I Have a Living Trust So I’m Covered – Right?
July 27, 2009
In discussing long term care planning with new clients, very often they will tell me that they have everything covered because years earlier they set up a living trust. Living trusts are estate planning devices designed to eliminate the need to probate an individualâs estate at his/her death. In the 1990âs they were especially popular and still are very common, especially in states such as Florida and New York, where probate is time consuming and expensive. But are they useful for long term care planning purposes?
Most likely, not. Living trusts are usually revocable, meaning that when a grantor or settlor (the person establishing the trust) transfers assets to it he/she has the ability to take the assets back out at any point in time. People believe that when they make transfers to the trust, these assets are not counted as theirs for purposes of qualifying for Medicaid or VA Aid and Attendance benefits. That is just plain wrong. If the trust gives you the ability to take the asset back out of the trust, the government will say âgo ahead and take it back, spend it all down and then when it is gone come back to us.â The trust has to be irrevocable, meaning assets transferred to the trust cannot be taken back out by the grantor.
A second reason living trusts (or other trusts, such as testamentary credit shelter or bypass trusts, wonât work for long term care planning purposes is that they usually contain a clause providing that the trustee can use the assets for the âhealth support and maintenanceâ of the beneficiary. Again, if the beneficiary needs long term care the government will look at the trust and point to that language. âLong term care needs are health, support and maintenance,â theyâll say, âso spend it down and then come back to us when itâs gone.â
So, whatâs the solution? If you have read previous posts on this blog you know that first of all, the trust must be irrevocable. Now, that makes people uncomfortable. âDoes that mean I am giving away my assets and losing control over them?â The answer of course, is no. What I tell people is that the purpose of this transfer is not to give away assets because you may very well need some (or all) of them, depending on what your health needs are. But you can qualify for government benefits that can help pay for care. Not knowing how long you will live, the challenge is to protect your assets so you donât run out of money. Tapping into other sources helps accomplish that goal because you are spending down your own assets less rapidly.
Additionally, the trust language allowing distribution of assets by the trustee to the beneficiary has to be tailored very carefully so as not to jeopardize eligibility for government benefits. It all adds up to a trust that avoids probate and addresses long term care planning needs.
The bottom line when it comes to living trusts is to get proper advice before jumping into one or if you already have one. Seek the advice of a qualified elder law attorney who can discuss every option with you. A living trust may meet your particular needs. But then again, it may not.
The Right Way — And The Wrong Way — To Hire a Home Aide
July 20, 2009
As long term care needs increase and families want to keep their loved ones at home, hiring home health aides often becomes necessary. Paying an aide, however, if not done correctly, can cause Medicaid ineligibility years later, after funds run out. Consider the following very common scenario.
Jane hires a home health aide at $700 per week cash, or $3000 per month. She keeps the aide 3 years until her funds run out and now needs round the clock care. A nursing home becomes the only option.
She applies for Medicaid but is told, âSorry, youâre not eligible for 15 months. Youâll have to private pay until then.â Of course, Jane has no more money. Sheâll have to come up with the funds some other way, perhaps from family members. But at $9000 per month or more that may not be possible. How did Jane get into this mess? Because Medicaid treated her payments to the aide ($108,000) as transfers subject to a penalty.
Qualifying for Medicaid requires spending down assets below $2000. Transferring assets may cause Medicaid ineligibility if you do not receive something of equal value back. Medicaid calls this a âpenaltyâ. However, and this is key, you must prove to Medicaid that assets transferred are not subject to a penalty.
If you pay the aide cash (or by check) and donât keep proper records Medicaid will assess a penalty. The penalty is calculated by dividing the transferred amount by the average cost of nursing home care. When one applies for Medicaid there is now a 5 year lookback period, meaning Medicaid will look back 5 years from the date of the application to find these transfers. They will add together all the transfers made during that time. The penalty will begin when all other assets have been spent down and the individual enters a nursing home and applies for Medicaid.
Of course, that is exactly the time when you have no more money. The State presumes you gifted the money and so will tell you to get it back, use it and then, after itâs gone to come back and they will pay for your care. But, you didnât gift the money so you canât get it back.
So,how can you avoid Janeâs problem? By keeping records to prove the payments were not gifts and not paying cash which is difficult to trace. It is also a good idea to generate detailed invoices of the services which you purchased. Another, perhaps better, solution is to hire a home health agency that will supply the aide. It will cost more than hiring an aide directly but your contract with the agency will insure that Medicaid can never challenge the payments as gifts. And, in the long run it may cost you less because you wonât be stuck with a Medicaid penalty.
The Bank Won’t Honor my Power of Attorney
July 13, 2009
As I often tell clients, one of the most important documents that everyone should have is a power of attorney. A power of attorney allows you to designate someone to conduct financial and other transactions on your behalf. The ease with which anyone can execute such a document is a positive but can also be a negative because of the risk of it being abused. And therein lies the problem when it comes to being accepted by a third party, such as a financial institution or bank.
When we prepare a power of attorney for a client we draft it with the clientâs needs in mind as well as the mindset that we may not have another opportunity to redo it later so it must be as broad as necessary to cover all possible scenarios in which it may be used by the agent. We also tell clients that when their agent presents the document to a bank or other financial institution the first reaction may be that the bank will want our client (the âprincipalâ, that is, the person signing the power of attorney in favor of the âagentâ) to execute another power of attorney on their own form.
The bankâs reason is usually a concern about liability â being sued for honoring an invalid power of attorney. However, the law provides a measure of protection for both the principal and the bank. New Jersey law states that a bank must accept a power of attorney that conforms to the law unless the principalâs signature is not genuine or the bank has actual notice that the principal has died, the power of attorney has been revoked or the principal was under a disability when the document was signed, meaning he/she wasnât competent to sign it.
The problem presented to clients is that the bank employee is usually following bank policy set by their legal department that they want the principal to sign their own document, typically in front of one of their own employees. Obviously, this makes it easier for them to be sure the document is valid but it frustrates the purpose and benefit of the law, that the principal can sign one document to cover all scenarios. Persistence with the bank employee and sometimes intervention by the elder law attorney will usually overcome this resistance and convince the bank to honor a valid power of attorney.
It helps to know a little bit about the law because the person you are dealing with at the bank probably doesnât and will tell you they are simply âfollowing bank policyâ. But this policy is not at all helpful to the client, especially in situations in which physical frailties prevent him/her from physically appearing at each bank to execute a separate power of attorney. Thatâs not to say that there arenât legitimate concerns about agents abusing their power. Itâs just that a âone size fits allâ approach is the easy way out, instead of a careful examination of the facts of each case.
Dad Owns a Home and Needs Nursing Home Care – What do I do?
July 6, 2009
A common scenario that I am seeing with increasing frequency is the following fact pattern. Dad owns a home but not much else. He needs nursing home care but canât get a mortgage to tap into the equity to pay for the care. The home is listed for sale but in todayâs market, homes arenât moving quickly. So the children pay the nursing home bill and the cost to maintain the home, with the expectation that when they sell the home they will repay themselves. The family doesnât have any written documentation to reflect this arrangement and thatâs where the problem starts.
So, the children pay for Dadâs care and expenses. Maybe they pay by credit card, sometimes, by check. Some expenses, such as lawn care, they pay cash. Often times they donât keep records to back up the expenses and if more than one child is helping out no one is keeping a running tally of who is paying what. âWeâll figure it all out laterâ, they say. Finally, the house is sold. Dad gets $200,000 from the sale. The kids estimate that they have spent $150,000 on Dadâs behalf and take that amount to repay themselves. Dad then spends down the rest for his care.
Now, itâs time to file a Medicaid application. As part of the application Dad must produce financial records for each account he had in existence, going back to February, 2006 (soon to be a 5 year lookback). The State will examine the home sale and discover the transfer from Dad to children. It will treat the transfer as subject to a Medicaid penalty, unless the children can prove the money was repayment for goods or services that Dad received. And that proof must be by documentary evidence. Dad wonât be eligible for benefits for a year or more, depending on the state he lives in. âBring the money back and spend it downâ, the State will say. So what can this family do?
There are a few options. Some involve applying for Medicaid immediately. Others involve family members paying for Dadâs care and then getting reimbursed later. However, the one common element to each option is that there is a written agreement in the form of a note and a mortgage on Dadâs home to secure the loan. The paper trail is the key. Without it the children will never be able to prove that the transfer was for value, and wonât be able to recoup the money, in some cases hundreds of thousands of dollars, advanced for their parentâs care.
And if you have been a frequent reader of this blog you know that the earlier in the process you seek proper advice and guidance the better off you are. You donât want to wait until filing the application to find all this out because, of course, by then it is too late.
