Should I Name a Beneficiary

            Many people are told that they should designate a beneficiary on their account. Their account might be a 401(k) account, an individual retirement account, an annuity, a life insurance policy, or simply an ordinary bank account.  In most instances, the person is told to name a beneficiary, because by doing so, he will avoid probate, based on the universally-accepted premise that probate is expensive and difficult.  Some people are even told that if they don’t name a beneficiary something dramatic will occur, such as the money in the account will pass to the State.

As with many things, the truth about beneficiary designations is somewhat different than what people believe.  In my opinion, it is very important to name a beneficiary on an IRA, 401k, deferred annuity, or any other tax-deferred account.  Most of these investment types permit favorable income tax treatment if the account names a beneficiary.

For instance, with an IRA, if you name your spouse as the primary beneficiary, then your spouse could roll your IRA over into a new IRA in her name in the event of your death.  If you didn’t have a spouse and you named your child as the beneficiary, your child could take the money out of the IRA over her life expectancy.  In taking the money out over her life expectancy—as opposed to taking the money out immediately, the child can defer the income taxation of the money in the IRA over many years.

Let’s assume that Mr. Smith, aged 80, dies owning an IRA worth $500,000.  Mr. Smith named his daughter, Lisa, aged 40, as the primary beneficiary of his IRA.  Based on life expectancy tables that the Internal Revenue Service publishes, Lisa’s life expectancy is approximately 43 years at the time of Mr. Smith’s death.

Given her life expectancy, Lisa could decide to take the $500,000 out of the IRA over her forty-three year life expectancy if she so choose.  The money in the IRA could continue to grow tax-deferred until such time as Lisa is mandated to remove the money from the IRA.  Only a forty-third of the IRA’s $500,000 value would have to be distributed to Lisa in the first year, or about $12,000.  This is called the Minimum Required Distribution amount.

If Mr. Smith had failed to name a beneficiary on his IRA, then the $500,000 would have to come out of his IRA much more quickly than over 43 years, possibly as quickly as within five years of his death.  Being forced to remove $100,000 a year from the IRA would cause more tax than taking out $12,000 a year.  For this reason, I always advise clients to name a beneficiary on their IRA and other tax deferred accounts, such as 401(k)s.

On the other hand, I am not a fan of naming beneficiaries on all accounts simply to avoid probate.  For one thing, as I have stated many times in the past, the process of probating a Will in New Jersey is extremely simple and extremely inexpensive.

For another thing, naming a beneficiary can have negative, unintended consequences.  By naming beneficiaries on all your accounts, you starve your executor of funds with which to pay your debts.  For instance, if you owe a hospital bill and you named beneficiaries on all of your accounts, how is the hospital bill going to get paid?  The hospital bill still must be paid, but the people who were named as beneficiaries might believe that they can simply refuse to contribute any money to the debt.  This could put your executor in a tough position.  The executor, quite literally, might have to bring a court action against the named beneficiaries to get the money.

What happens if your named beneficiary died before you?  Who gets his share of the account?  Don’t know.  Neither do I.  For all I know, every bank might have different terms on their beneficiary designation contract.  Perhaps Bank 1 says the money goes to the beneficiaries children, whereas Bank 2 says the money goes to the other named beneficiaries on the account.

In my opinion, unless there is a real benefit to naming a beneficiary, then as a general rule, you shouldn’t name a beneficiary.  As with any general rule, there may be exceptions, but the general rule is probably different than what most people think the rule should be.


What Is PEME?

Medicaid is a government health payment plan for needy individuals.  If an individual qualifies for Medicaid benefits, Medicaid will pay for many of the costs associated with long-term care.

If an individual qualifies for Medicaid benefits, Medicaid will pay for care in a nursing home, an assisted living residence, or at home.  At home, Medicaid will pay for a home health aide or an adult day care center.

When you apply for Medicaid benefits, you can elect to receive benefits up to three months prior to the date of your application; however, in order to receive benefits during this three-month retroactive period (the period of time three months prior the date of your application for benefits), you must have been eligible for Medicaid during those three months.

In other words, in order to qualify for Medicaid, an individual must have less than $2,000 in assets.  If he seeks benefits during the three-month retroactive period, then he must have had less than $2,000 in assets during those three months.  If he had, say, $10,000 in assets during the three-month retroactive period, then he will not qualify for retroactive benefits because his assets were over the limit during that period of time.

In addition, a person can only qualify for retroactive benefits if he were residing in a nursing home or an assisted living residence.  There are no retroactive benefits for people seeking Medicaid at home; Medicaid will only pay for benefits on a prospective basis for those individuals who reside at home.

If an applicant resides in a nursing home or assisted living residence and was ineligible during the three-month retroactive period and if he has unpaid bills during that three-month period of time, he might still qualify for another program that will enable him to pay his unpaid nursing home bills.  The program is called “pre-eligibility medical expenses” or PEME.

When a Medicaid beneficiary resides in a nursing facility, all of his income less certain deductions is payable to the facility as his cost share.  For instance, if Mr. Smith resides in a nursing home and has $2,250 a month in income, he can retain $50 as a personal needs allowance.  If his health insurance premium were $200, then Medicaid would permit him to pay the monthly premium from his income.  The remainder of his income, or $2,000 in this example, would be payable to the nursing home.

The $2,000 that Mr. Smith pays to the nursing home reduces what Medicaid pays the nursing home.  So, if Medicaid would have paid the nursing home $6,800 a month, which is a typically Medicaid reimbursement rate for a nursing home, then Medicaid would only pay $4,800, and Mr. Smith would pay $2,000.

If Mr. Smith owes the nursing home for the three months prior to the date of his application but was otherwise ineligible for Medicaid benefits, for instance because he owned too many assets, then the Medicaid office will permit Mr. Smith to use his $2,000 of available income to pay the nursing home for the bill he owes; however, the bill can only be paid at the Medicaid rate, not the private-pay rate, and the diversion of income can only occur if Mr. Smith did not give away any assets during the Medicaid five-year lookback period.

The request for PEME is typically filed by the nursing home or assisted living residence in which Mr. Smith resides.  The ability to make a PEME request is an important tool that an applicant should bear in mind, as applicants frequently have unpaid medical bills.

Prepaid Funerals and Medicaid

Many of my clients seek to qualify for Medicaid benefits.  Medicaid is a federal and state government health plan for needy individuals.  There are many different programs of Medicaid in any given state.  The program of Medicaid that I work with on behalf of my clients is for Medicaid that pays for institutional level services.

Institutional level services are services such as nursing homes, assisted living residences, and home aides.  Institutional level services, commonly known as long-term care services, can be quite expensive.  A nursing home can cost up to $14,000 a month.  An assisted living residence can cost upwards of $10,000 a month, and a home health aide can cost upwards of $7,500 a month.

Most of my clients never thought they would ever have to qualify for Medicaid.  In fact, they probably never wanted to qualify for Medicaid.  But when you are faced with costs that might last for years at the rate of $14,000 a month, you seek alternative methods of paying those costs.  When it comes to long-term care costs, Medicaid is, by far, the most frequent payor of long-term care services being provided in the United States, paying for over 50% of care that is being provided in nursing homes.

In order to qualify for Medicaid benefits, an individual must have insufficient income to pay for his care, and he must have limited assets, which are called “resources” in Medicaid parlance.  In order to qualify for Medicaid, an applicant must have no more than $2,000 in countable resources.

Countable resources include most every type of asset that has monetary value with the exception of a limited number of excluded resources.  Excluded resources include the home (if the individual is residing in the home), a car, personal goods and household effects, and certain funeral arrangements.

Recently, the state agency that administers New Jersey’s Medicaid program published a notice that clarifies the nature of the funeral arrangement exemption.  A burial space for the applicant, his spouse, and other immediate family members is excluded as long as the burial space is of reasonable value.  (I don’t know what type of burial space is of unreasonable value, but I’ve never encountered a burial space with unreasonable value.)  “Burial space” includes the gravesite, the casket, the urn, the vault, and the fee for opening the grave.

Also excluded are irrevocable prepaid funeral contracts for burial goods and services.  You can contract with a funeral home for the prepayment of your funeral.  If the contract that you enter with the funeral is irrevocable, meaning that you cannot surrender the contract and receive the money you paid towards the funeral back, then the burial contract is an excluded resource.  The burial contract must also name the state of New Jersey as remainder beneficiary for any funds remaining after the payment of the burial goods and services; in other words, if the money isn’t used for the funeral, then the money is paid to the state.

The burial contact cannot include the payment of certain goods and services.  The recent communication from the state makes it clear that you cannot prepay for such items as flowers, transportation for family members, and food for family members (such as the prepayment of a repast—the meal families typically have after the funeral).

Prepaying for a funeral is a typical planning technique when seeking to qualify for Medicaid benefits.  The recent communication from the state makes it clear what goods and services and individual can and cannot include in their prepaid funeral.

The Medicaid Premium

Medicaid is a health payment plan for needy individuals.  In order to qualify for Medicaid benefits, an individual must have limited assets and insufficient income to pay for the cost of her care.

If a person qualifies for Medicaid benefits, Medicaid will help pay for the costs of long-term care. Medicaid assists with paying for a nursing home, an assisted living residence, or long-term care at home, such as a home health aide or an adult day care.   Many of the people I help qualify for Medicaid benefits are people who never thought they would need to qualify for Medicaid benefits, who never wanted to qualify for Medicaid benefits.

But these same individuals never thought they would be faced with long-term care costs that range from $5,000 per month to $14,000 per month. Few people could afford to pay such care costs for a long period of time, yet that is exactly what people who are faced with long-term care costs must address.

Whether an individual qualifies for Medicaid benefits is, in large part, a question of financial eligibility (though there is a clinical eligibility component for long-term care costs). As mentioned, an individual must have limited assets in order to qualify for Medicaid benefits.  “Limited assets,” in New Jersey, means that the individual must have $2,000 or less in assets.  This is a hard-and-fast issue.  While there are exclusions from what is and is not a countable asset, the $2,000 figure is a relatively simple concept to understand.

An individual must also have insufficient income to pay for the cost of her care.  Insufficient income to pay for the cost of one’s care is a more complicated issue than limited assets.  You can’t receive Medicaid benefits if your income is sufficient to pay for the cost of your care.  For instance, if you are residing in a nursing home that costs $12,000 a month and your income is $14,000 a month, then your income is more than sufficient to pay for the cost of your care, and you would not qualify for Medicaid benefits.  You simply have more than enough income to pay for the cost of your care.

If an individual is living at home and qualifies for Medicaid benefits, Medicaid will pay for items such as a home health aide or adult day care services.  What is “too much income” is more difficult to understand.

When an individual qualifies for Medicaid at home, she can retain a certain amount of her income to pay for living expenses (shelter costs, food costs, clothing, and other daily expenses).  The maximum amount of income that she can retain for these expenses is $2,313 per month.

If the Medicaid beneficiary is married, her spouse might be able to retain some of her income, if the spouse’s income is insufficient to meet his needs.  Finally, certain medical expenses can be deducted from the Medicaid beneficiary’s income, such as her health insurance premium.

Sometimes, with married couples, the Medicaid beneficiary is the spouse who has the higher income.  For instance, the Medicaid beneficiary might have fixed monthly income (Social Security and a pension) of $3,500 and her spouse might have fixed monthly income of $500 a month.

Under the standard spousal income allowance, her spouse might be entitled to a spousal income allowance of $500.  Under the income rules, the wife (the Medicaid beneficiary) would be entitled to retain the maximum amount of income, $2,313, and her spouse would be entitled to retain his spousal income allowance, $500.

Finally, let’s assume that this same Medicaid beneficiary has a monthly health insurance premium of $200 per month.  In this case, the Medicaid beneficiary would be entitled to retain her $2,313, her spouse would be entitled to retain his spousal income allowance, $500, and the beneficiary could pay her health insurance premium of $200.

Her remaining income [$3,500 – ($2,313 + 500 + 200) = $487] would have to be paid to the state of New Jersey every month if she wanted to qualify for Medicaid benefits at home.  So, in essence, the Medicaid beneficiary would be paying a premium of $487 per month for the benefit of receiving Medicaid benefits.

The Season of Giving

The end of another year is upon us.  As with each year, this year ends with the holiday of giving, Christmas, and so our minds turn to gifting.  The most common questions that people have when it comes to gifting is: How much can I gift before I have to pay tax? And, how much can someone receive before they have to pay tax?  Much to most people’s surprise, few gifts would ever result in the giver of the gift paying gift tax, and the recipient of the gift never pays gift tax.

I have written numerous times about gifting and gift tax.  I can’t tell you how many people come to see me and tell me that they cut out my articles and have been saving my articles for years.  People tell me that they have hundreds of my articles saved.

Of course, I am flattered by this fact, and it affirms for me my initial thoughts for writing these articles. If I simply ran an ad saying “I’m great.  Come to me!,” I’d be no different than any other advertiser.  But by giving people information, I introduce myself to them, letting them know what services I provide, and I provide them with information.  I also let them know what I know about my practice area.

But I can tell you that no matter how many articles I write about gifting and gift tax, I will never get the message of truth about these issues to the masses. Most every person who comes to see me tells me their belief that they can only gift $15,000 (or some figure, which ranges anywhere from $10,000 to $15,000) a year without paying gift tax.  Oddly, though, people rarely understand when a gift occurs.  For instance, a person will tell me that they can only gift $15,000 a year, then they’ll tell me that they gave their house to the children.

A gift occurs anytime you give something of value away and do not receive that thing’s value. For instance, if I write you a check for $15,000, and you give me nothing, then I have made a gift of $15,000.  If I transfer my house to you and my house is worth $400,000, then I have made a gift of $400,000.  If I give you my house worth $400,000, and you give me $200,000, then I have made a gift of $200,000.

When people talk about gift tax, they are talking about federal gift tax. There is no New Jersey gift tax.  For federal gift tax, there is an amount that a person can give away each year to an unlimited number of people.  This exclusion from the gift tax is called the “annual exclusion.”  The current annual exclusion gift is $15,000.  This is where people get the “I can only give $15,000 a year without paying gift tax” rule from; however, this is only half of the rule.

Each person receives a credit equivalent against gift tax of $11,200,000.  What this means is, you would have to give away, at least, $11,200,000 before you would ever pay gift tax.  Because of the annual exclusion, a person can give away $15,000 a year to an unlimited number of people without reducing his $11,200,000 lifetime credit.

For example, if I gave away $15,000 to 1,000 people, then I would not reduce my $11,200,000 lifetime credit at all. If I give away $16,000 to the 1,001st person, then my lifetime credit against gift tax will be reduced from $11,200,000 to $11,199,000.

So, unless you are worth more than $11,200,000 (and that would certainly only be the top 1% of our society), then you have no chance of ever paying gift tax. You simply do not have enough money to ever pay gift tax.

On the other hand, gifts can cause issues for Medicaid eligibility. Any gift that you make will count against your eligibility for Medicaid for five years following the gift, but that is a discussion for another day.  The lesson of today’s article is, don’t let gift tax get in the way of your giving.

Debts of the Estate

Being an executor of a decedent’s estate can be daunting and intimidating.  As an executor, you are handling the affairs of someone else (the person who has passed away) for the benefit of other people (the people who are inheriting the decedent’s property, that is, the beneficiaries of the estate).

Most people who are charged with the role and responsibility of being an executor want to do a good job. They want to do things correctly.

A big part of being an executor is ensuring that all the debts of the decedent are paid. Some estates have insufficient assets to pay all the debts of the decedent.  These estates are said to be insolvent, because the assets of the estate are insufficient to pay the debts of the estate.

Ironically, I find that insolvent estates, which typically have few assets, are some of the more difficult estates to administer. You would think, for instance, that an estate worth only $30,000 wouldn’t be that hard to administer, but if the decedent had $120,000 in debts and only $30,000 in assets, the administration of the estate can get sort of tricky.

There is a procedure to be followed in these instances, and the debts of the estate are given a priority as to their payment given the nature of the debt. In order to properly administer an insolvent estate, I would say that the retention of the services of an attorney are a must because a court action must be filed on behalf of the estate in order to declare the estate insolvent and have a debt payment plan approved.

But even with solvent estates, the payment of creditors can get tricky. There are odd legal phrases that when the layperson hears them, I am confident he thinks they mean something other than what they truly mean.

For instance, if you were told that creditors of the estate have nine months from the date of the decedent’s death to present their claim (or debt) and if they don’t present their claim within that nine-month period of time their claim will be barred, you would think that if, for instance, Doctor Smith doesn’t send his medical bill to the executor within nine months of the decedent’s death, then Doc Smith isn’t being paid, ever. But this is incorrect.

Creditors have nine months to present their claims to the executor following the decedent’s death. Most creditors of an estate are “contract creditors,” creditors who performed some service to the decedent pursuant to a verbal or written contract.  For instance, a medical debt would be a debt based in contract law.

A contract creditor typically has six years from the date the services were provided to sue. All the nine-month limitation period is saying is this:  If the executor waits nine months following death before make distributions of the estate to the beneficiaries, then the creditor (Doctor Smith) cannot sue the executor for making a premature distribution of the estate.  Doctor Smith could still sue on his debt if the debt isn’t paid, but if the executor waited nine months, then Doctor Smith cannot sue the executor personally for administering the estate improperly.

Of course, if the executor distributed the money to the beneficiaries, who is Doctor Smith going to sue? The estate now has no money.

If the executor did things correctly, then the executor would have taken “release and refunding bonds” from each of the beneficiaries. A refunding bond is a document that each beneficiary signs that says, in essence, if a debt of the estate is presented, I will refund to you, the executor, my proportionate share of the debt based upon the proportion by which my share of the estate relates to the debt.

So, if here are four beneficiaries each receiving an equal share of the estate and Doctor Smith’s bill is $1,000, then each beneficiary must refund $250 to the executor to pay his share of the debt. If the beneficiaries do not do this, then Doctor Smith could sue each beneficiary on the refunding bond, essentially enforcing the agreement each beneficiary entered with the executor.

Planning for a Disabled Loved One

What is the difference between a special needs trust and a supplemental benefits trust?  If you have a family member who suffers from a disability, the answer to this question can be quite important.

A great number of people suffer from a disability.  Many of these individuals receive means-tested government benefits, such as Medicaid (the federal medical assistance program) or Supplemental Security Income (the federal cash assistance welfare program).  When a program is “means-tested” it means that a person’s assets and income affect his eligibility for the program.

For instance, both Medicaid and SSI have a $2,000 resource limit.  If the beneficiary’s assets exceed $2,000, he will be determined to be ineligible for the program.  For a person with a disability who has significant medical expenses, ineligibility for Medicaid could have devastating effects.

Certain trusts can assist a Medicaid beneficiary in maintaining his eligibility for the program.  A trust is an agreement pursuant to which one person, called the trustee, manages and invests the assets of the trust for the benefit of the trust’s beneficiary.

The terms of a trust can vary greatly.  Many people who come to see me talk as if there is one trust with one set of terms, but the reality is, the person who creates the trust, called the grantor, is free to establish the terms of the trust.

When it comes to Medicaid, it is important that the terms of the trust do not mandate the availability of the trust’s asset to the beneficiary.  The trust must be drafted as what is commonly known as a wholly discretionary trust.  A wholly discretionary trust is a trust the terms of which permit the trustee complete discretion in making distributions of assets and income to the trust’s beneficiary.

For instance, the terms of the trust might say, “My trustee has sole and complete discretion in making distributions of principal or income to the trust’s beneficiary.”  While the trust agreement could say that the trustee is take into consideration certain circumstances that are occurring in the beneficiary’s life (for instance, his need for dental care), the dispositive terms of the trust leave the obligation to make a distribution of principal or income at the sole and absolute discretion of the trustee.

Both a supplemental needs trust and a special needs trusts are wholly discretionary trusts designed to maintain a Medicaid beneficiary’s eligibility for benefits.  The difference between the two trusts is that a supplemental benefits trust is typically funded with the assets of a person other than the trust’s beneficiary (such as the beneficiary’s parents) whereas a special needs trust is typically funded with the assets of the trust beneficiary (that is, the disabled person’s assets).

Also, a special needs trust must contain a “payback provision.”  Because the assets in the trust are the assets of the Medicaid beneficiary, any money left in the special needs trust must first go to the state to payback the state for any Medicaid benefits it paid during the beneficiary’s life.  With a supplemental needs trust, because the money did not belong to the Medicaid beneficiary (for instance, it belonged to his parents), no payback is required.

Finally, a special needs trust must be established before the Medicaid beneficiary attains the age of sixty-five.  A supplemental benefits trust can be established at any age, because once again, the money was never the money of the beneficiary, so the government has no interest in substantially restricting the creation of a supplemental benefits trust.

Your Rights in a Nursing Home

Last week, I described the different long-term care facilities.  There are three primary long-term care facilities:  assisted living residences, nursing facilities, and continuing care retirement communities (or CCRC).

This week, I wanted to write a little about the practical aspects of entering these facilities.  Your rights can vary quite a bit in these different facilities, and those rights can have a practical aspect on you.

Nursing facilities are governed by the Nursing Home Reform Act, a law that has existed since 1987.  There are various rights guaranteed to every nursing facility resident.  The right to privacy, the right to confidentiality, the right to be free of restraints, the right of free choice are just a few of the rights guaranteed to every nursing facility resident in the United States.

A nursing facility also cannot obtain a guarantee of private payment from a third-party and it cannot require a prospective resident to guarantee private payment for any length of time or to refrain from applying for Medicaid benefits. Nursing facilities also cannot treat residents who are eligible for Medicaid benefits differently than those residents who are ineligible for Medicaid benefits.

For those residents who are eligible for Medicaid benefits, nursing facilities must accept Medicaid as payment in full. For instance, a nursing facility cannot ask the resident’s family to supplement the resident’s stay in the nursing facility if the resident is eligible for Medicaid benefits.

Almost every nursing facility in the state of New Jersey accepts Medicaid benefits. If the facility accepts Medicaid benefits, then it must agree to accept a minimum amount of its residents as Medicaid beneficiaries.  For instance, a facility must agree to accept at a minimum 45% of its residents as Medicaid beneficiaries.

In almost every nursing facility, every bed in the facility is dual certified for both a Medicare and Medicaid patient, meaning that in those beds, the facility must accept a resident who is eligible for Medicare or Medicaid. This can be very important because most people enter a nursing facility after being discharged from a hospital.  The resident enters the nursing facility to receive rehabilitative services, frequently as a Medicare beneficiary.

The family may decide that the resident needs to remain in the facility after his rehab is over. The resident will then switch to being either a privately paying resident or a Medicaid beneficiary.

The nursing facility might tell the family that they don’t have any Medicaid beds, but as stated above, in most facilities, every bed is dual certified for Medicare and Medicaid patients. Chance are quite high that the resident already is in a Medicaid bed—the same bed from which he was receiving rehabilitative services covered by the Medicare program.

Since the nursing facility cannot require a resident to refrain from applying for Medicaid benefits pursuant to the Nursing Home Reform Act, the facility cannot prevent the resident from applying for Medicaid benefits to cover the cost of the Medicaid certified bed in which he currently lies his head. The facility also must refrain from requiring the family (a third-party) from guaranteeing private payment for the resident’s stay.

Knowing that they cannot discharge you simply because you are converting from a short-term Medicare beneficiary to a long-term Medicaid beneficiary, many nursing facilities pressure the resident or his family to remove the resident from the facility. “We don’t have any Medicaid beds.”  “We don’t take a person Medicaid pending.”  “You will have to take the resident home and care for him in your home.”  These are common statements that nursing facility staff make to family members.  These statements are almost always incorrect.

Next week, I will write about your rights in an assisted living residence and a CCRC. Hint:  Those rights are substantially less than your rights in a nursing facility.

What Are My Rights

There are several common facts that people should know about long term care facilities.  Long term care facilities come in different varieties.  There are assisted living residences, a nursing facilities (commonly known as a nursing homes), and a continuing care retirement communities or CCRC.  Each type of facility is governed by different laws and each has a different type of license.

From a layperson’s point of view—which to a large extent includes me because I am not qualified or overly knowledgeable about the licensing standards for each of these facilities—an assisted living residence is similar to a hotel in appearance.  Compared to a nursing facility, an assisted living residence typically will have fewer professional staff members (for instance, nurses) than a nursing facility.

The residents often live in a room by themselves and share common areas for eating and socializing. The residents of assisted living residences are typically more active than residents of nursing facilities.  The residents will frequently go on day trips organized by the facility.

Nursing facilities when compared with assisted living residences are more hospital-like in nature. There are a number of nurses on duty at any given time and the residents are frequently visited by a staff physician.

Residents are often less cognizant of their surroundings than residents of assisted living residences. The residents rarely, if ever, go on day trips.  Unless there is a medical reason for a resident to have his own room, residents share rooms with one or more other residents of the facility.

A continuing care retirement community has various living arrangements at one facility. Most residents live in independent living areas, essentially apartments, but with common areas for eating and socialization.  If a resident’s care needs increase, the resident can move to the assisted living section of the CCRC, and if the resident’s care needs increase significantly, the resident can move to the nursing facility section of the CCRC.

The benefit of a CCRC is that the resident never has to leave the facility—or so they are told—if their care needs increase; the resident simply moves to a different area of the same CCRC. CCRC’s cost more than standalone assisted living residences and nursing facilities.  A CCRC will frequently require a large, upfront entrance fee—ranging anywhere from $100,000 to $500,000.  The entrance fee may be partially or wholly refundable when the resident vacates the CCRC, though the resident does not earn interest on the money given for the entrance fee.

Each of these facilities is governed by its own set of rules. For instance, residents of nursing facilities have significant rights that have been codified since 1987 in the Nursing Home Reform Act.  The right to privacy, the right to visit with friends and family, and the right to be free from restraints are just a few of the legal rights that have been established by the law for every nursing facility resident in this country for the past thirty years.  A resident of the nursing facility section of a CCRC would also be protected by the rights codified in the Nursing Home Reform Act.

On the other hand, a resident of an assisted living resident has far fewer legal rights than a nursing facility resident. I know of no codified system of rights that protects an assisted living resident.

The differences in the rights granted to the residents of these different facilities can make practical differences in the lives of the residents. Next week, I will write about how the rights of residents can have a practical application to the residents’ lives and the lives of their family members.

Beware of Your Own Generosity

Few issues prompt more questions to me than the concept of gifting.  In my experience, when it comes to gifts, people tend to focus on the unimportant and ignore, or are ignorant of, the important issues associated with gifting.

A gift occurs anytime a person gives something away and does not receive something of equal value in exchange for the thing given.  Clearly, if Mrs. Smith gives her son $10,000 and her son gives her nothing in return, a gift has occurred; however, gifts occur all the time without people knowing that a gift has occurred.

For instance, if Mrs. Smith gives her son her car, Mrs. Smith has gifted her car to her son.  Whatever the value of the car was at the time of the gift is the value of the gift.  Similarly, if Mrs. Smith “sells” her car to her son for $500 and the car is worth $5,000, then a partial gift has occurred.  If the son removes Mrs. Smith’s name from a bank account that held Mrs. Smith’s money and adds his name to the new account, then a gift of the bank account has occurred.  If Mrs. Smith adds her son’s name to the deed for her house, then a partial gift of Mrs. Smith’s house to her son has occurred.

Most people think they can only gift $15,000 a year without paying gift tax.  The fact of the matter is, a person can gift $11,200,000 during her lifetime without paying gift tax.  If a person gifts more than $15,000 in any given year to one person, then a gift tax return must be filed and the amount of the gift above $15,000 reduces the lifetime credit dollar-for-dollar.

Assume that Mrs. Smith gifts $20,000 to her son. Mrs. Smith must file a gift tax return, an IRS form 709.  No gift tax will be owed, but Mrs. Smith lifetime credit against gift tax will be reduced from $11,200,000 to $11,195,000.  Since most people have nowhere near $11,200,000, most people should have no concern about ever paying gift tax, and since a gift tax return is a simple tax form that most anyone can complete, there is little hassle associated with making a large gift.

What is a concern for gifting is the potential impact of the gift on the person’s eligibility for Medicaid benefits. If Mrs. Smith gives her son $20,000 or a partial interest in her house or her car, then those gifts could come back to haunt Mrs. Smith’s eligibility for Medicaid benefits if Mrs. Smith requires long-term care and applies for Medicaid benefits within five years of making the gift.

This is what the Medicaid five-year lookback is all about. When a person gifts any asset within five years of filing an application for Medicaid benefits, those gifts can come back to haunt the person’s application for Medicaid.

Pursuant to the five-year lookback, all gifts made within five years of applying for Medicaid benefits are aggregated. The aggregate value is then divided by a number, which is based upon the statewide average cost of a nursing home room.  That number is currently around $10,500.  So, for every $10,500 of aggregate gifts that Mrs. Smith made during the lookback period, she will be ineligible for Medicaid benefits for one month.

Since Mrs. Smith has no money—she is, after all, applying for Medicaid—she is subject to being discharged from the nursing home in which she resides if Medicaid assesses a penalty period against her for making gifts during the lookback period. If her son doesn’t want her discharged from the nursing home, her son may have to pay for the cost of her care.  Since a nursing home can cost upwards of $14,000 a month, the cost of Mrs. Smith’s care might exceed the value of the gifts that Mrs. Smith made to her son.