Understanding the maze of laws and benefits that form our long term care system is a full time job.  That’s why I devoted my practice exclusively to elder and disability planning.  A few weeks ago I was reminded of that fact when I was asked what I know about a particular VA program that provides adult day care services for a small co-pay.  This clearly didn’t sound like the Aid and Attendance program that in the past two years we have incorporated into our planning arsenal.(see my 2/25/08 post).  So I decided to investigate and here’s what I learned.

 The VA doesn’t do a good job of publicizing its benefits and services so getting accurate information is never easy.  There is a program of services under what the VA calls the Geriatric and Extended Care Program.  These include programs that provide care in a veteran’s home or in a community setting such as adult day care, specialized services for rehabilitation following, amputation, stroke, traumatic brain injury and spinal cord injury, physical therapy and home hospice care.  Keep in mind that the range of services can vary greatly depending on where you live and which health care network the VA has charged with providing those services.

 Uncovering and understanding the eligibility requirements is the harder part.   Unlike the Aid and Attendance program which is available to veterans and their spouses, the Extended Care Program is only available to veterans who received a discharge under honorable conditions.  It is, however, not limited to veterans who served during wartime (again, unlike Aid and Attendance).  There is no length of service requirement for vets who enlisted before 1980. 

There is a co-pay requirement applicable to the nonservice connected veteran, that is, a veteran who’s injury or illness is not linked to his military service (which is the case with most of our elderly clients).  In order to be eligible the veteran’s income must not exceed  the maximum annual pension rate for the Aid and Attendance program.  The co-pay generally ranges from $5 to $97 per day, depending on the particular service received.

What I concluded from my research so far is that  the Extended Care Program is another option, another piece of the long term care puzzle.  And with proper guidance our clients may be able to tap into a valuable source which will help lessen the risk that they will run out of money and options when they reach the next step in the long term care journey.

How many times have you contacted a government office to inquire about some benefit or program and told you are not eligible?  Have you then left the office or hung up the phone accepting that what you have been told is true?  What if that is just flat out wrong?  As an elder law attorney I see that happen all the time, especially when it comes to the Medicaid program.  A recent court case last week corrected at least one of those untruths.

A federal court last week finally weighed in on a particular exception to the Medicaid transfer rules that the State of New Jersey has, for some time, misinterpreted.  A transfer of assets from parent to child, if made within 5 years of the date of application for Medicaid benefits, carries a Medicaid penalty, but there are some exceptions to that general rule.  If the transfer is made to a child, or to a trust for the benefit of the disabled child, then that transfer is not subject to a Medicaid penalty.  The State has for as long as I can remember, insisted that this exception applies only if the transfer is to a trust for the sole benefit of the disabled child. 

Now, if you are not familiar with the ins and outs of the Medicaid laws, and were told that your mother is ineligible for this reason, what would you do?  Probably go home and wait till the Medicaid penalty expires, not knowing any better.  My staff has reported back to me on some of our cases the same thing.  I then have to go back to the federal law and state regulations interpreting that law to find the exact sections that support our claim.  Sometimes that is enough to resolve the issue, but other times, such as in the case of Sorber v. Velez, the case decided last week, the State doesn’t budge and we, as elder law attorneys, have to resort to the court system to settle the dispute.  In the Sorber case, the issue came down, in part, to the type of grammar lesson you might remember from elementary school about the proper placement of a comma. The State’s interpretation didn’t seem logical and the court agreed.

One of my staff asked me the other day why the State would take a position that seems so farfetched.  The answer, I think, can be found by looking at the bigger picture of what is playing out in this country.  The government doesn’t have enough money to fund the programs and services it currently has.  Looking at what’s coming, the number of people facing a long term care crisis will continue to increase in the next 20 years as 77 million baby boomers reach senior status.  So, you can expect the State to continue to interpret eligibility standards very strictly.  And sometimes they’ll get it completely wrong.  That’s why the “do it yourself” approach is dangerous.  You could be losing valuable benefits and without the assistance of someone with knowledge of the laws you wouldn’t even know it.   The government wants to push you to the back of the line.   Make sure you protect yourself and fight to maintain your spot at the front .

For many families, keeping their elderly loved one at home will require in home assistance.  There are many quality home health care companies in the area so finding one isn’t a problem.  But I find so often that clients don’t go through a licensed agency  because of the cost.  While I have written in the past about the Medicaid problem of hiring aides directly and paying cash (7/20/09 post), there is another very real risk, safety.  The following story is one, unfortunately, I have heard more than once.

Mary found an aide to care for Dad through an agency she had learned of from a friend.  I know many of the quality licensed agencies in the area but had never heard of this one.  Mary paid a fee to the agency, who sent an aide to her dad’s home but her financial dealings with the agency ended there. She paid the aide directly in cash.  I cautioned Mary that she didn’t really know anything about the agency or the person they were sending but she said she interviewed the woman, who seemed pleasant enough.  And Mary was in a bind because Dad had run out of money so she was paying out of her own pocked.  Now the aide she had found herself and whom had stayed with Dad for 3 years was going back to her native country.  Mary needed to find someone quickly and cost was a real issue.

What happened after one month was Mary’s worst nightmare.  On one of her daily visits to Dad’s home she found him bruised and battered, in a semiconscious state.  He had been beaten by the aide, who claimed not to know what happened.  Mary called the police. They immediately arrested the aide and Dad was transported to the hospital.

Upon further investigation, Mary discovered that the agency was neither licensed nor insured.  The owner disappeared, probably to reappear under another agency name.   And unfortunately Dad’s injuries were of a severity that he could no longer stay at home, but needed nursing home care.  Mary felt terrible, but her predicament is hardly uncommon.  When trying to make ends meet safety was compromised.  Bringing a complete stranger into a home to care for a defenseless senior should not be taken lightly.  Background checks must be done.  Training is important.  There is a reason going through a reputable agency is more expensive. 

However, if a long term care plan had been put in place, well before Dad needed care, perhaps Mary would not have been strapped for cash.  Dad would have the money to pay for his own care, maybe government benefits could have been tapped to help out. Mary would then have hired the licensed agency, safety precautions would have been taken, and a tragedy could have been avoided.

Let’s pick up where we left off with Mary.  Her son, Jim is unemployed and Mary has been giving him funds totaling $50,000 over the last 6 months to help him pay his bills.  And she intends to continue doing so until he finds a job.  While Mary is 70, healthy and not thinking she’ll ever need long term care, I explained to her that if her health takes a turn, the transfers to Jim will make her ineligible for government benefits should she run out of money.  That is a very real possibility, with the cost of care currently averaging over $100,000 per year in her area.  So what can we do?

 We can set up a trust to which Mary transfers assets.  The trust then provides the funds to Jim.  Now, you may be thinking, “doesn’t this create the same problem Mary already has by giving Jim money each month or two?”   Yes, but by having Mary transfer the money in one lump sum Medicaid’s 5 year lookback is applied one time so we know when it will expire.  If she transfers a little bit at a time Mary creates a new 5 year lookback for each separate transfer.  But isn’t there a potential Medicaid penalty when the trust gives money to Jim?  No, because Medicaid only looks at Mary’s transfers, not the trust’s.

 Some may read this and conclude that this is just a way for Mary to avoid using her money for long term care and have the government pay her bills instead.  But is that really what is going on here?  Cleary not.  Mary isn’t even thinking about long term care (although she clearly needs to).  Through the use of a trust she can accomplish both goals, helping her son get back on his feet and providing for her own needs.  If she gets sick she’ll definitely need to use some of her funds for her own care but when she spends down completely, if done properly, she will be ready for Medicaid.  And that benefits not only Mary, but also the providers of her care who will receive those benefits, whether it be a nursing home, assisted living facility or home health care agency.

 The long term care provider will know that after Mary spends down her assets she will qualify for Medicaid without any surprise ineligibility periods imposed by Medicaid. And Mary will know that she can be there for her family and still meet her own needs.  Mission accomplished.

Mary had been reading my blog posts for some time now about the need to plan ahead for long term care. Something struck a chord with her and she called.  She has a home and about $200,000 in investments.  While still healthy, she is 70 and thinking about the future.  I then asked her if she had made any gifts to her kids or grandkids.  She replied, “No gifts but I am helping out my son Jim a little bit because he has been out of work for 6 months”.

 “Well, Mary, actually, the money you are giving your son may disqualify you for government benefits down the road, should you need them”, I explained.  Mary became exasperated.  “Jim has had such a tough time finding a job in this economy.  How can the government tell me I can’t help my family when they are in need?”   The reason for this, if you have been reading my posts over the past number of months, is the Medicaid spend down rules.  The government wants you to spend your money on your own long term care first, before asking for assistance.

 Now, not all your money must be spent on long term care.  But it must be spent in such a way that you are getting something of equal value back.  Mary heard this and in an exasperated tone cried, “what could provide me greater value and satisfaction than helping to keep a roof over my son, daughter-in-law and grandchildren’s heads and food on the table, until Jim can get back on his feet?  My parents helped us out when my husband lost his job.  In tough times our family has always pulled together and pitched in.  Jim is a good son.  He just needs a break.”

 While you and I may view Mary’s help as essential and proper, unfortunately the government does not.  Mary estimates that she has given Jim $50,000 over the last 6 months and intends to continue to do so.  Right now, however, she has a potential Medicaid penalty of about 7 months and that will only increase if she continues to advance funds to Jim.

 Mary is really getting agitated now.  “So are you telling me I have to stand by and watch Jim lose his house -- that I can’t do anything?”  “Not at all”, I replied.  “You can be there for Jim, but we have to do it in a way that won’t create long term care problems for you down the road.”   In next week’s post I’ll share with you what I told Mary.

A few months back I wrote about how estates up to $3,500,000 are not subject to federal estate tax and that the tax will be eliminated in 2010.  For this reason, when people call our office to discuss estate planning they will often begin by saying that they are not concerned about estate tax.  I have to correct them, however, because most states have their own estate tax that may kick in on smaller estates where the federal tax isn’t a concern.  So, how big might such an estate tax bill be?

            First, a little background.  Under the previous law, Congress permitted a dollar for dollar credit towards the federal estate tax for any state estate and inheritance taxes paid up to a certain limit.  So, many states established their estate tax structures to “soak up” the maximum credit that Congress permitted.  In essence, the federal government shared a portion of its tax revenue with the states.  When it raised the federal exemption, however, Congress decided it could no longer share a smaller tax revenue with the states so it phased out this credit.  Many states, in response, changed their tax laws to preserve their revenue stream.  New Jersey now has an estate tax that kicks in on estates greater than $675,000 and New York on estates greater than $1,000,000.

            New Jersey’s estate tax  starts out at 4% and gradually increases to a maximum of 16%.  New York’s estate tax also maxes out at 16%.  As I explain to our clients, we usually see federal estate taxes in the six figure to seven figure range and state estate taxes in the tens of thousands of dollars on the low end, and hundreds of thousands of dollars on the higher end.

            What can you do to reduce, or even eliminate this tax?  Well, for starters, in the case of married couples, a bypass or credit shelter trust should be employed.  This will save substantial amounts of tax that would be paid by children at the death of the second parent to die.  But you must have this trust set forth in your will before you pass away.  

On September 1, 2009 New York’s new power of attorney law became effective.  There has been much written about it.  The intent of lawmakers was to correct the financial abuses that seem to increase in frequency, probably due to the aging of our populace.  As with any new law, however, what lawmakers envision and what actually occurs often differ greatly. But, what does the new law mean for you?

 First, let’s run through the major changes.  One of the biggest changes is the creation of a “statutory major gifts rider”.  This is a document separate from the power of attorney that specifically authorizes major gifts and other transfers (defined as greater than $500 per person per calendar year).  No longer can the principal (the person executing the power of attorney) authorize gifts in the body of the power of attorney document.  This will impact many long term care plans in which assets are placed in trust, for example.  If the principal can no longer make the transfer and a child, as agent under power of attorney, needs to complete that transaction, New York law now requires this separate rider.

 A second  important change focuses on the execution of the document.  Now the principal and the agent must sign the document in front of a notary and two disinterested witnesses.  The signings need not, however, occur at the same time.  The agent may sign at a later date than the principal.

 A third major change is one that at first might not seem like much.  Any new power of attorney automatically revokes all previous power of attorney unless the principal expressly states otherwise in a special “modifications” section.  This could really wreak havoc upon estate and long term care plans.  Think about it.  How many times have you gone into a bank and executed a limited power of attorney appointing a family member as agent for a particular account?  If that document doesn’t expressly state your wish not to revoke your general power of attorney or any other limited power of attorney that you signed previously then they all are revoked.  What if the bank employee doesn’t point this out to you?  They may not even be aware of this provision. 

It will be interesting to see what impact the new law will have.  Will it correct financial abuses of the elderly?  Will it be too restrictive and hamper families in their ability to care for elderly members?  Will there be any unintended consequences that nobody foresaw?  And will other states follow suit?  One thing should be clear.  Consult your elder or estate planning attorney before you execute any other powers of attorney.

One of the more common questions asked of me is “should I take Social Security early?”.  The questioner is referring to the ability to take Social Security as early as age 62, rather than waiting till the full time retirement age of 65. (By the way that age gradually increases for those born after 1937 until it reaches age 67 for those born 1960 or later.)  Taking early Social Security reduces your monthly payment by ½ of 1 percent for the number of months before age 65 you start those checks coming.  If you enroll at age 62 you will get roughly 75% of what you would receive at age 65.  Ok, those are the basics. So, what’s the answer?

 Well, it depends.  There isn’t a “one size fits all” solution here.  But let’s analyze this a bit.  One consideration is going to be, “How long do I think I will live and what is my break even point?”  For example, if I wait until age 65 to take my benefit how long will I need to live before I come out ahead by giving up a lesser benefit at an earlier age?  That may also be impacted by what I do with the money if I take it early.  If I have sufficient other income and I invest the Social Security that will affect the calculation.

But, wait.  That’s not the only consideration.  If I am still working when I take an early benefit I can lose some of that Social Security if my income exceeds a certain level (this changes from year to year).  And, what about my spouse?  When one spouse dies, the surviving spouse is entitled to receive the larger of the two checks.  So that may work into this as well.

 As you can see, there are many things to consider.  There is a certain amount of guesswork involved as well.  The best answer I can give, however, is to consult with your professional advisors – financial, tax and elder law – to run some numbers.  What is best for you will most likely not be best for the person seated next to you.  There are just too many variables for there to be one right answer.  But, one thing I can unequivocally say is that you should “run the numbers” before you reach age 62.  It might be right for you and you wouldn’t want to pass up that opportunity if it makes financial sense.

I met with a family with the following scenario.  Dad needed nursing home care and the family had done no long term planning.  We talked about how under Medicaid rules the couple’s assets would be counted, divided in half and that Mom would be able to keep 50% of the assets up to a maximum of $109,540 and the home.  We went through a list of their investments.  I then asked if they had anything else of value.  Son, Joe, mentioned that Dad had just signed up for Jets season tickets at the new stadium the Giants and Jets will be opening in 2010.  “We want to keep the tickets in the family”, he said.  “Dad can just transfer them to us, right?”  That got me thinking.  “I’m not so sure”, I replied.

            If you’re a sports fan, by now you know all about seat licenses.  Both the Giants and Jets are selling season tickets in a new way.  Before you can have the privilege of buying a game ticket you must pay a fee, called a seat license.  The better the seat, the higher the fee.  Joe told me that the license for his family’s seats cost Dad $60,000.  So, what do you think will happen if Dad just transfers his seats and later applies for Medicaid?

            Certainly there is no mention of NFL seat licenses in any state Medicaid regulations.  But, doesn’t the license have a value?  Teams are telling their fans that they can resell the license, that it’s really an investment.  It isn’t a stretch, then, for the State to treat the transfer of the license from one generation to another as a transfer for less than fair value subject to a Medicaid penalty.  Especially since the State is facing huge budget deficits and can ill afford to pay out benefits to huge numbers of its residents.  So, do I think that the State will let it go?  Not likely.

I discussed in last week’s post how a guardianship may not be possible where Mom needs help but is not necessarily incompetent.  So, what other options are there?  Mom’s health has been in gradual decline.  The family sees it.  Sometimes they agree that action is necessary, some times not.  They have had more than one conversation with Mom about the need for long term care planning, for example moving Mom to a safer environment. 

The problem, however, is that the family (usually the children) are uncomfortable in their role.  Mom, understandably, is not thrilled with the suggestions, and may even be hostile.  Roles are reversed.  The child assumes a parental role, taking care of the parent, who cannot, or will not, consider the risks that lie ahead.  Yet the child is waiting for the parent to say “yes” and can only go so far on his/her own without that permission.  So nothing is accomplished and the family simply moves from crisis to crisis, always seemingly reacting to events, not preparing for them.

That’s when you need to introduce an outside person into the conversation.  As I explain to clients, I can say things to your parents that will be heard differently than if you say them to your parents, or if I say them to my own parents.    I may, in fact, say the very same things that the family has been telling Mom.  But, now it’s different.  Mom may have been waiting for the children to take the next step.  It isn’t just talk anymore.  One step turns into the next and that’s how problems get solved.  That process can start with an elder law attorney.  It can also begin with a trusted advisor, such as your financial planner or accountant.

            Another opportunity that so many families let pass is when a crisis occurs.  Mom is in the hospital or rehabbing in a subacute care facility.  She wants to go home.  The family relents.  That may, however, be the best time to make a change.  It doesn’t have to be a permanent one from the start. But you’ve got doctors and medical staff to support you as well.  If everyone is telling Mom what needs to be done the focus isn’t on the children.  It is a whole lot easier for Mom to accept.

            Just a few options to consider.  Time isn’t on Mom’s side.  Her health will continue to decline.  Sometimes it’s a matter of waiting for, and recognizing, the opportunities that present themselves, and then seizing upon them.  In the end, Mom may come to accept the changes as necessary, or at least grudgingly allow the children to take the action they know is necessary to insure Mom’s continued well being.

The caller gives me the following fact pattern or some variation.  Mom’s health is deteriorating.  Her behavior is becoming extremely erratic, in some cases violent or abusive.  In some cases it’s dementia.  In others it’s alcohol or the side effect of the medications she is taking.  Bills go unpaid.  Spending is out of control.  The house is falling into disrepair.  The family has spoken to Mom but hasn’t gotten anywhere.  She refuses to sign a power of attorney or health care directive or take any direction or assistance from family.  The caller would like to know more about guardianship.

 I listen patiently and then start by explaining that guardianship isn’t suitable for everyone.  And it isn’t easy to obtain.  Now that can be a good thing, but it also can be a bad thing.  You see, the first step in seeking guardianship is a decision by a court that Mom is incompetent, that she legally cannot make decisions for herself.  We have a long history of individual rights in this country.  Taking away that freedom is not something we take lightly.  So the process of declaring someone incompetent is not an easy one.

 Mom has to be examined by two doctors who must agree that she is incompetent. (The exact process may vary from state to state.)  Then the court appoints an attorney to represent Mom.  The attorney must meet with Mom and report back to the court.  And here is where the problem usually occurs.  If Mom is aware of what is going on, she may object to the process.  She may become angry with her children and tell her attorney to go back to the judge and tell him she doesn’t want to be declared incompetent and that she will fight it. 

She tells the attorney that her decisions are hers to make.  Her children may think she is incompetent but where is the line between bad decisions and mental incompetency?  It is not an easy one to draw.  In many cases I must tell the children that attempting a guardianship will probably fail.  Even worse, it may drive the parent away from seeking or allowing the children to help, actually making the problem worse.  In those cases, then, what other options are there?  More on that in next week’s post.

Long term care for people suffering from Alzheimer’s Disease and other progressive, degenerative neurological diseases comes in many forms.  In past posts I have discussed nursing homes, assisted living facilities, adult day care and home care administered by professionals and family members.  Another type of care that you may or may not have heard of is called respite care.  This type of care is as much for the caregiver as it is for the ill family member.

For so many people care is provided by family members.  As anyone who has provided this level of care for any length of time knows, it is an exhausting task, both mentally and physically.  It is a full time job, but not one typically limited to 9 to 5 hours.  It is often a 24/7 task and the toll, especially if the caregiver is a healthy, but elderly, spouse, can be harsh.  That’s why respite care is so important.

Respite care is a form of short term relief for the primary caregiver.  That caregiver may need time away to “recharge the batteries” or to address his/her own health issues.  There are various programs and services available to provide care to the ill loved one while the caregiver is taking a break.  This can range from home health care to adult day care to overnight care in a licensed facility such as an assisted living facility or nursing home.  The care is temporary, usually a period of days or weeks at a time.

Mary calls with the following problem.  Her father recently passed away and left a sum of money to each of his grandchildren, including Mary’s son, John.  “So, what’s the problem”, you ask.  John is 25 and mentally challenged.  He is disabled, doesn’t work and receives Medicaid.  Mary is concerned because she heard that receiving the inheritance will cause  John to lose his benefits.  She’s correct if John’s assets exceed $2000.  “Is there anything that can be done?” she asks desperately.

 The answer is to set up a special needs trust, but the timing of doing so is critical.  The law has established certain safe harbor trusts that allow recipients of Medicaid and other needs based government benefits to keep those benefits and place their assets into a trust to be used for their “special needs”.  These trusts, however, have very technical and specific rules surrounding their set up and administration.

 For example, the trust must be irrevocable and established by a parent, grandparent, guardian or court.  The disabled individual cannot set it up him/herself.  The trust must provide that the disabled individual is the only beneficiary and that the assets can only be used for special needs and not for food, clothing or shelter.  The trust may also need to include a “payback provision”, which states that any assets left in the trust when the beneficiary dies will be used to pay back government benefits first.  Oh, and the trust cannot be set up if the disabled person is over the age of 65.  These are just some of the many restrictions and requirements.

 So, let’s go back to Mary and her problem.  We can absolutely place John’s inheritance in a special needs trust.  It probably is best to have the court act as the grantor so we’ll need to make an application to the court.  It is also important that we do this before assets are ready to be distributed from the grandfather’s estate.  Once the inheritance is made available to John he may lose some months of benefits before the court establishes the trust.  He doesn’t actually have to receive the assets for them to “be available”.  A typical estate can take several months or longer to administer so while the executor is gathering estate assets and paying debts and taxes is the best time to get the trust set up.

 Keep in mind that the laws in this area are very technical so it is always best to hire an elder and disability attorney who is very familiar with these types of trusts.  And, where possible, it is better for the family member leaving assets to the disabled relative to set up a special needs trust in his/her will or leave the gift to a trust that already has been established by another family member.  That is what we call a “third party special needs trust”, but that’s a discussion for another day.

The recent deaths of two wealthy men, one very well known, the other not, illustrates yet again the complications and costs of not preparing an estate plan.  The media has focused in the last few months on the story about Michael Jackson’s death and its aftermath.  No doubt we will be bombarded with this story for months and years to come.  Jackson left a mountain of debt, assets that in death are probably worth more than when he was alive, and a less than traditional family.  Jackson did, however, do some things right.  He left a will which included trusts for his children and a clear indication of who he wished to be appointed as their guardian.

 Then there is Yung-Ching Wang.  Most people probably never heard of Wang but he ranked among Forbes Magazine’s top 200 wealthiest people in the world when he died last year at the age of 91.  Wang was a true success story, born into poverty, the son of Taiwanese farmers, he turned a $700,000 loan from the United States government during the height of the Cold War into a multi billion dollar international manufacturing conglomerate.  His company, Formosa Plastics, became the largest manufacturer of the ubiquitous plastic materials that we find in all kinds of products today. 

By all accounts, Wang was a management guru and a visionary.  His personal life was a little bit more, shall we say, messy.  He left a wife, to whom he was married for 72 years and 9 children.  None of those children, however, were born to his wife.  Oh, and he didn’t have a will.  No written plan of distribution from a man whose rightful heirs is now open to interpretation and who left property and other assets around the United States and around the world.

One of his sons has filed a complaint in New Jersey state court (he was a part time resident there) seeking to be appointed administrator, the official estate representative charged with gathering assets, paying all debts and taxes and distributing the balance to his heirs.  He already has a fight on his hands from two of his sisters.  Had Wang executed a will appointing someone this initial fight could have been avoided.

The battle promises to last for years and drain the estate of countless dollars.  One of the big questions is who the rightful heirs should be, not an easy answer since Wang fathered his children with several different women.  New Jersey’s intestacy laws address distribution of estates when no valid will exists but the laws are not perfect and there, no doubt, will be issues for which clear cut answers don’t exist.  Legal battles will ensue.

The lessons learned from the Michael Jackson and Yung-Ching Wang cases are clear for all of us.  You can save your family much heartache and expense by leaving a clearly thought out estate plan.  In Jackson and Wang’s cases, their estates are so complicated that courts will need to step in at some point to assist in the distribution.  However, Jackson’s family will have a much easier time than Wang’s since Jackson at least took care to express his wishes in writing.  For the average estate that usually is enough to eliminate the fighting the typically ensues when a loved one passes away.

Mrs. Jones came in to see me. Her husband was diagnosed with Alzheimer’s three years ago and the disease has progressed to the point where he needs long term nursing home care. At the time of the diagnosis she talked to some family friends and they told her to go ahead and add the kids’ names to her bank accounts and mutual funds to protect those assets from Medicaid. Now that her husband is in a nursing home she wonders whether she did the right thing. Unfortunately, she did not.

In New Jersey, Medicaid says that adding someone else’s name to a bank account or mutual fund does not transfer the ownership on that account. In other words, if Mrs. Jones had a bank account with $50,000 and she added her daughter Mary’s name to the account, the State would say that she did so for convenience purposes. The entire account still belongs to Mrs. Jones. So even though Mary’s name has been added, the practical effect, from a Medicaid standpoint, is that there has been no gift and the entire account still belongs to Mrs. Jones.

This is true whether we are talking about bank accounts, certificates of deposit, savings bonds, mutual funds or any other liquid asset. The law says there is no gift until, and unless, the child actually takes the money out of the account. Using this same example, if Mrs. Jones added Mary’s name to the account three years ago, there has been no gift made, even if Mary’s Social Security number is used for the account and she pays the taxes on all income. If Mary later takes some money out of the account, and moves it into her own name, then the gift is made at that point in time.

This general rule is not true where real estate is concerned. That’s because if someone’s name is added to real estate, at the time the deed is signed and recorded, then a completed gift has been made.  For instance, let’s say that Mrs. Thompson is a widow and she owns a house valued at $200,000. If she adds her son’s name to the house and then has the deed recorded, at that time she has made a completed gift. A gift in the amount of $100,000 would cause her to be ineligible for Medicaid for 13 months. At the end of that time, however, the Medicaid ineligibility would cease... and one-half of the house’s value would be protected.

Whether or not it makes sense to add someone’s name to real estate or financial assets depends upon the facts and circumstances of each particular case.  Be sure to seek the advice of a competent elder law attorney before proceeding.

Joe calls me because he wants to understand how Medicaid works.  I start to explain how you have to spend down your assets before you can qualify for benefits.  That the spend down has to be for value, meaning that you are spending your money and receiving something of equal value in product or service in return.  Joe listens and then perks up.  "Wait a second", he says.  "I can make a gift of $10,000 per person so that doesn’t count, right?".  "Wrong", I reply.

 What Joe has done is make a very common mistake by confusing the annual gift tax exclusion with the Medicaid rules.  So let’s run through the basics and clear it up.  Gift tax is paid when you make a sizable gift to someone who isn’t your spouse.  One of the purposes of the gift tax law is to protect the estate tax.  For example, if I know that my estate of $2,000,000 will be taxed when I die, then why don’t I just transfer all my assets to my loved ones shortly before I die.  The gift tax eliminates this estate tax avoidance strategy.

A certain amount, however, is exempt from the gift tax.  There is a lifetime exclusion of $1,000,000, meaning I can transfer up to that amount, in one lump sum or in smaller increments, over my lifetime.  In addition, I can gift up to $13,000 per person per year (everyone remembers it as $10,000, but several years back an inflation adjustment was added so the number now is $13,000).  Yes, there is no gift tax owed when you make that gift but it does carry a Medicaid transfer penalty.

 How so?  Because the gift tax rules have nothing to do with the Medicaid rules.  On  the one hand, the government is telling us its OK to gift some amount of money without paying tax, but only up to a point.  On the other hand, if we need nursing home care the government doesn’t want to pay for that care unless we spend all of our own money on that care first.

 Every $13,000 gift, therefore, carries a Medicaid transfer penalty, a period during which you are not eligible for  Medicaid.  That penalty, expressed in months, is calculated by taking the transfer for less than fair value (the gift, as we have been discussing) and dividing by the average monthly cost of nursing home care.  This number is set by each state and in some states it varies by region.  Here in New Jersey that number right now is $7282.  This means every $13,000 tax free gift carries a Medicaid penalty of almost 2 months.

 Now, does that mean that you should never make gifts?  No, not necessarily.  It just means that in today’s increasingly complicated world, you have to understand that making those gifts can result in long term consequences, which you may not recognize until it’s too late.  That’s why a carefully thought out long term care plan is critical and getting the proper advice and guidance well before that care is needed is always the best approach.

In discussing long term care planning with new clients, very often they will tell me that they have everything covered because years earlier they set up a living trust.  Living trusts are estate planning devices designed to eliminate the need to probate an individual’s estate at his/her death.  In the 1990’s they were especially popular and still are very common, especially in states such as Florida and New York, where probate is time consuming and expensive.  But are they useful for long term care planning purposes?

Most likely, not.  Living trusts are usually revocable, meaning that when a grantor or settlor (the person establishing the trust) transfers assets to it he/she has the ability to take the assets back out at any point in time.  People believe that when they make transfers to the trust, these assets are not counted as theirs for purposes of qualifying for Medicaid or VA Aid and Attendance benefits.  That is just plain wrong.  If the trust gives you the ability to take the asset back out of the trust, the government will say “go ahead and take it back, spend it all down and then when it is gone come back to us.”   The trust has to be irrevocable, meaning assets transferred to the trust cannot be taken back out by the grantor.

A second reason living trusts (or other trusts, such as testamentary credit shelter or bypass trusts, won’t work for long term care planning purposes is that they usually contain a clause providing that the trustee can use the assets for the “health support and maintenance” of the beneficiary.  Again, if the beneficiary needs long term care the government will look at the trust and point to that language.  “Long term care needs are health, support and maintenance,” they’ll say, “so spend it down and then come back to us when it’s gone.”

So, what’s the solution?  If you have read previous posts on this blog you know that first of all, the trust must be irrevocable.  Now, that makes people uncomfortable.  “Does that mean I am giving away my assets and losing control over them?”   The answer of course, is no.  What I tell people is that the purpose of this transfer is not to give away assets because you may very well need some (or all) of them, depending on what your health needs are.  But you can qualify for government benefits that can help pay for care.  Not knowing how long you will live, the challenge is to protect your assets so you don’t run out of money.  Tapping into other sources helps accomplish that goal because you are spending down your own assets less rapidly. 

 Additionally, the trust language allowing distribution of assets by the trustee to the beneficiary has to be tailored very carefully so as not to jeopardize eligibility for government benefits.  It all adds up to a trust that avoids probate and addresses long term care planning needs.
 
 The bottom line when it comes to living trusts is to get proper advice before jumping into one or if you already have one.  Seek the advice of a qualified elder law attorney who can discuss every option with you.  A living trust may meet your particular needs.  But then again, it may not.

As long term care needs increase and families want to keep their loved ones at home, hiring home health aides often becomes necessary.  Paying an aide, however, if not done correctly, can cause Medicaid ineligibility years later, after funds run out.   Consider the following very common scenario.

Jane hires a home health aide at $700 per week cash, or $3000 per month.  She keeps the aide 3 years until her funds run out and now needs round the clock care.  A nursing home becomes the only option. 

She applies for Medicaid but is told, “Sorry, you’re not eligible for 15 months.  You’ll have to private pay until then.”   Of course, Jane has no more money.  She’ll have to come up with the funds some other way, perhaps from family members. But at $9000 per month or more that may not be possible.  How did Jane get into this mess?  Because Medicaid treated her payments to the aide ($108,000) as transfers subject to a penalty.

Qualifying for Medicaid requires spending down assets below $2000.  Transferring assets may cause Medicaid ineligibility if you do not receive something of equal value back.  Medicaid calls this a “penalty”.  However, and this is key, you must prove to Medicaid that assets transferred are not subject to a penalty.   

If you pay the aide cash (or by check) and don’t keep proper records Medicaid will assess a penalty.  The penalty is calculated by dividing the transferred amount by the average cost of nursing home care.  When one applies for Medicaid there is now a 5 year lookback period, meaning Medicaid will look back 5 years from the date of the application to find these transfers.  They will add together all the transfers made during that time.  The penalty will begin when all other assets have been spent down and the individual enters a nursing home and applies for Medicaid. 

Of course, that is exactly the time when you have no more money.  The State presumes you gifted the money and so will tell you to get it back, use it and then, after it’s gone to come back and they will pay for your care.  But, you didn’t gift the money so you can’t get it back.

So,how can you avoid Jane’s problem?  By keeping records to prove the payments were not gifts and not paying cash which is difficult to trace.  It is also a good idea to generate detailed invoices of the services which you purchased.    Another, perhaps better, solution is to hire a home health agency that will supply the aide.  It will cost more than hiring an aide directly but your contract with the agency will insure that Medicaid can never challenge the payments as gifts.  And, in the long run it may cost you less because you won’t be stuck with a Medicaid penalty.

As I often tell clients, one of the most important documents that everyone should have is a power of attorney.  A power of attorney allows you to designate someone to conduct financial and other transactions on your behalf.  The ease with which anyone can execute such a document is a positive but can also be a negative because of the risk of it being abused.  And therein lies the problem when it comes to being accepted by a third party, such as a financial institution or bank.

 When we prepare a power of attorney for a client we draft it with the client’s needs in mind as well as the mindset that we may not have another opportunity to redo it later so it must be as broad as necessary to cover all possible scenarios in which it may be used by the agent.  We also tell clients that when their agent presents the document to a bank or other financial institution the first reaction may be that the bank will want our client (the “principal”, that is, the person signing the power of attorney in favor of the “agent”) to execute another power of attorney on their own form.

The bank’s reason is usually a concern about liability – being sued for honoring an invalid power of attorney.  However, the law provides a measure of protection for both the principal and the bank.  New Jersey law states that a bank must accept a power of attorney that conforms to the law unless the principal’s signature is not genuine or the bank has actual notice that the principal has died, the power of attorney has been revoked or the principal was under a disability when the document was signed, meaning he/she wasn’t competent to sign it.

The problem presented to clients is that the bank employee is usually following bank policy set by their legal department that they want the principal to sign their own document, typically in front of one of their own employees.  Obviously, this makes it easier for them to be sure the document is valid but it  frustrates the purpose and benefit of the law, that the principal can sign one document to cover all scenarios.  Persistence with the bank employee and sometimes intervention by the elder law attorney will usually overcome this resistance and convince the bank to honor a valid power of attorney. 

It helps to know a little bit about the law because the person you are dealing with at the bank probably doesn’t and will tell you they are simply “following bank policy”.  But this policy is not at all helpful to the client, especially in situations in which physical frailties prevent him/her from physically appearing at each bank to execute a separate power of attorney.  That’s not to say that there aren’t legitimate concerns about agents abusing their power.  It’s just that a “one size fits all” approach is the easy way out, instead of a careful examination of the facts of each case.

A common scenario that I am seeing with increasing frequency is the following fact pattern.  Dad owns a home but not much else.  He needs nursing home care but can’t get a mortgage to tap into the equity to pay for the care.  The home is listed for sale but in today’s market, homes aren’t moving quickly.  So the children pay the nursing home bill and the cost to maintain the home, with the expectation that when they sell the home they will repay themselves.  The family doesn’t have any written documentation to reflect this arrangement and that’s where the problem starts.

 So, the children pay for Dad’s care and expenses.  Maybe they pay by credit card,  sometimes, by check.  Some expenses, such as lawn care, they pay cash.  Often times they don’t keep records to back up the expenses and if more than one child is helping out no one is keeping a running tally of who is paying what.  “We’ll figure it all out later”, they say.  Finally, the house is sold.  Dad gets $200,000 from the sale.  The kids estimate that they have spent $150,000 on Dad’s behalf and take that amount to repay themselves.  Dad then spends down the rest for his care.

 Now, it’s time to file a Medicaid application.  As part of the application Dad must produce financial records for each account he had in existence, going back to February, 2006 (soon to be a 5 year lookback).  The State will examine the home sale and discover the transfer from Dad to children.  It will treat the transfer as subject to a Medicaid penalty, unless the children can prove the money was repayment for goods or services that Dad received.  And that proof must be by documentary evidence.   Dad won’t be eligible for benefits for a year or more, depending on the state he lives in.  “Bring the money back and spend it down”, the State will say.  So what can this family do?

 There are a few options.  Some involve applying for Medicaid immediately.  Others involve family members paying for Dad’s care and then getting reimbursed later.  However, the one common element to each option is that there is a written agreement in the form of a note and a mortgage on Dad’s home to secure the loan. The paper trail is the key.  Without it the children will never be able to prove that the transfer was for value, and won’t be able to recoup the money, in some cases hundreds of thousands of dollars, advanced for their parent’s care.

 And if you have been a frequent reader of this blog you know that the earlier in the process you seek proper advice and guidance the better off you are.  You don’t want to wait until filing the application to find all this out because, of course, by then it is too late.