Are Your Advisors All on the Same Page?
February 22, 2010
As I am fond of saying, navigating through the long term care system usually requires a team of advisors. While the elder law attorney is, no doubt, a pivotal person, the accountant, financial advisor and insurance specialist are equally important. And when one piece isn’t properly in place it can be catastrophic. Betty’s story is illustrative. Betty and Tom decided to sell their home in which they raised their four children. They invested the majority of the proceeds in annuities and decided to rent and live off the income from their investments and Social Security. Tom, however, had exhibited some signs of dementia.
After the sale of their home, Tom’s condition deteriorated rapidly. He became restless and, at times, physical with Betty, who weighed 100 pounds less than Tom. She could no longer keep him at home. Betty came to us for help, thinking she could get Tom on Medicaid. She didn’t realize that the $300,000 she invested in annuities was now a countable asset and would have to be spent down to $109,560 before Tom could get Medicaid. Betty was distraught. “I am only 65. How can I live on $100,000”, she asked me. I told her not to worry. She could cash in the annuities, buy another home with that money and keep it, as an exempt asset. After Tom qualifies for Medicaid she could then resell the home if she wanted, to reinvest for income again.
Then we examined the annuities. That’s when I discovered the surrender charges of 7% that Betty would have to pay. While they did have a provision that waived the charges if the owner needed to cash them for long term care expenses, the problem was that Betty, and not Tom, was the owner. Betty told me that Tom had definitely been diagnosed with dementia at the time that these decisions were made but couldn’t recall any conversations about long term care or how to provide for it. Big mistake.
We were able to help Betty get Tom into a quality nursing home. She privately paid for 7 months, cashed in the annuities, paid a surrender charge, and bought a home. We helped Betty preserve the majority of their savings, money she will need to provide for her own care down the road. But, there are lessons to be learned here.
The result could have been much better had Betty come to us before she sold her home and before she bought the annuities. We might have suggested she wait until Tom entered the nursing home, to sell her home. We also would have cautioned Betty about purchasing investments that could easily be liquidated if a large expense (ie. nursing home care) became necessary. Buying the annuities wasn’t the problem. It was the fact that she couldn’t sell them without paying a penalty. No one thought to ask what would happen if Tom needed care sooner rather than later. And that’s why having a team of advisors working together is so important. All tax, financial and legal aspects of any decision should be analyzed carefully and that’s more than any one advisor is capable of doing.
How Jane’s Simple Estate Matter Turned into a Complicated Mess
February 15, 2010
There are many misconceptions about estate administration and probate. So often when someone asks me about it, they’ll typically tell me that their family member’s estate matter is not that complicated, that they can handle it themselves. The following is a cautionary tale for the do-it-yourselfer. Mary died without a will. She never married and had no children. She did have 3 sisters, Jane, Ann and Betsy. Betsy had died before Mary, leaving two children, Jim and John. Jane was appointed administrator of Mary’s estate and thought she could handle things herself. However, she made 2 big mistakes.
Under intestacy laws, Mary’s sisters were entitled to split her estate 3 ways. That’s where Jane made her first mistake. A family friend told her she should split the estate 2 ways, not 3, because since Betsy had died, she wasn’t entitled to receive anything. Except that, under New Jersey’s intestacy laws, Betsy’s share should have passed to Jim and John.
Then Jane made her second mistake. New Jersey has an inheritance tax payable based on the relationship of the heir to the decedent (the person who died). Siblings are Class C beneficiaries. Nephews are Class D beneficiaries. Each class has a different tax rate. So when Jane filed the inheritance tax return indicating that she and Ann were the heirs she didn’t pay enough tax.
When Jim and John realized they were entitled to receive a share of Mary’s estate they contacted an attorney who then contacted Jane. Jane had already distributed the estate assets and had already filed the tax return and paid the tax by the 8 month deadline. So, now she has a problem. Jane has to retrieve funds from Ann to then pay Jim and Joe their proper share. She also must file an amended tax return with the State and pay the proper amount of tax as well as a penalty for late payment at 10% per year.
The irony of the story is that the estate was a simple one with a few bank accounts to be administered and an uncomplicated tax return. But by trying to do it herself, Mary made mistakes that an experienced estate attorney would have recognized right away. So now it will be more complicated to fix things. A lesson learned the hard way.
Are You Putting All Your Eggs in One Long Term Care Basket?
February 8, 2010
Last year on this blog I wrote about the financial risks of investing in a continuing care retirement community (CCRC) . Late last year Erickson Retirement Communities, which operates CCRCs in 10 states, including New Jersey, filed for Chapter 11 bankruptcy, reinforcing many of the concerns I have often expressed to clients.
CCRCs are communities that provide a full continuum of care for their residents. They have flexible accommodations designed to meet their resident’s health and housing needs as those needs change over time, offering independent living, assisted living and nursing home care, usually all in one location. As a requirement for admission, most CCRCs require residents to pay an entrance fee, or lump sum “buy-in”. In Erickson’s case this can range from $150,000 to $400,000. And there lies one of the concerns.
So often I see people consider committing almost their entire savings to the entrance fee. “The CCRC is going to provide my care no matter what level I need”, they tell me. “And the entrance fee is refundable,” (which is true in Erickson’s case). My reply, however, is that even if it is refundable, there is no guarantee you’ll get it back if the company collapses financially.
Erickson is a good illustration of that. While it appears that there will be some kind of restructuring that will allow it to continue to operate, that is far from certain at this point and if creditors of the company push to get paid back your money is at risk of being used to pay off this debt. There are no certainties in life (other than death and taxes, as the saying goes). So, you’ve got to have a contingent plan, in the event that the CCRC can’t deliver on its’ promise. Remember, you could be living in their community for 10 to 15 years or longer. A lot can change in that amount of time.
It’s important, therefore, not to put all your eggs in one basket. If you do invest in the CCRC model, and it certainly can be a good option for some, make sure you do your “due diligence”, as we attorneys are fond of saying, (ie. do a background check on the company) and make sure you’ve got a backup plan. This means the company shouldn’t be holding all (or substantially all) of your money. You’ve got to have sufficient money remaining after you’ve paid the entrance fee, to finance a backup plan. Because without any money, you’ve really got no plan.
How Does Medicaid View Same Sex Partnerships?
February 1, 2010
The past year has seen failed attempts by supporters of same sex marriage to have the definition of marriage expanded to include gay and lesbian unions. However, some states have passed laws creating domestic partnerships and civil unions, which then carry with them some of the benefits of marriage. New Jersey has a civil union law which it established in 2007. So, how would partners in a civil union be treated for Medicaid purposes? Not surprisingly, the answer isn’t so clear cut.
While Medicare, for example, is a federal program governed by rules established by Congress, Medicaid, on the other hand, is a mix of federal and state law. It is that attempted blend of two governmental systems and sets of laws and regulations that makes the Medicaid system so uncertain for those trying to tap into it. The issue of civil unions is a perfect example.
New Jersey’s law states that civil union couples are entitled to the same benefits (as well as held to the same set of responsibilities) as heterosexual spouses, including Medicaid. But, it’s not that simple. Of course, with the government it never is. That’s because there is a certain federal law known as the Defense of Marriage Act which says that, in interpreting any act of Congress the term marriage means only a legal union between a man and a woman. This presents a problem for states recognizing civil unions because they get federal money to support their Medicaid programs. So, they may be violating federal law and possibly lose federal funding by treating civil union partners as married for Medicaid purposes. At least that’s what the federal agency overseeing Medicare and Medicaid has indicated on at least one occasion. On the other hand, the New Jersey’s civil union law seems quite clear that civil union couples are to be treated as married for purposes of Medicaid.
Where does that leave things? We’ll probably have to battle this one out in court. And, by the way, it isn’t necessarily the case that treating civil union partners as married is best when it comes to Medicaid. As readers of this blog are aware each case must be examined individually. In some instances it would be advantageous to be married, in others it wouldn’t. But, the question does raise some interesting issues and is just another example of why the long term care system is so impossibly confusing to navigate alone.
