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.
How $250,000 Went Up in Smoke
December 14, 2009
Mary’s husband Joe, passed away several years ago but she continued to live in the home where they had raised their family. Mary was now struggling with the effects of dementia. But she wouldn’t hear of it when her children talked about moving her to a safer environment. So they arranged for a home aide to provide some assistance. However, Mary had no other assets from which to pay for care so her children chipped in. Nevertheless, Mary was home alone for long periods of time. And that’s when tragedy struck.
Mary was using the stove and, although no one is really sure how it happened, the fire originated in the kitchen. The home was destroyed. Miraculously, Mary escaped serious injury. The family considered themselves lucky. They now knew, almost too late, that Mom needed more supervision. They planned to take the homeowners insurance money and use it to place her in an assisted living facility. That’s when Mary’s family got a second shock.
You see, Mary had never increased the insurance limits on her home. As its value increased, along with the costs of material and labor to rebuild, her policy limits remained unchanged. So, all she received from the insurance company was $100,000, even though the fair market value of the now destroyed home was over $500,000.
When Mary sells the now vacant lot, she’ll get a bit more cash to help pay her long term care needs, but it won’t be anywhere near $400,000. The end result is that Mary lost at least a quarter of a million dollars in that fire along with the rest of her belongings. There is now a greater chance that she’ll run out of money. So, while Mary and her family were lucky that she escaped the fire with her health intact she wasn’t so lucky when it comes to her finances. She now is much worse off than her family could have ever imagined.
There are a couple of lessons to be learned here. First, make sure you check your insurance coverages and keep them up to date. But, the broader lesson to be taken from this tragedy is that a failure to act can have catastrophic consequences far worse than the decisions you are trying to avoid making. As the saying goes, “a failure to plan is a plan for failure”.
Is Long Term Care More Important to Women Than Men?
December 7, 2009
I could hear the panic in Mary’s voice. Her husband Joe’s health had been steadily declining for years and Mary has been his primary
caregiver. But last week he fell at home, breaking his hip, and now he’s in a subacute facility. The recovery process hasn’t gone well, in part because of Joe’s age and partly because of the toll that Alzheimer’s has taken on his mind. Mary is now facing the prospect of either long term care at a cost of $11,000 per month or, in an effort to keep the cost down, trying to bring him home and provide much of the care herself, supplementing it with a few hours of home aide assistance. “Joe never wanted to talk about long term care and so we never did plan for this,” she tells me. It’s a classic scenario and one that, so often, is more damaging to the wife than the husband. How so?
Mary’s situation is a typical one. At 72, she’s 6 years younger than Joe. Add the fact that women have a longer life expectancy than men and chances are that the husband will need long term care first. And if the couple haven’t planned for it, they’ll likely spend most of their savings on his care. Mary and Joe have $400,000 of assets plus their house. Without any guidance Mary could be left with as little as $109,000 and the house before the State will help pay for Joe’s care.
The Holidays – A Time to Consider Elderly Loved Ones
November 30, 2009
Once again the holiday season is upon us, a time of joy but also stress. We often visit family members we haven’t seen in some time and that’s when changes in older loved ones become more noticeable. Some of the changes that may indicate your loved one needs some extra help:
1. Weight loss
2. Deterioration in personal hygiene
3. Unusually dirty or messy home
4. Unusually loud or quiet, paranoid or agitated behavior
5. Local friends and relatives noticing changes in behavior
6. Self-imposed isolation, stops attending activities
7. Signs of forgetfulness such as unopened mail, piling newspapers, missed appointments, unfilled prescriptions
8. Signs of poorly managed finances, such as not paying bills, losing money, paying bills twice
9. Unusual purchases
So what should you be doing if you see any of the above? A physical and neurological exam should identify any medical issues. A Geriatric Care Manager (GCM) can help assess the options available that will allow your loved one to continue to live a full, fruitful and safe life. Suggestions may include a home health aide, adult day care, and personal organizer to help with money management.
If your loved one can no longer live alone, possible alternative living arrangements include another family member’s home, assisted living, senior housing or nursing home. Each choice has pros and cons and expense is often an issue. Planning should be done as early as possible to determine what government benefits can be tapped to help pay the cost, such as Medicare, Medicaid and Veteran’s benefits.
Because the family is together once again, the holidays are a good time to begin discussing these difficult decisions. For example, if one child lives nearby an aging parent and sees the decline on a daily or weekly basis, and the other child does not, there is often a tendency for that second child to downplay or minimize the decline, often basing his/her opinion on phone calls with the parent. But seeing the parent and visiting their home can alter that perception.
Remember, there are resources available to you. All you need to do is find them or consult with someone knowledgeable, such as an elder care attorney, who can help point you in the right direction. But, don’t put it off till next year. By that time you may be dealing with a full blown crisis.
A Pension Crisis Brewing?
November 23, 2009
Much has been written in recent years about the health of Social Security. As the population ages two things are happening. Fewer people are paying into the system, while at the same time more people are receiving benefits, raising concern that the program will run out of money. But there is another, perhaps, more serious crisis developing within state employee pension programs that hasn’t, until now, received as much attention. We are seeing it here in New Jersey, as are other states across the country. And it may hit some folks harder than the Social Security problem because so much more of their retirement income may be derived from a state pension than from Social Security.
As the economy remains in a funk and financial markets still struggle to recover from huge losses over the past couple of years, many pension systems have seen their investments take a big hit. Since the beginning of 2009, for example, New Jersey ‘s pension fund has lost almost 13% in value, $10 billion to be exact. It hasn’t helped that the government has taken money from the pension system to plug budget gaps in other areas in past years.
Now, our new governor, Chris Christie, is assessing the situation. Will he be the one to make some hard decisions? Our outgoing governor already has signed legislation raising the retirement age and barring retirement payouts for part time employees paid less than $7500 per year. You can be sure other changes are coming from the new governor. There have to be. There isn’t enough money to pay everyone who will be entering the pension system in the next 30 years. The state has to close the gap somehow.
Now, ask yourself what you would do if the State cut your pension by 10%, 20% or more. What would you do to replace that income? And what would you do if you were then faced with rising long term care costs? The government is dealing with a fiscal crisis. It is doing the same things we all do when we are faced with a financial crisis ‘ tighten our belts and cut costs.
The signs are there. You just have to pay attention ‘ and take the opportunity to protect yourself and our families. Don’t assume the government will be there to protect you. It’s busy trying to fix it’s own problems. You’ve got to take care of your own. And the time to do it is now.
Mary’s Worst Home Care Nightmare
November 2, 2009
For many families, keeping their elderly loved one at home will require in home assistance. There are many quality home health care companies in the area so finding one isn’t a problem. But I find so often that clients don’t go through a licensed agency because of the cost. While I have written in the past about the Medicaid problem of hiring aides directly and paying cash (7/20/09 post), there is another very real risk, safety. The following story is one, unfortunately, I have heard more than once.
Mary found an aide to care for Dad through an agency she had learned of from a friend. I know many of the quality licensed agencies in the area but had never heard of this one. Mary paid a fee to the agency, who sent an aide to her dad’s home but her financial dealings with the agency ended there. She paid the aide directly in cash. I cautioned Mary that she didn’t really know anything about the agency or the person they were sending but she said she interviewed the woman, who seemed pleasant enough. And Mary was in a bind because Dad had run out of money so she was paying out of her own pocked. Now the aide she had found herself and whom had stayed with Dad for 3 years was going back to her native country. Mary needed to find someone quickly and cost was a real issue.
What happened after one month was Mary’s worst nightmare. On one of her daily visits to Dad’s home she found him bruised and battered, in a semiconscious state. He had been beaten by the aide, who claimed not to know what happened. Mary called the police. They immediately arrested the aide and Dad was transported to the hospital.
Upon further investigation, Mary discovered that the agency was neither licensed nor insured. The owner disappeared, probably to reappear under another agency name. And unfortunately Dad’s injuries were of a severity that he could no longer stay at home, but needed nursing home care. Mary felt terrible, but her predicament is hardly uncommon. When trying to make ends meet safety was compromised. Bringing a complete stranger into a home to care for a defenseless senior should not be taken lightly. Background checks must be done. Training is important. There is a reason going through a reputable agency is more expensive.
However, if a long term care plan had been put in place, well before Dad needed care, perhaps Mary would not have been strapped for cash. Dad would have the money to pay for his own care, maybe government benefits could have been tapped to help out. Mary would then have hired the licensed agency, safety precautions would have been taken, and a tragedy could have been avoided.
How Can the Government Tell Me I Canât Help My Family? (Part 2)
October 26, 2009
Let’s pick up where we left off with Mary. Her son, Jim is unemployed and Mary has been giving him funds totaling $50,000 over the last 6 months to help him pay his bills. And she intends to continue doing so until he finds a job. While Mary is 70, healthy and not thinking she’ll ever need long term care, I explained to her that if her health takes a turn, the transfers to Jim will make her ineligible for government benefits should she run out of money. That is a very real possibility, with the cost of care currently averaging over $100,000 per year in her area. So what can we do?
We can set up a trust to which Mary transfers assets. The trust then provides the funds to Jim. Now, you may be thinking, ‘doesn’t this create the same problem Mary already has by giving Jim money each month or two?’ Yes, but by having Mary transfer the money in one lump sum Medicaid’s 5 year lookback is applied one time so we know when it will expire. If she transfers a little bit at a time Mary creates a new 5 year lookback for each separate transfer. But isn’t there a potential Medicaid penalty when the trust gives money to Jim? No, because Medicaid only looks at Mary’s transfers, not the trust’s.
Some may read this and conclude that this is just a way for Mary to avoid using her money for long term care and have the government pay her bills instead. But is that really what is going on here? Cleary not. Mary isn’t even thinking about long term care (although she clearly needs to). Through the use of a trust she can accomplish both goals, helping her son get back on his feet and providing for her own needs. If she gets sick she’ll definitely need to use some of her funds for her own care but when she spends down completely, if done properly, she will be ready for Medicaid. And that benefits not only Mary, but also the providers of her care who will receive those benefits, whether it be a nursing home, assisted living facility or home health care agency.
The long term care provider will know that after Mary spends down her assets she will qualify for Medicaid without any surprise ineligibility periods imposed by Medicaid. And Mary will know that she can be there for her family and still meet her own needs. Mission accomplished.
How Can the Government Tell Me I Can’t Help My Family?
October 19, 2009
Mary had been reading my blog posts for some time now about the need to plan ahead for long term care. Something struck a chord with her and she called. She has a home and about $200,000 in investments. While still healthy, she is 70 and thinking about the future. I then asked her if she had made any gifts to her kids or grandkids. She replied, ‘No gifts but I am helping out my son Jim a little bit because he has been out of work for 6 months’.
‘Well, Mary, actually, the money you are giving your son may disqualify you for government benefits down the road, should you need them’, I explained. Mary became exasperated. ‘Jim has had such a tough time finding a job in this economy. How can the government tell me I can’t help my family when they are in need?’ The reason for this, if you have been reading my posts over the past number of months, is the Medicaid spend down rules. The government wants you to spend your money on your own long term care first, before asking for assistance.
Now, not all your money must be spent on long term care. But it must be spent in such a way that you are getting something of equal value back. Mary heard this and in an exasperated tone cried, ‘what could provide me greater value and satisfaction than helping to keep a roof over my son, daughter-in-law and grandchildren’s heads and food on the table, until Jim can get back on his feet? My parents helped us out when my husband lost his job. In tough times our family has always pulled together and pitched in. Jim is a good son. He just needs a break.’
While you and I may view Mary’s help as essential and proper, unfortunately the government does not. Mary estimates that she has given Jim $50,000 over the last 6 months and intends to continue to do so. Right now, however, she has a potential Medicaid penalty of about 7 months and that will only increase if she continues to advance funds to Jim.
Mary is really getting agitated now. ‘So are you telling me I have to stand by and watch Jim lose his house — that I can’t do anything?’ ‘Not at all’, I replied. ‘You can be there for Jim, but we have to do it in a way that won’t create long term care problems for you down the road.’ In next week’s post I’ll share with you what I told Mary.
New York’s New Power of Attorney – What Does it Mean for You?
October 5, 2009
On September 1, 2009 New York’s new power of attorney law became effective. There has been much written about it. The intent of lawmakers was to correct the financial abuses that seem to increase in frequency, probably due to the aging of our populace. As with any new law, however, what lawmakers envision and what actually occurs often differ greatly. But, what does the new law mean for you?
First, let’s run through the major changes. One of the biggest changes is the creation of a ‘statutory major gifts rider’. This is a document separate from the power of attorney that specifically authorizes major gifts and other transfers (defined as greater than $500 per person per calendar year). No longer can the principal (the person executing the power of attorney) authorize gifts in the body of the power of attorney document. This will impact many long term care plans in which assets are placed in trust, for example. If the principal can no longer make the transfer and a child, as agent under power of attorney, needs to complete that transaction, New York law now requires this separate rider.
A second important change focuses on the execution of the document. Now the principal and the agent must sign the document in front of a notary and two disinterested witnesses. The signings need not, however, occur at the same time. The agent may sign at a later date than the principal.
A third major change is one that at first might not seem like much. Any new power of attorney automatically revokes all previous power of attorney unless the principal expressly states otherwise in a special ‘modifications’ section. This could really wreak havoc upon estate and long term care plans. Think about it. How many times have you gone into a bank and executed a limited power of attorney appointing a family member as agent for a particular account? If that document doesn’t expressly state your wish not to revoke your general power of attorney or any other limited power of attorney that you signed previously then they all are revoked. What if the bank employee doesn’t point this out to you? They may not even be aware of this provision.
It will be interesting to see what impact the new law will have. Will it correct financial abuses of the elderly? Will it be too restrictive and hamper families in their ability to care for elderly members? Will there be any unintended consequences that nobody foresaw? And will other states follow suit? One thing should be clear. Consult your elder or estate planning attorney before you execute any other powers of attorney.
