own. Any trust (indeed all estate planning activities) should be designed with careful consideration and thoughtful legal consultation. Be aware that when establishing some trusts, you may limit your options in the future.

A "revocable trust" may be established to set aside certain assets in the event that the individual becomes incapacitated. These assets never technically leave the person's ownership, so the assets are still considered part of one's estate when one applies to Medicaid for benefits. The value of a revocable trust is that you can designate a professional to manage your finances, receive income from the trust, and potentially reduce expenses associated with settling your estate at death. With a revocable trust the individual can change the terms of the trust at any time.

An "irrevocable trust" is also referred to as a "Medicaid Trust." Assets are transferred into a new legal entity that then owns those assets. These assets are then no longer considered part of your taxable estate. By shifting assets into the trust, you may now be eligible for Medicaid benefits, but subject to the specific "look-back" rules of your county (see below). When setting up the trust, you determine who will receive the assets, regular payments, and income from the assets. Irrevocable trusts may also be used as an entity to own one's life insurance policy.

This is a simplification of the process, so keep in mind that estate planning involves a lot of "moving parts" that should all be considered. Some types of transfers may result in tax liabilities and future financial limitations. Irrevocable trusts require that the individual give up some degree of flexibility with the assets and may be expensive to prepare. Once the trust is established, the individual gives up all rights to the assets that are included in the trust. You can not change the terms once it is finalized.

A "credit shelter trust" is used to help an individual and her spouse maximize the federal tax credits they have when they die. This type of trust is also called a "bypass trust," "A-B trust," or "credit shelter trust plan." Each individual is permitted to transfer a large (but limited) amount of assets to his/her heirs free of taxation. For a married couple, the tax credit is essentially doubled (since it is the credits of two people). When the first spouse dies, the estate passes to the other, but when the second spouse dies, only one credit is remaining. This trust allows the two tax credits to be used instead of just one. Be aware that the U.S. Congress may make changes to the estate tax laws, raising the credit, or eliminating it all together. You should consult with legal and financial advisors who have
up-to-date knowledge of federal and state tax laws.

Medicaid Planning

Since most people are concerned about spending down all of their assets to pay for long-term care, they will establish certain types of entities like trusts, give cash gifts to children, spend money on exempt assets, or engage in other legal financial maneuvers. You should make sure that your financial activities are legal as well as the smartest use of your assets. Even with perfectly legal activities, you may compromise or delay some of your potential benefits from Medicaid.

Look-back periods. The application required to collect Medicaid benefits includes extensive questions about financial assets going back from three to five years. Medicaid will "look back" to see whether assets had been illegally sheltered to qualify a person for coverage. Moving assets through legal means is permitted. (All of the general approaches discussed in this article are legal at the time of writing 6/2001). However, transfers within the look-back period will be scrutinized, and even if they are legal, may incur some penalties. For example, if the person applying for Medicaid made an asset transfer (a gift, transfer into a trust, or other large transaction) within the look-back period, it does not
necessarily disqualify them from receiving benefits, but it may delay the date when nursing home benefits begin. Currently, homecare benefits are not affected by the look-back period. There are many strategies for legally moving assets and timing the submission of a Medicaid application. A person skilled in the rules of your particular county, with knowledge of your larger estate plan, and with an understanding of your loved one's health condition can assist you in managing the process of applying for Medicaid.

Spousal refusal. Married people have a legal obligation to pay for the healthcare costs incurred by their spouse if they are admitted into a nursing home (with some exceptions). If your spouse has been admitted to a nursing home, you may file a form with Medicaid and state that you refuse to pay for your spouse's care. This does not mean that you are getting a divorce! It is a legal bureaucratic loophole that allows individuals to retain additional resources than they normally would be able to. The county Medicaid office has the right to seek reimbursement from the spouse who is not in the nursing home (referred to as the "community spouse"), but such lawsuits are rare. It is unwise to assume that the
county never will decide to sue you for the funds it has spent on your spouse's nursing home bills. In some cases, when individuals were sued, the county has settled for less than the full dollar amount spent on the care.

Final Things to Remember

Nothing is as simple as it sounds when it comes to "The Law." This article is not intended to be legal advice, nor does it cover all issues associated with estate planning. It provides an educational and informational background to the issues and documents involved in basic estate planning. We hope that you will use this article to give yourself a foundation with which to have intelligent discussions with your legal, financial, and care management advisors. As with all sensitive matters, you should consult your legal, financial and medical advisors whenever you make important decisions. Some of the concepts have been simplified and stripped of extensive legalese in the interest of readability and length. Furthermore, we have limited specific information on eligibility criteria, tax rules, and asset amounts since they vary considerably from state to state and county to county. We hope that this does not limit the value of the article, but recognize that it is a limitation. Laws and rules vary from state to state (and from county to county) and change constantly, so you should consult with advisors before making and firm decisions.

Related Articles
- Elder Law: The Basics
- Medicaid Eligibility
- Medicaid Benefits
- Medicare Overview
- Discrimination Against Medicaid Recipients
- Tips for Choosing a Financial Planner
- Life Insurance Trusts

Resources
- Long-Term Care Analyzer (interactive assistant)
- Medicaid Long-Term Care Services (US federal government website)
- ElderCare Online Insurance Coverage Channel
- ElderCare Online's Legal & Financial Matters Channel

Additional Reading
- Health Care Without Medicare by Joseph Jackson
- Beat the Nursing Home Trap: A Consumer's Guide to Assited Living and Long-Term Care by Joseph Matthews
- ElderCare Online's Legal & Financial Matters Bookshelf

Related Websites
- Crash Course in Wills and Trusts
- ElderLaw Answers
- Seniorlaw.com
- National Academy of Elder Law Attorneys
- Pierro & Associates Law Firm (New York)
- Estateplanning.com


Available from ElderCare Online™ www.ec-online.net ©2001 Prism Innovations, Inc.