Quarterly Newsletters

June 2008: Two Steps Forward, One Step Back

The Deficit Reduction Act of 2005 (the "DRA") is a comprehensive federal law that brought many changes to the federal Medicaid Act. In several of my columns, I have discussed how the DRA changed the Medicaid transfer of asset rules by expanding the lookback period from three to five years and by changing the start date of penalty periods.

The "lookback period" is the period of time that the Medicaid office is looking at to see if an applicant for benefits made any uncompensated transfers. Medicaid is a welfare program. In order to qualify for Medicaid benefits, an applicant must have a very limited amount of resources, with certain exceptions, less than $2,000 in resources.

Since Medicaid is a welfare program, the Medicaid office must punish a person who has disposed of his assets for less than fair market value. If the program failed to punish an applicant for disposing of his assets for less than fair market value, everyone would simply give their property away when they needed long-term care services and qualify for Medicaid benefits the next day.

The lengthening of the lookback period from three to five years, however, is not as onerous as the change in the start date of the penalty period. Prior to the DRA, if an applicant made an uncompensated transfer of an asset, the Medicaid office would start the period of ineligibility running for that transfer in the month that the uncompensated transfer occurred, irrespective of the amount of resources that the individual retained in his name after the transfer occurred.

For example, if Mr. Smith transferred $10,000 in January 2003 but still had $200,000 in his bank account, the Medicaid office would calculate a two month period of ineligibility for Medicaid benefits based upon the $10,000 transfer. That penalty period would begin to run in January 2003 and would end on the last day of February 2003, or two months later, irrespective of the fact that Mr. Smith had $200,000 of other assets remaining in his name.

After the DRA, if Mr. Smith transferred $10,000 in January 2008 and retained $200,000 in other assets, no penalty period would begin until Mr. Smith no longer owned the $200,000 and he applied for Medicaid benefits. So, if Mr. Smith entered a nursing home in January 2009 and spent his money on his nursing home care between January 2009 and January 2011 and then he applied for Medicaid benefits, the Medicaid office would begin the two month penalty period that he incurred as a result of the $10,000 gift in January 2008 in January 2011. Mr. Smith would be ineligible for Medicaid benefits for the months of January and February 2011, as result of the January 2008 gift.

With regard to the start date of the penalty period, the state of New Jersey has taken the position that when a Medicaid applicant is applying for a home- or community based service program, commonly referred to as "HCBS" programs, a penalty period for any uncompensated transfers that the applicant made during the lookback period causes the applicant to be ineligible for HCBS services but the penalty period does not begin to run at all, meaning that the applicant must wait five years (or the entire lookback period) before he can receive HCBS services. HCBS services include home health aides, adult day care services, and assisted living services.

I am in the process of appealing the State's interpretation of the DRA. In my brief, one of the facts that I pointed out to the Court is that the DRA actually expands HCBS services. The DRA was not meant to contract HCBS services.

This past week, the Centers for Medicare and Medicaid Services ("CMS"), the federal department responsible for administering the Medicaid program, proposed regulations designed to implement the DRA's provisions that expand HCBS services. In reading these regulations and the comments that CMS made in promulgating these regulations, it is clear to me that the intent of the DRA, at least with reference to HCBS services, is to expand Medicaid services in the community.

In my opinion, these new regulations and comments will further serve to bolster my appeal of the incorrect interpretation of the DRA transfer of asset rules as applied to HCBS programs. Why would the DRA punish people applying for HCBS programs more severely than it punishes people applying for nursing home services, yet at the same time, expand HCBS program in order to permit people to live at home for as long as possible? To me, the answer is it wouldn't.

THE DANGER OF DESIGNATIONS

Many people believe in the magic of beneficiary designations. They might not think of beneficiary designations as being magical, but when they tell you what, in their opinion, a beneficiary designation can accomplish, the only way their thoughts could be described is magical.

For instance, many people believe that if they place a beneficiary designation on an account, the account will not be part of their estate for estate tax purposes. This is wholly incorrect.

The federal government levies an estate tax against all estates with a gross value greater than $2,000,000. The credit against federal estate tax will increase to $3,500,000 next year. In 2010, the federal estate tax will be repealed, meaning that no federal estate tax will be levied against any estate no matter the value. Unfortunately, this repeal of the federal estate tax is not permanent. In fact, the repeal will only last for one year.

In 2011, the federal estate tax credit will be $1,000,000. In my opinion, and I have been saying this for years, I believe the credit will be frozen at somewhere around $3,000,000. I do not think we will see even the one year repeal.

New Jersey also has an estate tax. New Jersey's estate tax is based upon the federal law as it existed in the year 2001. In 2001, the federal government offered a credit against estate tax equivalent to $675,000, so New Jersey's credit is equivalent to $675,000.

If an estate exceeds the applicable credit, the estate is potentially subject to estate tax. The federal estate tax rate is as high as 45%. The New Jersey estate tax rate is, on average, approximately 10%.

The tax code, the series of laws governing taxation, is exceedingly complex. The government picks and prunes the tax law frequently, making a complete comprehension of the law nearly impossible.

If a beneficiary designation could help you avoid estate tax, the government would close that loophole in a second. A beneficiary designation cannot help you save estate tax.

The only asset for which I see a real benefit to naming a designated beneficiary is an individual retirement account or other qualified account, such as a 401(k). But the advantage to naming a designated beneficiary on that type of account is not so much for estate tax purposes as it is for income tax purposes.

If you name your spouse as the primary beneficiary of your IRA, your spouse can roll the IRA over into her name after you die and name your children as the designated beneficiary of her roll-over IRA. This permits maximum income tax deferral because the life expectancy of your spouse and then your children is used to calculate the minimum required distributions from your IRA. The financial gurus call this a "stretch IRA."

On the other hand, designating a beneficiary on your non-qualified brokerage account offers no tax advantage. Moreover, in my opinion, having designated beneficiaries can be a bad thing because when people rely too heavily on beneficiary designations, their estate plan end up being far more complicated than the plan needs to be.

I have had numerous clients come to me and say, "my one son is the beneficiary on this CD and my other son is the beneficiary one this CD, and my daughter gets this CD." The client then asks me to draft a Will that leaves everything to her four children equally.

The problem I see with this situation is, the client now has four estate plans, not one. The three beneficiary designations and the Will that I drafted for her.

If she no longer owns any one of those CDs at the time of her death, one of her children is getting shafted. And while the client may swear up and down to me that she will have all three of those CDs and that all three of the CDs will be of equal value at the time of death, the fact of the matter is, the client has no way of knowing that or guaranteeing that it will be true.

So, in my opinion, have a beneficiary designation on your IRA and other qualified accounts and skip the designations on your other assets. That's what a Will is for.

SHELTERING MONEY WITH INSURANCE

Long-term care has become truly long. In the past ten years, the long-term care industry has exploded. Home health aides, adult day care centers, assisted living residences, nursing homes, continuing care retirement communities-all forms of long-term care have burgeoned in the recent past.

And long-term care is expensive. A live-in home health aide can cost upwards of $5,000 a month. An assisted living residence can cost anywhere from $3,500 to $7,000 per month. A nursing home can cost $7,500 to $9,500 per month. If you require long-term care for five years, you could be looking at expenses of $500,000 or more.

It is little wonder why people look for solutions to the costs of long-term care. One solution that has gained in popularity in recent years is long-term care insurance.

Long-term care insurance is a policy of private insurance that will pay for the costs of long-term care. The general idea is, if the insured requires long-term care, his long-term care insurance will help him pay for the cost of that care.

In my practice, a number of people have asked me my opinion on long-term care insurance. For the record, my opinion is long-term care insurance can be a good product. Since a significant percentage of elderly individuals will require long-term care at some point, I think any product that will help defray the cost of that care can be a good thing.

But you have to be careful with long-term care insurance. Because long-term care insurance has such a high payout rate-meaning that many of the insured actually use the insurance-you have to ensure that the company from which you purchase the insurance is highly capitalized. In short, when it comes time for the insurance to pay your bills, you want to make sure that the insurance company will have money.

The number one reason people do not get long-term care insurance is because of the cost. I have heard of annual premiums of anywhere from $1,500 to $4,000. When you are sixty-five years old and living on a fixed income, $2,500 a year for something you think-and hope-you will never need seems like a lot of money. Of course, $8,000 per month is a lot of money, so you have to bear in mind the cost of the thing you are insuring against.

There are a number of factors that affect the premium you will pay. The length of the policy. In other words, once the policy begins to pay for your care will it pay for one year of care, two years, three years, or more? The longer the period of time during which the policy will pay, the higher the premium will be.

The amount that the policy will pay on a daily basis affects the premium.

In other words, the policy will pay for three years, but how much will it pay a day? $150 per day? $200? Obviously, the higher the daily benefit amount, the higher your premium will be.

Whether or not your daily benefit amount has an inflation rider will affect the premium. In other words, your policy will pay you $200 a day for three years. But you are only sixty-five today and most people who need long-term care need that care in their eighties. A $200 daily benefit will not be worth much twenty years from today when the average nursing home costs $700 per day.

So, if your policy includes an inflation rider through which your daily benefit rate increased 5% compounded per year, your premium will be higher.

Aside from the general benefits of purchasing long-term care insurance, that is, someone else pays for your care, in New Jersey, purchasing some policies of long-term care insurance just got better. New Jersey has just enrolled in the long-term care insurance partnership program.

The partnership program permits individuals who purchase certain qualified policies of long-term care insurance to shelter additional amounts of money and qualify for Medicaid benefits. In short, if you purchase a qualified policy of long-term care insurance that pays you $300,000 in benefits, the Medicaid program will permit you to retain an additional $300,000 in assets and qualify for Medicaid.

This is a great deal. I have always been of the opinion that long-term care insurance and Medicaid planning can work wonderfully together, and the long-term care insurance program proves that opinion.

WHAT DID YOU TELL YOUR PARENTS

Would you recommend this to your parents? It's a question that the child of a client asks when she does not fully understand what you are suggesting but wants to make the right decision for her parent. The thought being, if I would recommend it to my parents, the advice must be appropriate.

Most of my practice involves planning for future events. I help people plan for their potential future disability or for the orderly distribution of their assets after their passing. I help people plan for potential Medicaid eligibility if they require long-term care or because they are currently receiving long-term care. Because I am planning for future events, some of which may never occur, my advice can never be flawless. Life has a way of throwing all of us a curve ball.

But there are certain pieces of advice that I give to many of my clients, including my parents. Some pieces of advice have a universal application, meaning that all clients should heed the advice without exception. Some pieces of advice are only suggestions, because the advice deals with future events that may or may not occur.

In the first category of advice is estate planning documents. Almost without exception, I recommend that clients have a last will and testament, a power of attorney, and an advanced health care directive. And, yes, I drafted these documents for my parents.

A last will and testament is a document that has a primary purpose of directing to whom your assets will pass after your death. It is of significant importance that you name the individuals who will receive your assets after your death. Furthermore, when you have a Will, you are not only providing for the orderly disposition of your assets, you are also making the distribution of your assets less costly.

Through your Will, you can name an individual, your executor, to handle the affairs of your estate. By naming an executor, you save your estate money by providing a preordained individual who will handle your affairs.

A general durable power of attorney is a document that almost every person over the age of eighteen should have. Once you attain the age of eighteen, no one else can make decisions for you, not your spouse, not your children, no one. So, if you were ever mentally incapacitated, no longer capable of handling your affairs, no one else would be able to help you. Someone in your family would need to become your guardian.

A guardianship is a costly court procedure. Unlike a power of attorney, which costs less than $200, a guardianship frequently costs $4,500 or more.

An advanced health care directive is a document that allows someone else to make health care decisions for you and to access your medical information. Like a power of attorney, an advanced health care directive is something that almost everyone should have.

In the second category of advice are documents that I think advisable for many clients but that do not have the universal application as the estate planning documents that I mentioned. For instance, I have advised my parents to transfer an interest in their home to an irrevocable trust retaining for themselves the right to live in their home for the remainder of their lives.

By doing this, my parents have protected their home against potential long-term care costs. My siblings and I are the beneficiaries of the trust. Yet, by transferring the house into an irrevocable trust, the house is protected against potential pitfalls that my siblings or I may have.

For instance, if any one of us is sued or dies before my parents, the trust insulates my parents' home from these personal problems. The trust also offers income tax benefits. By transferring the house into the trust, my parents are retaining the $500,000 exclusion from gain on the sale of the house, if they ever sell the house in the future.

Unlike a power of attorney, however, a deed transfer and trust are not for every client. Simply stated, some people do not want to give away their property. My parents didn't mind, but your parents might.

So, while I might give a piece of advice to my parents, your parents do not know me the way my parents do.

A SPECIAL TRUST

For disabled individuals under the age of sixty-five, there exists a significant planning opportunity.

For those people who are under the age of sixty-five and disabled, public benefits such as Supplemental Security Income (SSI) and Medicaid can often be obtained by placing assets into a self-settled special needs trust.

Disability is defined for this purpose as the inability to engage in substantially gainful employment as the result of a physical or mental illness that is expected to result in death or persist for longer than twelve months. SSI is a cash-assistance government program. The current federal benefit is $623 per month and there is a small state supplement. SSI is intended to pay for food, clothing, and shelter items. Finally, Medicaid is a health insurance program; however, unlike traditional health insurance plans, Medicaid pays for the costs of long-term care, such as home health aides, assisted living residences, and nursing homes.

In some cases, disabled individuals under the age of sixty-five are disqualified from SSI/Medicaid because their income from other sources (such as Social Security Disability Income, long-term disability, worker's compensation, or pensions) is too high to permit qualification for these programs. There is little that can be done with excess income; however, for those individuals with limited income and assets too high to permit qualification, the self-settled special needs trust can be the answer.

In order to qualify for the SSI/Medicaid programs, an individual must have less than $2,000 in countable assets. Countable assets are all assets except non-countable assets. Non-countable assets are the house, a car, personal goods and household effects, and small policies of life insurance.

So, let's assume the following facts, disabled man (Mr. Smith) who has schizophrenia. Mr. Smith is forty years old. Mr. Smith has held sporadic jobs throughout his adult life; however, due to his illness, he has never been able to maintain employment. In total, Mr. Smith's employment has been for fewer than ten years; accordingly, Mr. Smith does not have a sufficient amount of quarters of employment to qualify for the Social Security Disability program, which would provide him with a source of income based upon his work-history earnings.

Mr. Smith has accumulated assets of $60,000, primarily through inheritances that he has received from family members. Because Mr. Smith has more than $2,000, he does not qualify for the SSI/Medicaid programs; accordingly, Mr. Smith has no source of income and no health insurance of any nature whatsoever.

Based upon these facts, Mr. Smith could qualify for the SSI/Medicaid programs if he were willing to place his assets (the $60,000) in to a self-settled special needs trust. As odd as this may sound, the trust is funded with Mr. Smith's assets but can only be established by a court, a parent or grandparent of Mr. Smith, or Mr. Smith's legal guardian, if he has one.

The trust must contain a payback provision, which requires any money remaining in the trust at the time of Mr. Smith's death to be paid-back to the State for Medicaid benefits that the State paid on Mr. Smith's behalf during his life. Money remaining after the payback can pass to Mr. Smith's family in accordance with his wishes.

Once the money is in the trust, Mr. Smith will qualify for SSI and Medicaid, and the trustee of the trust (perhaps a family member of Mr. Smith) can use the money in the trust to supplement Mr. Smith's care or living arrangements.