A few months ago I wrote about the difficulties qualifying for assisted living Medicaid.  (See 3/23/09 blog post).  Last year I wrote about the risks of trying to handle a Medicaid application yourself.  (See 10/5/09 blog post).  A recent case we handled in our office illustrates both issues.

 John had been in an assisted living facility for several years. His wife, Mary was living at home and private paying for his care.  She had numerous conversations with the assisted living facility about Medicaid and was told that qualifying wouldn’t be a problem and that John could remain in the facility on Medicaid.  Pretty simple, or so it seemed.

 Mary began the long winding journey that we have come to know as the Medicaid application process.  Similar to the couple I wrote about in March, Mary did not understand the timing aspect of Medicaid, that she had to reach a target level of assets before John could qualify and that each month she missed that target was a lost month, never to be recaptured.  This was of paramount importance to her, since she is several years younger than John and will need to preserve as much as she can to live on after he is gone.

 The Medicaid application process dragged on as the caseworker asked for each follow up piece of documentation, all very confusing to Mary.  She finally sought assistance and we were able to help her finally achieve financial eligibility.  At that point Medicaid sent a nurse out to the facility to evaluate John medically, to determine that he needed nursing home care.  Mission accomplished.  John received the go ahead.  Now, all that remained was for the facility to complete its required form, indicating that it would OK John for a Medicaid slot.  Imagine the surprise when we received word of Medicaid’s denial.

 When we followed up, we learned that the facility refused to make a Medicaid slot available, resulting in the denial, despite the promises made to John and Mary.  We were told, however, by Medicaid that John could still be approved if the facility simply changes its stance and agrees to make a slot available.

 John and Mary’s experience is a cautionary tale for families.  Qualifying for Medicaid is anything but simple, especially so when it comes to assisted living.  It requires the cooperation of families and the facilities caring for their loved one.  It is confusing and time consuming and best not handled without the guidance of a qualified professional, such as an elder law attorney.  And keep in mind that much of this is state specific.  While the long term care options are complicated no matter where you live, each state has its own system and set of laws so make sure you consult with someone familiar with the process in the state where your loved one lives.

As I have written previously, in speaking with families, overwhelmingly the desire is for elderly family members to remain in their own home as they age and face declining physical and mental health.   But, is that always the best thing?  Perhaps, not for everyone.

 I was reading a recent post on the New York Times New Old Age blog (www.newoldage.blogs.nytimes.com) which highlighted two cases in which elderly parents were living at home in declining health.  One was a 95 year old woman living in her own home with a team of aides and other assistance, all coordinated by her overwhelmed daughter.  The other was an elderly man suffering from Alzheimer’s Disease, living in the basement of his son’s home.  The woman had visitors and activity in her home every day.  The man did not, spending most of the day alone watching television.

 The two cases raise some interesting questions.  Would the elderly man be better served in an assisted living facility or at least, adult day care?  He is not getting any mental stimulation through most of the day, which, if received, could slow down the progression of his disease.  There is the safety issue as well.  He remains at home in the basement for long hours unsupervised.  What if there is an emergency?   Will help arrive in time?

 The elderly woman would seem to be better cared for.  She has visitors in and out of her home throughout the day.  But, her daughter is coordinating all this care.  It sure sounds like a full time job.  And then we learn that the daughter, herself, is 74 years old.  How is this affecting her health and what happens if she needs care?  Finally, I wonder what Mom’s finances are?  All this assistance can approach and exceed the cost of care in a facility.  Will she run out of money and if so, what happens then?

 As 77 million babyboomers begin turning 65 in 18 months, long term care will continue to be a major issue families will have to wrestle with.  And, I am not saying that remaining at home shouldn’t be the goal for many.  However, as with most complex problems a one size solution does not fit all.  Assisted living facilities and nursing homes will always have a place in the continuum of care and may just be the right fit for some.  Food for thought and a different perspective to consider.

Some months ago I wrote about the couple who, not understanding the peculiarities of the Medicaid rules, did not spend down in a timely manner and, as a result, lost six months of Medicaid eligibility.  Even though the money was eventually spent those lost months could not be recovered and the wife was stuck with a nursing home bill of $60,000 she should not have had. (See 10-5-08 blog post)

 The ins and outs of Medicaid are complex and confusing.  Another example which we recently addressed in our office highlights that point.  Mr. Jones was in a nursing home and we were applying for institutional Medicaid.  Under Medicaid rules the applicant needs to be below $2000 in assets as of the first moment of the first day of the month in order to qualify for Medicaid for that month.  We tell clients that they must be below this number as of the last day of the preceding month.

 Spending down means making transfers for value, that is to say, a purchase of goods or services for fair or equal value.  Very often this spend down occurs right up until the last day of the month.  So, what happens if I write a check to pay a bill on the 31st of the month but the person or business I give it to doesn’t cash it until the next month?  As long as it is dated the 31st (or earlier) and you give it to that person or business no later than the 31st, then it is counted as being spent even though it will not clear your checking account until the next month.

 Now, this all sounds very trivial, and I would agree with you, but don’t think for a minute that the State will overlook these transactions.  They won’t.  They scrutinize them very carefully.  If you’re over the Medicaid limit by a dollar, you’re over for that month and have to wait until the next month.  (See above)

 Let’s go back to Mr. Jones.  His son was spending down Dad’s assets.  He had credit card, rent and utility bills to pay.  We spoke on the 31st and Son confirmed that Dad’s 3 accounts totaled $1200 after accounting for payments.  Now, we didn’t have statements yet for one of the accounts so we had to rely on Son’s statement.  We filed the application and several weeks went by before we heard from the Medicaid office.  They wanted missing statements from one of the accounts at an out of state bank.  With some difficulty (because the bank at first balked at accepting the power of attorney Dad had executed in Son’s favor) we obtained the statements but were surprised to learn that some of the bills were not paid by check, but rather by electronic transfer on the first of the month.  So, while Son kept telling us that Dad’s accounts totaled $1200 that was not, in fact, true.  He was counting these electronic debits which Medicaid would not.

 As it turned out, we still were under $2000 in Mr. Jones’ case, but not by much.  (We tell clients we want them to be well below $2000 to leave room for just these types of surprises.)  The next case may not work out so favorably.  Just another example of how tricky the Medicaid rules really are and why you don’t want to go it alone.

Ever since Congress passed the current estate tax legislation in 2001 it was the belief of many, including myself, that legislators would have to go back and pass changes to the law before 2010.  You see, in 2010 there is no federal estate tax.  But, the elimination of the tax applies only to that one year.  In fact, in 2011 the federal exemption, the amount one can pass free of federal estate tax, goes back to $1,000,000.  It doesn’t take much imagination to see why that can be a dangerous thing. A little explanation is required.

 

            In 2001 the federal exemption amount was $675,000 and heading towards $1,000,000 by 2006.  President Bush came to office having promised during his presidential campaign in 2000 to push for legislation eliminating the estate tax.  However, he couldn’t get his bill passed through Congress and had to reach a compromise.  That is why the current law gradually raises the exemption until, in 2010, the tax is eliminated.  But, the law contains a “sunset provision”, meaning it expires on December 31, 2010.  The previously law becomes effective once again.  Bush intended to go back and eliminate the tax permanently after midterm Congressional elections, which he hoped would increase the Republican majority in Congress.  As we all know, 9/11 and the Iraq war changed everything and in the last year the economy has sunk into recession.

 

            The federal estate tax is a pretty hefty one.  The tax rate is 45% so the tax can very quickly reach six and seven figures.  So, if Dad dies in 2010 there is no tax, but if he dies in 2011 the tax can be hundreds of thousands or millions of dollars.  Legislators often change the tax laws to influence public behavior.  We make so many financial decisions based on the tax impact (too many, in my opinion).  So, what will happen if families know that they can save millions in taxes if Mom or Dad dies on December 31, 2010, rather than January 1, 2011? 

 

            That is one reason why I always felt that change would happen before 2010.  Well, we’re 6 months away and still, no change.  Last year there was some talk about extending the exemption through 2015 at $3,500,000.  With the economy worsening, and government deficits increasing, however, that doesn’t seem likely.  The latest proposal is to put the exemption amount at $2,000,000.  But what if change doesn’t happen this year?  Can the law be passed after the beginning of next year?  Experts believe it can because estate tax is due 9 months after death, meaning the first 2009 returns are due October 1, 2009.

 

            Things will certainly be interesting so stay tuned.  And keep in mind that even if your estate is below $1,000,000 many states have their own estate tax which kicks in at amounts lower than the federal exemption amount.

In Show 18 of his monthly elder law podcast, Yale Hauptman, a practicing elder law attorney, provides an overview of CCRCs, the pros and cons.  So often, he sees people enter into these financial arrangements without closely examining the 40+ page contract that typically the resident must sign.  The contracts often require a large upfront financial commitment.  What will the CCRC agreement cover?  What won’t it cover?  What happens if you run out of money?  What if the facility runs out of money? 
 
If you are considering a CCRC for yourself or a loved one you’ll definitely want to tune in first.

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Continuing Care Retirement Communities (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 to most CCRCs, residents are required to pay an entrance fee or a lump sum “buy-in” which, in addition to other things, guarantees the resident’s right to live in the facility for the remainder of his/her lifetime.  In addition to the entrance fee, residents pay a monthly service fee. 

            The entrance fee is often, but not always, reimbursable (at least partially) if the individual moves from the facility, passes away while a resident at the facility, or otherwise terminates the contract.  Many contracts also contain a provision wherein an individual is able to use a portion of the entrance fee towards monthly resident charges if the resident exhausts his resources and becomes otherwise unable to pay.

            The concept is a very appealing one.  The resident knows that as he or she ages and needs increased care it will all be provided by the same organization, usually in the same location.  There are certain risks, however, that make it unsuitable for many. 

The CCRC is promising to provide care over a potentially long time frame without knowing exactly how much it will cost or when it will be needed.  The concept is something akin to insurance.  The company must make projections as to how many of its residents will need what level of care at any one time.  But so many things can go awry.  What happens if too many people need nursing home care at one time?  What about the rising cost of long term care?  What happens if residents run out of money?  Or the CCRC runs out of funding?  Certainly possible in today’s world, where not even big financial companies like Prudential or AIG are safe.

            Because of all these contingencies the CCRC contracts have many so called “out” clauses.   When you buy into the community there isn’t an iron clad guaranty that no matter what you’ll be able to stay.   Under some scenarios you may run out of money and be asked to leave.  This risk is especially present when husband and wife move to the community together.  If one spouse needs nursing home care for an extended period the couple may spend down their assets towards that care, leaving the health spouse with not enough to cover his/her care.  In some cases the entrance fee can be used for that care but then what?  Is Medicaid a possibility?  Maybe, but usually the resident must satisfy certain conditions imposed by the CCRC in addition to Medicaid eligibility rules.  It depends on the terms of the contract.

            It is, therefore, very important to review the contract (which can be 40 pages or more) with an elder law attorney before signing and go through these different scenarios.  If you put all your financial eggs into the CCRC basket, what happens if that basket springs a leak?  It is a good idea to have an emergency plan in place.

 Medical science has made great strides in the last 30 years.  We are certainly living longer.  Illnesses and injuries that in the past resulted in death, now do not.  However, the recovery period can be a long one, especially for the elderly, whose recuperative abilities are not the same as younger patients.  As a result, patients remain hospitalized longer and bounce back and forth between nursing home and hospital, in so many cases.

 That’s where the long-term acute care hospital or LTACH, comes in.  General hospitals are typically paid a standard fee for a diagnosis so they earn more for a quicker patient discharge.  At the same time, the patient may not quite be ready for a subacute facility in a nursing home, which focuses primarily on rehabilitation but can’t provide the medical care of a hospital.  The LTACH can bridge that gap.  Patients receive the benefit of physicians on duty around the clock as well as nurses, respiratory therapists, case managers, physical and occupational therapists, dieticians and pharmacists, all on staff.  LTACHs provide more nursing care than on a medical-surgical floor of a hospital but less than is provided in an intensive care unit.

 Many LTACH patients use ventilators to breath and are recovering from multiple medical conditions such as heart failure, major surgery, etc.  They may have developed complications such as bed sores.  The specialty hospital can concentrate on weaning the patient off of the ventilator or providing wound care, for example, that can require weeks of care, that the general hospital won’t receive payment for.  For those on Medicare, LTACHs are covered under Part A.  The average stay in an LTACH is 25 days.

 There are over 400 LTACHs nationwide and 8 in New Jersey.  Most are housed in general hospitals, however, some are freestanding, such as Select Specialty Hospital in Rochelle Park, New Jersey which is owned by the same company that also owns Kessler Institute, the facility that specializes in the treatment of spinal cord injuries.  The long term acute care hospital is definitely an option families should explore for their critically ill or catastrophically injured loved one.  It may very well improve the recovery process and increase the chance that a loved one can ultimately return home, the end result that we all want to achieve.

Last week I wrote about Dad who gifted a large sum to his children and within 6 months needed long term care.  Because the money had been spent and could not be returned I had to explain to the daughter that Dad would not be eligible for Medicaid for 4 and ½ years.  A complete disaster.  But this week let’s take a look at a success story, one in which we were able to work to fix the mistakes that were made, long before long term care and Medicaid were needed.

Two years ago Mary contacted me concerning her mom who was living in an assisted living facility with an aide that she and her sisters were paying cash.  Mom had transferred her assets to her 3 daughters.  They had begun to spend some of the money on Mom’s care but had also opened and closed accounts, moving, combining and commingling assets.  Over time it would have been very difficult to follow the paper trail and establish with Medicaid that Mom’s money had been spent for her care, and not gifted to the children.  Unlike last week’s family, however, Mary reached out to me within a few months after the initial transfers and, as it turns out, almost 2 years before we applied for Medicaid.

We quickly counseled Mary that the assets had to be returned, and, thankfully, although some had been spent on Mom’s care, she and her sisters still had possession of the balance.  We then guided Mary on the records that she needed to obtain in preparation for the anticipated Medicaid application.  While she still employed the aides we were able to prepare invoices and documentation showing that the cash withdrawals were not gifts, but payment for services, including a statement from the facility.  Mary had been paying the facility bill on her credit card and then taking money from Mom’s account (which was titled in Mary’s name).  We had her go back through her records and copy the credit card bills with those charges and match up payments back to her from “Mom’s account”.  We also counseled her on a better way to make those payments.

Finally, Mary and her sisters had moved money from one account to another, for convenience, a better interest rate or to keep FDIC insurance coverage.  Without recognizing it, however, they were muddying the paper trail.  You see, Medicaid requires as many as 5 years of financial records to show how money has been spent.  Mary and her sisters didn’t realize the problems they were creating. We painstakingly had to document all the transfers from one account to another and transfers in and out of each account.

As I said, this was a success story.  2 months ago we applied for Medicaid.  We provided Medicaid with details of each transaction, backed by supporting documentation.  Last week the family received Medicaid approval without a hitch.  Every dollar had been accounted for and we achieved a smooth transition to Medicaid with no ineligibility period.  Financially, the family can rest easy that Mom’s care is paid for and the nursing facility, which receives those Medicaid benefits, is happy that their resident went from private pay to Medicaid without interruption of payment.  An example of the way things can work if you have someone with knowledge guiding you through the process.

In February, 2006 Congress passed some significant changes to the Medicaid laws that created some very dangerous traps for unprepared families needing long term care. At the time I wrote about a case in which Granddad gifted his money to  Granddaughter who moved in to care for him. When she could no longer provide the care and applied for Medicaid she was told, mistakenly, that he was not eligible because of the gifts. It turned out that the Medicaid ineligibility period had expired.  We filed for Medicaid on her behalf and the application was approved. A happy ending, but one which I wrote at the time would not end so happily under the new law.

Last week I received a call with an all too common story. Mom had recently died. Dad moved in with Daughter, Jane and the plan was for him to live there the rest of his life. At the same time, Dad gifted $150,000 to Jane and her brother, Joe. "It's Dad's money. He can do what he wants with it", she told me.

Well, I think you can guess what happened. Jane was unprepared for the reality of long term care. I could hear the stress in her voice as she described the deterioration of Dad's mental and physical state, from the mood swings and erratic behavior to the declining personal hygiene and the inability to walk without assistance. His care needs were increasing and Jane was unable to handle the increased demands on her time while caring for her own young children.

"I just never expected this", she exclaimed."  I can't do this anymore. I need to get Dad into a nursing home and he has $50,000 left.  What do I do?", she pleaded. I explained to her that once his money was spent down he could qualify for Medicaid, but she and Joe would need to return the $150,000. But here was the problem. Jane and Joe had already spent the money and, therefore, couldn't return it. "Well”, I told her, "when Dad's remaining $50,000 is spent down he still won't be Medicaid eligible for another 4 years. That’s because the Medicaid penalty doesn’t start until he has less than $2000 to his name and he needs nursing home care.

"It's so unfair," she cried. "The government is forcing me into poverty to pay for Dad's care." I had to patiently explain to her that she and her brother did receive a substantial sum from Dad, money that should be spent for his own care before public funds could be tapped.  The sad truth, however, is that had the family consulted with an elder law attorney before the gifts were made, Dad could have transferred some assets but enough would have been preserved to cover the possibility that he would need long term care before Medicaid eligiblity.  Unfortunately, in Jane’s case I didn’t have any solution to her problem.  She would have to figure out how to care for her Dad or pay out of her own pocket until the Medicaid ineligibility period expired.  It didn’t have to turn out this way.  A cautionary tale for all.

The law allows every person to distribute property according to their wishes by a written instrument known as a Last Will. However, many people never execute one and miss that opportunity, the consequences of which can be devastating to loved ones.

In Show 17 of his monthly elder law podcast, Yale Hauptman, a practicing elder law attorney, discusses what can go wrong without a will. Each state has a set of laws that predetermines how assets will pass where there is no will, known as intestacy. That may not, however, be what you want. For example, assets may be left outright to heirs who shouldn’t or can’t handle the money or may end up in the wrong people’s hands.

Yale also discusses the difficult issues involved in second marriages where each spouse has different heirs who they wish to leave their estate. Without proper planning that won’t happen. Ownership of real estate in another state can also present a problem without planning. The bottom line is that without a carefully drawn plan your intentions and desire may not be carried out.

Tune in to learn what you need to do to safeguard yourself and your loved ones.

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Jane’s husband, John, was recently hospitalized and nursing home care was looking more than likely.  At that time, their assets totaled approximately $150,000 (not including their home and one car, both of which are “exempt” for Medicaid purposes). Jane went to the Board of Social Services to see what benefits would be available to help her pay for her husband’s nursing home costs. The caseworker explained to Jane that, upon application for Medicaid benefits, the state will total all of the assets she and John own on the day he entered the nursing home (the “snapshot date”). The state will then divide their assets in half (“division of assets”) and Jane is entitled to keep one-half of the couple’s assets, but only up to a maximum of $109,540.  John will qualify for Medicaid once his “half” of the assets are spent down below $2000.

Jane and John needed to spend their assets down to $77,000 before qualifying John for benefits. Jane was distraught at the idea of having to spend her life savings … what about her own health care costs?  A social worker at the hospital recommended that Jane contact an elder law attorney to see if there were ways they could preserve more of their assets. When we met Jane we explained that there was a way she would be able to increase the amount of assets she is entitled to keep. Here is how.

Jane and John owned their home free and clear, with  no mortgage. It was no problem for them to take a home equity line of credit in the amount of $100,000, since their home was worth approximately $400,000. Jane immediately borrowed $70,000 against the line, before John entered the nursing home. By doing so, she increased the amount of assets at the snapshot date from $170,000 to $220,000.  This meant that Jane could keep $109,540 and the couple would need to spend the remaining assets down to $2000.  In other words, the couple would have to spend $110,460 before John could qualify for nursing home benefits.

 After John entered the nursing home we instructed Jane to repay the line of credit leaving another $40,440 to spend down.  Paying the nursing home and other bills quickly accomplished that and we were able to get John Medicaid.  The end result was that Jane kept nearly $110,000 of their combined $150,000, much needed money considering she was also going to lose some of John’s income and could very well outlive John by 5 years or more.

 A word of caution.  This scenario is fact specific to Jane and John and should not be considered without proper counseling. The bottom line, however, is that before you start spending down, you should seek advice from someone who knows the Medicaid laws.

Mary and Joe own their home and have $150,000 in savings.  They have wills leaving everything to each other and then alternatively to their children, but they have done nothing to address their long term care needs.  Joe is now about to enter a nursing home and Mary is faced with spending down to $75,000 and losing Joe’s income before he will be eligible for Medicaid.  A classic crisis planning case.  Does Mary have any options?

Actually, yes.   While she will have to spend down there are ways to spend that will be more beneficial for Mary.  Let’s go through a list of some of them.  At the top of the list is setting up an irrevocable burial fund to pay for both of their funerals.  Better to do that now.  Otherwise she’ll have to take that expense out of what Medicaid says she can keep.  Other strategies focus on exempt assets, the house and a car.  Mary will keep the house and one car.  Of the $75,000 that she has to spend down she could fix up the house.  That might include replacing an old cooling or heating system, installing new windows and/or siding and remodeling the interior.  If she makes improvements that enhance the value of the home should she decide to sell that will result in more money for her to live on.

How about her car?  Mary has a 10 year old car.  It is better for her to purchase a new car as part of the spend down.  Or perhaps she has a car loan that she is paying off over time.  Paying it off before applying for Medicaid may be the better alternative.  That applies for other debt, such as credit cards or other installment loans.  Finally, Mary ought to look at anticipated expenses.  For example, if she or Joe needs dental work now may be the time to do it.

Some of the spend down will need to go to the nursing home to pay for the cost of care at its private pay rate so it is important to determine what amount will be necessary to get Joe into a quality facility.  Knowing that, they can then work backwards to determine what they have left to spend on the other items.  Additionally, if Joe is not yet in the hospital or nursing home it may be possible for Mary to keep more than $75,000 by taking a home equity line of credit (more on that in next week’s post).

A word of caution, however.  One size does not fit all.  What is best for one person may not be right for another.  Medicaid rules are very complicated and quite technical.  Before taking any action it is best to consult with an elder law attorney well versed in Medicaid law.  But, if done properly, Mary can preserve more than the 50% of assets that Medicaid laws say she can keep.  This is especially important, given the possibility that Mary may outlive Joe by 5 or 10 years or more.

Whenever we meet with new clients, especially married ones, I always want to review the estate planning documents that they currently have.  Sometimes those documents are 10, 20 or 30 years old.  Other times, the clients will say, “Oh, we just had our wills updated in the last year so we’re good there.  Yet, when I review the documents, I find that they are not suitable for their current needs.  How can this be?

 Very simply, no one considered how long term care costs can completely destroy an estate plan.  As I have explained in previous posts, when one spouse needs nursing home care and the other does not a spend down must occur.  The healthy spouse gets to keep one half of the couple’s assets up to a maximum of $109,540 and a home, if he/she is living there.  The ill spouse can then get Medicaid.  But, what happens if the healthy spouse dies first?

 Well, in most cases the will provides that everything is left to the surviving spouse and then to the children after the second spouse dies.  Or, perhaps, the will establishes a bypass trust for the surviving spouse, to save on estate taxes.  In either case the assets will now be accessible to the surviving spouse who is on Medicaid.  One of two things will happen.  Either the assets must be given to the State to pay back Medicaid benefits received and the surviving spouse can continue to receive benefits. The alternative is to terminate Medicaid and begin private paying for care until all the assets are spent and then reapply for Medicaid.

 Neither scenario is very appealing and need not happen if we modify the will.  Instead of leaving everything to the surviving spouse we leave the assets to a trust for that spouse, but, and here is the key, a trust that will not be counted for Medicaid eligibility purposes.  Now, those assets are available to be used for other needs not covered by Medicaid.  And when the surviving spouse passes away, there will likely be something left to pass on to the next generation, an important goal for many families.

 Does this mean that everyone should set up their will in this manner and that leaving everything to your spouse is the wrong thing to do?  Not necessarily.  What I am saying is that you do need to sit down with an elder law attorney who is well versed in the long term care system.  You may have a will that was suitable for your needs at the time it was created but things change and your plan may need to be changed too.  You may be leaving yourself vulnerable.  The State says you have to spend down most of your assets towards long term care.  With a poorly drafted estate plan you may end up spending all of your assets towards care, something even the State doesn’t require you to do.  

In my last post I explained how Mom’s transferring her home to me during her lifetime will result in capital gains tax whereas passing the home to me after she dies can reduce or even eliminate the tax.  However, Mom considered transferring the house because she wanted to protect it from being consumed completely by the cost of long term care, especially important where other family members live in the home.(See my posts on 2/23/09 and 3/2/09). 

Right there is the dilemma.  What to do?  Capital gains tax, at worst, will never consume the entire proceeds of sale.  Long term care, however, could easily exceed the home value if it is needed for several years.  But do I have to really choose between the two?  Well, maybe there is another way.

 Putting the home in a trust, if set up properly, can accomplish both goals.  The home is removed from the parent’s name and, if done 5 years or more before needing long term care, will be outside the Medicaid lookback, that time frame within which Medicaid looks to confirm that you have in fact spent all your money and haven’t given it away.  At the same time, the trust can be set up in such a way that the assets it holds will be part of Mom's estate and she will be able to take advantage of both the capital gains tax exclusion and the step up in basis that I discussed in my last post.

 We accomplish the best of both worlds.  The home can be protected and tax advantages will not be lost.  But, there are even more potential benefits.  Since the home is not in the child’s name but in the trust, it is not subject to the child’s creditors, or to being split with the child’s spouse in a divorce.  Additionally, if Mom needs care within 5 years of the transfer, the home can be sold or borrowed against to help pay the cost of care.  In other words, some of the asset can be used for care but not all of it need be consumed.

 As you can see, a simple question, or so you thought.  Is home transfer right for you and your family?  Well, that depends on many factors, including the health of the parent, what other assets exist to pay for long term care and what goals the parent and child want to accomplish.  One thing is for sure.  Planning early makes things easier and the outcome so much better than waiting until a crisis hits.

"Mom wants to transfer her home to me.  Do you think it’s a good idea?"  A seemingly simple question and one that is probably one of the more common questions I am asked as an elder law attorney.  But, not one that I can answer without knowing more.  One size does not fit all.

 The home is typically the largest asset people have and they are frequently and understandably emotionally attached to it.  The primary residence also enjoys special tax treatment and that is what most people fail to consider when they make the decision.  Let's run through the basics.

 Real estate, like stocks, bonds and other investments, is subject to capital gains tax.  If Mom bought her home for $100,000 and sells it for $500,000 she has what is called a "realized gain" and Uncle Sam will want to tax her on that gain.  The gain is calculated by taking the amount she sold the home for and subtracting the “cost basis”.  The cost basis is her purchase price plus capital improvements (eg. addition, new roof, windows, siding) and closing costs.

 In my example, if Mom made no improvements her gain is $400,000.  The capital gains tax she must pay is based on her tax bracket. The higher the bracket the higher the tax, although capital gains tax rates are lower than for regular income.  Let’s say her tax rate is 20% so her potential capital gains tax is $80,000.  I say “potential” because, if the home was her primary residence in 2 of the 5 years before she sold it then she can exclude up to $250,000 of gain.  Married couples can exclude $500,000 of gain.

 If Mom transfers her home to me and I don’t make it my primary residence then when I sell I won’t be able to exclude any capital gains from tax.  But, Mom still intends to live in the home.  I don’t want to sell it until after she passes away.  Is there a way to avoid the capital gains tax, entirely? 

Yes, by invoking something called the “step up in basis”.  If Mom owns the home when she dies and passes it to me upon her death my cost basis when I sell is not what she paid for it, but rather what it was worth at the time of her death (or, alternatively, 6 months after her death).  If I  sell it immediately after she dies my capital gains is zero, and thus, there is no tax.  If I sell after Mom dies, but she transferred it to me during her lifetime, then I owe Uncle Sam capital gains tax. 

So, then that’s it, right?  Mom shouldn’t transfer the home to me.  Well, not so fast.  What if Mom gets sick and needs long term care?  We’ll tackle that one in next week’s post.

Mom is unable to handle her affairs and either can’t or won’t accept assistance from other family members. Or maybe one child lives close by and is taking advantage of mom and other family members, who live a distance away, are frustrated in their attempts to protect mom. Is guardianship a solution?

In Show 16 of his monthly elder law podcast, Yale Hauptman, a practicing elder law attorney discusses when a guardianship is possible and when it isn’t. Does Mom need to be declared incompetent? How does that happen and what is the standard? Yale also discuss what options are available when a guardianship isn’t possible, such as a conservatorship.

If your family is grappling with these issues or you know someone else who is, then you’ll want to tune in to learn more.

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As the current economic crisis deepens, it is becoming increasingly clear that we are heading into uncharted waters, in so many respects.  Specifically, however, I am talking about the long term care arena, and a recent phone call I received highlights this so clearly.

 John called concerning his father.  Dad owns a home in which he lives.  Home health aides come into the home to assist Dad but as his health deteriorates and he needs increased care John believes that Dad will very soon need to move to a nursing facility.  Now, here is where it gets interesting.

 Dad took a reverse mortgage for $300,000 and he took it in a lump sum.  John’s plan was to invest the money in the market, get a decent rate of return that would help meet Dad’s expenses.  Well, we know what has happened in the past year.  The stock market has headed south.  Dad’s investment headed south too.  He lost roughly half of his investment.  That’s bad enough.  But here is the problem.  John transferred the money to an account in his name.  Not because he intended to keep it, but because it was just easier to manage the funds that way.

 When he did that, however, he caused a Medicaid transfer penalty.  In New Jersey that penalty is approximately 3 and ½ years.  So what happens when Dad sells his home and uses the sale proceeds (less the amount he pays back to the bank) for his nursing home care?  He will be ineligible for Medicaid unless John transfers back the money.  Except that he doesn’t have all of it.

 I know.  You’re thinking, “Will Medicaid really deny Dad’s application if John can show that the loss in value occurred in the market, and that he didn’t take the money?”  I don’t know.  Maybe, maybe not.  You see, we are living in unusual times.  Many states are struggling with budget deficits.  Medicaid is one of the biggest, if not the biggest, program for most states.  If they don’t have the money to fund these programs I can certainly see them applying the Medicaid rules as written and impose a penalty.  If Dad is ineligible for 3 and ½ years he may never live to receive Medicaid, something the government no doubt may consider when trying to balance its budget.

 And just another reason why you can’t afford to be unprepared when it comes to long term care.

Dad has been living in an assisted living facility for 3 years at a cost of $4500 per month.  He likes it there, is safe and well cared for.  There is one small problem.  He is running out of money and the family is becoming desperate.
 
 Fortunately, some states have Medicaid programs that cover assisted living care but the rules can vary significantly from nursing home Medicaid. In New Jersey, for example, if income exceeds the Medicaid cap ($2022 per month in 2009) the assisted living program won’t, under any circumstances, be an option.  For those needing nursing home care, on the other hand, we have two Medicaid programs, one for those who do not exceed the income cap and a second for those who do. 

The application process for Medicaid can take several months or longer.  If, for example, Dad becomes eligible and applies for Medicaid beginning in February, it might take until April, or longer in some cases, for him to receive approval.  In the case of nursing home Medicaid whenever Dad is approved payments will be made on his behalf retroactive to when he first applied (assuming of course that he was eligible in that month).  Not so for assisted living Medicaid.  Approval is not retroactive.

 As an elder law attorney, our focus with clients is on the financial requirements of Medicaid.  I always, however, remind clients that we can’t forget about the medical requirement.  The applicant must meet the test of medical necessity for nursing home level care as determined by a Medicaid nurse who visits the applicant.  In New Jersey, this is true even in the case of assisted living.  It bears repeating.  The assisted living Medicaid applicant must be certified as needing nursing home level care.  Fail that test and the asset and income levels are irrelevant.

 So, if Dad can’t get Medicaid, what then?  If he can’t pay the bill he generally won’t be able to stay in the assisted living facility unless the family pays for his care.  Not a great result but one the family could have avoided.  Before he entered the facility a plan should have been put in place to cover the possibility that he could run out of money.  In some cases that may involve moving assets to a trust, determining what public benefits he can or cannot receive and when, (such as VA Aid and Attendance benefits) or negotiating a contractual modification with the facility before initial entry.  It may mean choosing a different, less expensive, facility or living arrangement.  It all depends on one’s particular situation. 

 The mistake that Dad and his family made is in not looking far enough down the road and failing to sit down with someone knowledgeable about the various issues and pitfalls, such as an elder law attorney.  The lesson to be learned is that you can’t wait until the money runs out to then answer the question "What do I do now?"

So often, when working with families who are struggling to care for a loved one with dementia, the most frustrating part is the uncertainty of the condition from day to day.  The recent case in Minnesota of Verne Gagne highlights that very clearly.

            Verne Gagne was a prominent professional wrestler in his day with the American Wrestling Association, in the 1960’s and 70’s.  He eventually lost his big stars, such as Hulk Hogan and Jesse Ventura, to the World Wrestling Federation. He is now 82, and suffers from Alzheimer’s disease, residing in a nursing home.  That is where he had an altercation with a 97 year old resident and put a wrestling move on the resident, slamming his body to the ground.  The other man broke his hip and died several weeks later.  The police are investigating the incident but there is a consensus of opinion that Mr. Gagne should not be charged with a crime because he didn’t know what he was doing.  A tragic story but with similarities that are all too familiar to families who have loved ones with Alzheimer’s.  It is the uncertain, sometimes violent and erratic, behavior that can be most frustrating and frightening. 

Although no one can be sure what caused Verne Gagne to act in the way he did, we know that Alzheimer’s patients very often lose their short term memory but are able to conjure memories of events and people 40 or 50 years ago or more.  Gagne’s skill as a wrestler made him more dangerous than the average resident.  Firstly, he was more physically fit than the average resident.  Secondly,  while he was losing his short term memory, he was prone to recalling events from his past, such as his days wrestling.  Perhaps it is that memory, programmed into his brain, that caused him to perform a wrestling move on his co-resident.

            It is the unpredictability that often turns a family’s world upside down,.  Dad can be living comfortably in a facility one day and the next he can become extremely agitated and aggressive, causing the facility to ask the family to move him because they can’t accommodate his needs, or because of concern for the safety of other residents.

            It is just another reason why families cannot wait and react to a loved one’s long term care needs.  When possible, preventative measures need to be taken.  So often, we see families plan as if Mom or Dad’s current condition, while tragic and upsetting, will remain static, unchanging.   That is usually far from the case and misjudging the situation can be worse than anyone imagined.

Who knows what could have been done to prevent Verne Gagne from acting out, although, there was at least one previous altercation between the two residents.  The lesson to be learned on a broader level, however, is to recognize the unpredictability of Alzheimer’s, and dementia in general.  Take action before, not after, it becomes necessary.  I am sure everyone involved in Verne Gagne’s case is reexamining what they could have done differently.   

Jane calls us to relate the same problem that many Americans today are coping with, trying to care for aging parents.  She calls because Dad’s health is rapidly deteriorating and she fears he will need nursing home care.  I ask about Mom’s health.  Jane replies that she is healthy.  And here is the twist, where the story becomes more complicated.

 Jane tells me that Mom and Dad have been separated for years, never divorced, just living separate lives under separate roofs, with separate assets.  “Dad was never easy to live with”, she tells me, “but Mom wasn’t the type to file for divorce.  It wasn’t acceptable.”  “So”, she asks me, “we can spend down Dad’s assets and then qualify him for Medicaid, right?”

 “Well”, I tell her, “it is a bit more complicated than that”.  Under Medicaid rules, because they are still married, all their assets are combined for purposes of calculating how much to spend down.  Medicaid rules do provide that if the applicant is separated from a spouse for at least one month then he will be treated as a single person and only his assets will count towards the asset spend down.  However, there is no definition of what constitutes a separation and you can be sure that the State will scrutinize it very closely.  Mom may still have to spend some of her assets for Dad’s care even though they have been living single lives for years.  “Is there anything we can do,” Jane asks, as I hear the desperation in her voice.

 Divorce is still an option, although it could be considerably more difficult if Dad doesn’t have the mental capacity to understand the legal process and consent to a divorce settlement.  There is also the matter of the State, again, scrutinizing the divorce, especially if Mom has accumulated and wants to keep more than 50% of the combined assets.  You see, the State assumes the divorce was obtained for the purpose of qualifying for Medicaid.  If Mom keeps more than half of the assets Dad would probably be turned down for benefits.  There may also be other strategies that we have discussed for married couples that could be employed to preserve assets for Mom but, although they are married under the law, they are not really “together”.    So preserving Dad’s assets for Mom and vice versa is not the goal.

As Jane puts it, “Mom and Dad have lived separate lives for many years.  Mom has struggled to accumulate her own assets and become self sufficient.  How can I tell her that she may lose some of her hard earned money?”.  I didn’t have an answer for Jane.  I do, however, have one for others who may one day be in that situation.  If any of Jane’s story sounds familiar to you, don’t wait till long term care is staring you in the face.  Plan ahead and solve the problem before it reaches crisis proportions or you’ll be faced with the dilemma that Jane and her family face.