Will I Lost My Family Business if I Need Long Term Care (Part 2)
July 19, 2010
So, we were discussing Joe’s situation last week. He owns a business and a building which rents space to his company and 3 other tenants. Their combined value is $1.25 million dollars. As we learned last week these assets are countable for Medicaid purposes as assets that need to be spent down. Joe has a real problem.
He tells me that he doesn’t want to sell the business or the building. He has a will that leaves both to his sons. “But”, I explain, “if he needs long term care he will have to sell both before he or Mary can qualify for Medicaid. Joe becomes exasperated. “My sons support their families through the business, just as I did. I can’t sell it now.”
I hear what he is saying. More than simply an asset, the business is also the income that supports 2 families. Yet, Medicaid doesn’t look at it that way. Which is why Joe ought to strongly consider transferring both the business and the building out of his name now. Careful consideration must be paid to the tax consequences but using some of the strategies we have discussed previously in this blog can protect Joe and his family.
Medicaid transfers carry a 5 year look back so the time to start transferring is now, while Joe and Mary are still healthy. There are gift and estate tax consequences to making transfers. Joe and Mary can make lifetime gifts of up to $1,000,000 each before having to pay gift tax so they should be able to transfer these assets without paying tax. They may also be able to eliminate the possibility of estate taxes by employing certain tax strategies.
If Joe wants to continue to receive the income generated by each asset he has some options. He could transfer ownership to a trust set up so that he receives the income from anything held in the trust. On the other hand, he can choose to continue to receive a salary from the business and rental income from the building as an employee. He’ll need to consult with his tax advisor to see which way is best.
But by putting a plan in place now to protect both he and Mary should they need long term care he is also preserving the financial viability of his company, which is critical to 3 generations of his family. Just another example of how long term care has the potential to destroy a family unless you are prepared for it.
Will I Lose My Family Business if I Need Long Term Care (Part 1)
July 12, 2010
Joe built his construction business from nothing. He was able to provide for his family, put his children through college and live a nice life on the income generated from it. Now in his 70’s, Joe doesn’t work much anymore. He goes into the office a few days a week, receives a paycheck, but he has turned over the day to day operations to his sons who have expanded the business. But recent heart surgery and his good friend’s recent diagnosis of Alzheimer’s disease has caused Joe to consider what would happen if he needed long term care. Is his business in jeopardy?
The answer to that is yes. You see, Joe still owns 100% of the business. He estimates that it is probably worth close to $750,000. He also owns the building in which his company is housed and that is probably valued at another $500,000. He receives rental income from the business and 3 other tenants there. He and Mary have other investments totaling $200,000. Joe figures that if he or Mary need long term care he’ll use the investments. When that’s gone he’ll still have the salary plus rental income and his sons will pay for the rest of their care at home through the business.
But, is this realistic? What Joe doesn’t realize is that 24/7 long term care averages about $125,000 per year. If both Joe and Mary need care, that’s a quarter of a million dollars a year. When I explain this to Joe he quickly tells me that there is no way the business can support that kind of expense. Quite frankly, what business can? Joe also tells me that he and Mary don’t have long term care insurance. If they can still get it, I would strongly urge them to purchase it. But if they can’t get it, what then? We’ll look at some of those options in next week’s post.
Can I Be Paid to Care for Mom?
May 3, 2010
In times of crisis, families pull together. Long term care is no different. So much of the care is administered by family members. And it doesn’t take too long before the question is asked. “Can I be paid to care for my mom or dad?” A recent New Jersey case decided by the appellate court makes it clear how tricky that can be.
Mom was 97 years old and in a nursing home. Daughter entered into a caregiver contract with Mom to provide care and was paid the sum of $56,000. This amount was based on daughter performing 15 hours a week at a rate of $25 per hour for 2.9 years, the life expectancy of a 97 year old. The payment was made and within 5 years of that payment Mom applied for Medicaid. The State denied her application, counting the $56,000 as a transfer for less than fair value, not a payment for fair value received.
We use life care contracts often in the cases in our office. But, we also know that the State will scrutinize those contracts very closely because when the payments are going to family members the State assumes that these transfers are “for less than fair value”, what most people would call gifts. They will then impose a penalty period, or period of ineligibility.
For example, the contract can’t be retroactive. If I have been caring for Mom for the last 2 years and now we decide that it would be a good idea for her to pay me for that care, Medicaid will flag that transfer. I had no expectation that I would be paid when I performed the services so I can’t change that now. There must be a contract in place going forward. I also can’t be paid an outrageous sum of money. Mom can pay me no more than what are fair market rates for the services I will perform.
So why didn’t our 97 year old Mom get Medicaid? We’ll explain that in next week’s post.
Cuts in Prescription Drug Plans Coming?
April 26, 2010
Here in New Jersey our new governor, Chris Christie, is making some tough, and unpopular, decisions in an effort to close a huge state budget deficit. While I have written previously about his focus on reducing teachers’ pensions and benefits, a fight that is expected to continue, the latest changes focus on a program that provides prescription drugs to low income seniors and the disabled.
We have a lot of negatives to contend with here in New Jersey. You can start with the highest property tax and automobile insurance rates in the country and an overall high cost of living and go from there. However, the Pharmaceutical Assistance to the Aged and Disabled (PAAD) and the Senior Gold programs that we have here are among the most generous programs of their kind that can be found anywhere in the nation. In fact, fewer than 20 states offer comparable programs.
What makes these programs so good is the income levels needed to qualify. For PAAD in 2010 one must have no more than $24,432 per year in income for an individual and $29,956 for a married couple. Senior Gold income limits go up to $34,432 for an individual and $39,956 for a married couple. There is no asset limit. Participants in PAAD pay $6 per generic prescription drug and $7 per name brand drug. The Senior Gold co-pay is $15 plus 50% of the remaining cost of the prescription or actual drug cost, whichever is less. But that’s what is going to change.
Under Governor Christie’s plan, beginning in January 2011, there would be a $310 per year deductible per person. The co-pay for brand name drugs would also increase from $7 to $15 while the co-pay for generic drugs would drop from $6 to $5. While there are approximately 165,000 people participating in PAAD, it appears that the 40,000 lowest income participants would be exempt from this increase.
Nevertheless, this latest news is just another example of the belt tightening that is going on everywhere and is just another reason why, as our population ages and more Americans reach senior status, it is so important to be proactive in planning for long term care rather than simply waiting for something to happen before addressing the need. You want to get to the front of the line because it is all to easy to get pushed to the back.
Obama’s CLASS Act – Good Idea or Wasted Effort? (Part 2)
April 19, 2010
Last week we reviewed the specifics of the new CLASS Act which is part of the new health care reform bill that passed through Congress and was signed into law by President Obama last month. CLASS attempts to provide coverage for long term care. But, is it going to have an impact on the growing long term care problem in this country? I wouldn’t count on it. I wouldn’t hold out any hope that this program will solve, or even make a dent in, the growing long term care problem. Here’s why.
For one thing, the specifics are very sketchy. The Department of Health and Human Services is supposed to put together regulations that will govern the administration of the program so that CLASS won’t be rolled out for 2 years. Add to that the 5 year pay in requirement before you can put in a claim for benefits, which means we won’t see any impact from this program until 2017. And that’s if you believe that the details will all get worked out on that time schedule (I wouldn’t bet on it).
And how about the benefit amount of $50 to $75 per day, which equates to $1500 to $2250 per month? Anyone who is dealing with a long term care expense knows how little that is when compared to a minimum $4000 assisted living facility charge and a $10,000 nursing home charge per month in our area. For those being cared for at home, $50 won’t cover much more than 2 to 3 hours of in home care a day. That’s without considering that, with inflation, the cost of care will surely be significantly more than it is now. I haven’t heard anything about cost of living increases being included as part of this program.
I also have my doubts about the financial soundness of the program. Will there be enough people paying into the system, for enough time, to cover those collecting lifetime benefits? We’ve seen how the Social Security system is being stretched because of an aging population, not enough workers contributing to the syste, and people collecting benefits much longer than was ever anticipated. Will employees in their 40’s and 50’s commit to a payroll deduction that will reduce their take home by $200 a month, when they are already struggling to pay their bills in recessionary times? Especially if there is no guarantee that the premiums won’t increase on an annual basis? My experience tells me that the average person’s reluctance to address long term care needs – the “it will never happen to me” mentality – won’t change. And 5 years doesn’t seem like a long enough time to collect money into the program before starting the pay outs.
All in all, I don’t expect much from the CLASS program. By the time it has any impact, in the best case scenario, the oldest babyboomers will be into their 70’s and the already overburdened long term care system will need more than what this program can offer.
Obama’s CLASS Act – Good Idea or Wasted Effort (Part 1)
April 12, 2010
Congress’ passage of President Obama’s health care reform last month has generated much controversy and fear, including, in some cases death threats against politicians in Washington who voted for it. I have been asked my thoughts on the long term care provisions contained in the bill, known as the Community Living Assistance Services and Supports or, to add yet another acronym to our vocabulary, CLASS. First, let’s go over the specifics as we know them.
CLASS creates a voluntary government program under which participants will pay a monthly premium, which will then guarantee them a small benefit to cover their long term care needs. However, they must pay into the program for at least 5 years before claiming the benefit. The program is not supposed to be funded with any taxpayer dollars but rather through the premiums collected from healthy participants.
Participants will pay a monthly premium through payroll deduction. The amount has yet to be determined but reports are that it will be in the $180-240 per month range, although it can be increased on an annual basis to insure the program is actuarially sound. The benefits are promised for lifetime, to cover long term care needs. The criteria has yet to be determined as far as what degree of impairment is necessary to qualify for benefits. The dollar amount of benefit has been reported to be anywhere from $50 to $75 a day.
Employers who participate in CLASS will have their employees automatically enrolled, although anyone can opt out of the plan. Self-employed persons and those whose employers choose not to participate will be able to join CLASS through what has been termed a government payment mechanism. Those are the basics as we know them. So, is this program going to be a savior or just another ill-conceived government program? I’ll weigh in on that next week.
Multigenerational Households – A Long Term Care Solution? Maybe
April 5, 2010
An article in last Sunday’s business section of the Star Ledger, New Jersey’s largest daily newspaper, caught my attention. It discussed the rising trend of multigenerational households, highlighted by quotes from a few families in which adult children modified their homes so their parents could move in. Looking at it from my perspective as an elder law attorney and knowing from my own experience how unprepared most people are when it comes to long term care, the article left me with many questions.
According to statistics cited in the article in 2008 one in six households were multigenerational, up from one in eight 30 years ago. For one family interviewed, the reasons were health related and financial. Dad had a stroke and was forced to retire. Social Security and disability payments aren’t enough to pay the costs of maintaining their home so daughter and son-in-law built an addition to their home. Although not entirely clear, it appears that the children are paying for the addition and the parents will sell their home and live rent free with the children, providing childcare for the grandchildren. The article’s author comments that with rising nursing home costs baby boomer children are increasingly providing care for their parents in their own homes.
But, is that realistic in this case? With 2 toddlers, will daughter be able to care for her dad if he needs nursing home level care? Probably not. And is their concern about spending all their money towards a $100,000 plus nursing home bill solved by selling their home? Not at all. Actually, they may have to spend down more by selling their home and living rent free with the kids than if they still owned the home. So does that mean the decision they made is the wrong one?
Absolutely not. But what it tells me is that they have started to think about and address a very real problem but haven’t gone far enough and thought it all the way through. I certainly don’t have all the facts here. But, it might make sense for the parents to buy into the home, either now or later. That depends on how much savings they have, who will need long term care, and when and where it will be administered. The possibility of needing government benefits down the road certainly must be discussed because what choices the family make now could very well impact what is available to them later.
Maybe this was all discussed. But, experience tells me it probably wasn’t. Mom talks in the article about having fewer expenses and being able to go on vacations and enjoy life. And that is important. But, what I see so often is that people don’t really look closely at what long term care means, day to day. It means a downward decline in health and upward trend in expenses. So you can’t just look at where you are now and come up with a solution that solves today’s problem. You have to expect your life, in the next 10 to 20 years, to look very different than it does now and plan for that. That’s what real long term care planning is all about.
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.
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.
Retirement Accounts – More Than the Minimum Required Distributions?
December 28, 2009
The fact that we are living longer than our parents and grandparents is changing so many aspects of our lives. One area that will be impacted by this longevity is retirement accounts. So many of our clients have it ingrained in their minds that they must not touch their retirement accounts. They withdraw only the minimum amount each year that the government says they must, what is known as minimum required distributions. But is that really the best approach?
Retirement accounts enjoy tax deferred status. The tax that one owes on the growth of these accounts is not paid until the money is withdrawn from the account. The thinking goes that by withdrawing the money after retirement there will be less in taxes because the retiree will be in a lower tax bracket than during working years. Many also view their accounts as something they want to pass on as an inheritance to children and other loved ones. This combination results in the “I don’t want to withdraw anything” attitude.
For so many of our clients, the majority of their investments sit in retirement accounts. This makes their failure to plan for long term care more acute because if we want to protect assets, by using trusts, for example, we must move those assets out of the retirement accounts. Doing so, however, can cause a large tax bill, one that most are reluctant to pay, thinking that, they’ll never really need long term care, or they’ll wait till it happens. Waiting, however, can cause disastrous results.
Moving through the 21st century as a greater number of people live 20, 30 or even 40 years in retirement, we may need to reconsider how we use our retirement accounts. Maybe it isn’t best to keep the money in the account as long as possible with the specter of long term care on the horizon. Perhaps it might be better to start withdrawing funds soon after retirement, rather than gambling that we won’t need long term care. Guessing wrong will likely result in the loss of more than just the tax on the withdrawals, perhaps even the entire account towards the cost of long term care.
As one advisor I know put it, we forget that not all the money in the account is ours. If we recognize that, roughly one third of the money is Uncle Sam’s it is easier to accept the tax bill that comes with withdrawing funds. Of course, this is not a one size fits all situation. Everyone needs to consider the matter individually based on their own set of facts. But, when our thinking on such an important decision becomes so automatic, we need to go back and examine the wisdom of that approach because times are definitely changing and we need to adjust with them.
