We plan to go on vacation. We plan to have dinner with friends. But when it comes to planning for how we will be taken care of as we advance in age, many of us prefer not to think about it, believing it will somehow all work out. Unfortunately, when it comes to long term care planning, including finding the appropriate care and figuring out how to pay for it, those who fail to plan are clearly the ones who risk losing the most.

Consider the two scenarios below that contrast the different outcomes of planning early and choosing the “wait and see” approach for long term care.

The Facts

Hank is 72 and Ellen is 69. They have been retired for several years and have started traveling a few times a year to visit their children and grandchildren who live in nearby states. During a recent visit, their oldest child asked them whether they had made any plans in the event one of them suddenly got sick. Hank and Ellen had not thought much about this since both of them were in good health. However, they agreed to seek some advice upon returning home to see what their options were.

Hank and Ellen own a home that they have lived in since their marriage 45 years ago, and they have checking, savings and CD accounts that total $325,000. They both worked most of their adult lives, carefully watching their expenses and never spending money on extravagant items they didn’t feel they needed.

Scenario #1 – Hank and Ellen planning ahead. Hank and Ellen spoke with an elder law attorney, as they knew they should update their will and their powers of attorney. While there, they were surprised to learn that they could actually plan now to avoid running out of money in the future should they need long term care either at home or in a facility. With the help of their elder law attorney, they placed $200,000 and their home into an irrevocable trust, and named their children as beneficiaries of the trust. If needed, their children would be able to take a distribution from the irrevocable trust rather than using their own money for Hank and Ellen’s needs.

The remaining $125,000 would be kept in a revocable trust that Hank and Ellen would use for their living and travel expenses. Ellen would apply for a long term care insurance policy to provide further protection for them should her health fail (Hank had applied previously but was denied). The $200,000 placed into the irrevocable trust would not be counted against them after 5 years, should either of them need long term care and the assistance of state benefits to pay for it.

Unfortunately, six years later Hank had a severe stroke and ended up in a nursing home unable to use his right side arm or leg. Ellen tried caring for him at home but was simply unable to. Ellen went back to see the elder law attorney for help. Because they had planned ahead and had set up an irrevocable trust, Ellen was able to keep all of the remaining cash assets in their revocable trust, and Hank was able to qualify immediately for state Medicaid benefits. The irrevocable trust (which had now grown to $215,000) remained in place but did not count against Hank since more than 5 years had passed and neither Hank nor Ellen had any direct access to the trust assets.

Ellen was incredibly relieved to know that she did not have to worry about paying for Hank’s care and could instead focus on visiting him and providing as much support as possible to him. Although Ellen was not able to obtain long term care insurance, she has piece of mind knowing their children continue to manage the irrevocable trust and are ready to help both Ellen and Hank as needed.

Scenario #2 – Hank and Ellen without planning ahead. Let’s assume Hank and Ellen did not plan ahead. When Hank had a stroke at age 78, the couple had $300,000 in checking, savings and CDs. Under the Medicaid regulations in place at the time, Ellen was able to keep $110,00 of the assets, but most of the remaining assets had to be used for Hank’s care, leaving only $90,000 that was transferred to the children (or to an irrevocable trust) and thus protected from Medicaid. While their home would be protected since Ellen was still living there, if she were to become ill the home could be subject to a lien by Medicaid.

It took nearly two years to get Hank qualified for Medicaid, and the process was incredibly stressful for Ellen and her children. Furthermore, no planning has been done for Ellen and if her health fails, their remaining assets are at risk.

What If Hank Was Not Married?

Let’s assume Hank was not married, but had the same assets. If Hank planned early, all of the assets he put into an irrevocable trust (including his home) would be protected. Any assets left outside the trust could be transferred or turned into an income stream to pay for his care, should his health fail and he would need to qualify for Medicaid. Just as above, the Medicaid application process would go smoothly and quickly. In addition, an enhanced power of attorney would avoid the need for a guardianship in the event Hank was unable to make the transfers or sign the Medicaid application himself.

If Hank did not plan ahead, more than half of his liquid assets may have had to be used in order to protect Hank’s home, depending on the Medicaid rules in effect at the time. This would leave only $50,000 to transfer to the children (or to an irrevocable trust). And, if Hank did not have capacity to make any transfers or to establish an irrevocable trust, a guardianship proceeding would have to be initiated before any transfers could be made. Furthermore, the guardianship court would have to grant permission for such transfers to be made.

Conclusion

The scenarios above have highlighted the importance of seniors and their loved ones planning early for the possibility of needing long term care. There are not only financial benefits to doing so, but also numerous non-financial benefits, including reduced stress on the family and peace of mind knowing that the family’s needs are taken care of regardless of any health care crisis that may occur.

Our law firm helps families plan for their long term care needs, whether it is years in advance or after a health care crisis has occurred. We would be honored to work with you or the seniors and families you assist.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Proposed Cuts to the Federal Budget

Much of the news this year has been dominated by talks of the debt our country faces. As a result, much of the focus has been on cutting spending, particularly in the areas of Medicare, Medicaid and Social Security.

An agreement was reached for the first round of cuts earlier this year, and a super committee was appointed to meet and come to an agreement on an additional $1.2 trillion in cuts over the next ten years. The super committee, made up of six Republicans and six Democrats from Congress, is to reach an agreement by late November, and Congress is to approve the recommendations by December 23, 2011. If the super committee does not reach an agreement or Congress fails to approve any agreement proposed, then automatic cuts will occur.

For an in-depth explanation of the process and potential cuts if the super committee does not reach an agreement, please view the OMB Watch report at http://www.ombwatch.org/files/budget/debtceilingfaq.pdf.

CLASS Act Provisions Withdrawn

The Community Living Assistance Services and Supports (CLASS) Act was the government-operated long term care insurance program that was part of last year’s Patient Protection and Affordable Care Act of 2010, commonly referred to as “health care reform.” The CLASS Act provisions were to begin in January 2011 and required a working individual to be enrolled in the program for 5 years and maintain the minimal work requirements for 3 of the first 5 years of employment. Premiums would be deducted automatically from the individual’s paycheck and were expected to range from $150 to $240/month depending on the age of the enrollee, with decreased premiums available to persons with low income. The $50/day minimum benefit could be used to pay for personal care needs, medical equipment, and care at home.

However, on October 14, 2011, the Department of Health and Human Services Secretary Kathleen Sebelius sent a letter to leaders of Congress stating that despite their best analytical efforts, the Department did not see “a viable path forward for CLASS implementation at this time.” There are no plans to move forward with the CLASS Act as written in the health care reform law of 2010.

U.S. Supreme Court to Review Constitutionality of Health Care Reform Law

At the end of September, 26 states in the 11th Circuit, states in the 4th and 6th Circuits, and several private plaintiffs filed petitions asking the United States Supreme Court to review whether the health care reform law as passed in 2010 is constitutional, in particular the mandate requiring all individuals purchase and maintain health care insurance. If found to be unconstitutional, states are arguing that the individual mandate cannot be separated from the rest of the Act, and the entire Act should be declared unconstitutional.

The Supreme Court announced on November 14 that it would review the constitutionality of the health care reform law. A decision is not expected until 2012.

COLA Increase for Social Security and Certain Veterans Benefits

For the first time since 2009, Social Security recipients will receive an increase in their monthly checks. In October, the Social Security Administration announced a cost of living adjustment of 3.6% that will take effect December 1, 2011. Recipients will see the first increase in their January 2012 check. The standard Medicare Part B premium will only increase $3.50 to $99.90 per month, much lower than initially projected.

Veterans will also see an increase in Compensation and Pension benefits as a result of the Social Security increase. While an increase is not automatic with a cost of living adjustment, the House and Senate have both voted to increase Compensation and Pension benefits (including those payable to eligible survivors) by 3.6%. Senate Bill 894 was passed by the Senate in October and approved by the House in early November and is expected to be signed by the President shortly. Like Social Security, the increase in veteran’s benefits is scheduled to begin in December 2011, with the first increase to appear in January 2012 payments.

More Caregivers are Proactive in Planning for Loved Ones with Special Needs

The MetLife Center for Special Needs Planning’s 2011 Torn Security Blanket study polled 1,000 caregivers and included follow up interview with some of the respondents. The study, released in October, found that progress has been made in the area of special needs planning by caregivers, but there is still much progress to be made.

Some key findings include:

• 38% of caregivers have written a Will, compared to 32% in 2005.
• 36% of caregivers have planned for their dependent’s future housing, up from 31% in 2005.
• 21% of caregivers have set up a special needs trust, nearly double the number in 2005.

As noted above, the study also showed where there is still much room for improvement when it comes to planning:

• Only 49% of caregivers have identified a guardian for their dependent should they no longer be able to care for them.
• More than half (56%) said they are unfamiliar with the steps needed to identify a trustee to watch over their dependent’s financial holdings in the future.
• 55% weren’t sure how to set up a plan for lifetime financial assistance for their dependent.

The full text of the study can be found at: http://www.metlife.com/assets/investments/services/special-needs-children/Torn-Security-Blanket-Report.pdf.

Conclusion

The past year was a turbulent one with continued financial strain on much of the population. Adding to the stress of many families who have loved ones receiving government benefits was the continued talk of cutting government programs like Medicare and Medicaid. The next few months will prove critical in understanding how those programs will be affected.

Despite the turbulence around the economy, social security recipients and veterans’ benefits recipients will receive the first cost of living adjustment since 2009. Other positive news was reflected in the 2011 MetLife Torn Blanket Study that showed more caregivers are being proactive in planning for loved ones with special needs.

If you have any questions or if we can help someone you know, please don’t hesitate to contact our office.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Benefits Available

There are three types of pension benefits available that provide monthly cash payments to surviving spouses who either have low income, long term health care needs, or both. The pension benefit is referred to as “Death Pension.” Below is an overview of the three benefits, and more detail will be provided on each benefit in the following paragraphs.

Death Pension. The VA provides a monthly cash payment to surviving spouses of veterans who meet active duty and discharge requirements, who are either 65 or older or disabled, and who have limited income and assets. A surviving spouse can receive up to $661 per month (with additional payments available if dependent children are present in the home).

Death Pension with Housebound Allowance. A slightly higher monthly payment is available to surviving spouses of wartime veterans (who meet the same service requirements as Service Pension) but who are confined to their home for medical reasons. A surviving spouse can receive up to $808 per month (with additional payments available if dependent children are present in the home).

Death Pension with Aid and Attendance. The highest monthly benefit is available when a surviving spouse requires the assistance of another person to perform activities of daily living, or is blind or nearly so, or is a patient in a nursing home. This benefit, often referred to simply as “Aid and Attendance” is the most widely-known and talked-about benefit as it offers the highest possible monthly payment. A surviving spouse can receive up to $1056 per month (with additional payments available for dependent children).

Practice Tip: While Aid and Attendance is the most popular VA benefit, it is important to remember that Death Pension (with no additional allowances) is available to surviving spouses who do not require assistance with activities of daily living but are either disabled or 65 or older and have low income.

Eligibility Requirements

Valid Marriage. The surviving spouse and the veteran must have been married for at least one year prior to the veteran’s death. This particular requirement is met, however, if the couple was married for any period of time and a child was born to them before or during the marriage, if the marriage occurred before or during the veteran’s service, or if the marriage occurred prior to the following dates:

• World War II veteran: January 1, 1957
• Korean War veteran: February 1, 1965
• Vietnam War veteran: May 8, 1985
• Persian Gulf war veteran: January 1, 2001

Next, the surviving spouse must not have remarried or lived with someone and held themselves out as married, unless the remarriage ended prior to November 1, 1990, by death, or unless legal proceedings to end the remarriage were started by November 1, 1990. Additionally, the surviving spouse must have been living with the veteran at the time of the veteran’s death. If the couple was living apart, it must have been for medical, business, or other reasons besides marital discord, unless the marital discord was not the fault of the surviving spouse.

Wartime service and discharge. As noted above, the deceased veteran must have met certain service and discharge requirements before the surviving spouse can be considered for any type of pension benefit. The deceased veteran must have served 90 days of active duty with at least one day beginning or ending during a period of war. After September 1, 1980, the active duty requirement increases to 180 days. In addition, the veteran must have been discharged under circumstances other than dishonorable.

Disability. To qualify for any type of pension benefit, a surviving spouse must also be 65 or older or be permanent and totally disabled.

Permanent and total disability includes a claimant who is:

• In a nursing home;
• Determined disabled by the Social Security Administration;
• Unemployable and reasonably certain to continue so throughout life; or
• Suffering from a disability that makes it impossible for the average person to stay gainfully employed.

Asset and Income Requirements

The financial eligibility requirements of any pension benefit address a claimant’s net worth and income. A claimant is the individual filing for benefits. A surviving spouse should have no more than $50,000 in countable assets. Retirement assets are counted, but a claimant’s home and vehicle are not. However, the $50,000 limit is a guideline only – it is not a rule set by the VA. The VA looks at a claimant’s total net worth, life expectancy, income and medical expenses to determine whether the surviving spouse is entitled to any monthly death pension benefits.

Practice Tip: Many times the most difficult task in this area is to reduce a claimant’s assets down to the applicable level (or what one hopes will be acceptable to the VA). The assistance of legal counsel is important to insure the right strategies are used with minimal impact on Medicaid in the future.

A surviving spouse must have Income for VA Purposes (“IVAP”) that is less than the benefit for which he or she is applying. IVAP is calculated by taking a claimant’s gross income from all sources less countable medical expenses. Countable medical expenses are recurring out-of-pocket medical expenses that can be expected to continue throughout a claimant’s lifetime. If a claimant’s IVAP is equal to or greater than the annual benefit amount, the veteran or surviving spouse is not eligible for benefits. Table 2 below shows the applicable income and pension amounts for surviving spouses.

Is the Surviving Spouse Housebound?

If a surviving spouse qualifies for regular death pension and is housebound, her maximum allowable income increases (as does the annual benefit amount). The VA defines housebound as being substantially confined to the home or immediate premises due to a disability that will likely remain throughout the claimant’s lifetime. A surviving spouse with no dependent children who is housebound is eligible for benefits of up to $808 per month.

Unreimbursed medical expenses will reduce a surviving spouse’s income dollar for dollar after a small co-pay (5% of the annual pension amount) is met. But remember, to be eligible for an additional allowance for being housebound, the surviving spouse’s IVAP must be less than the annual income threshold.

To illustrate, a surviving spouse with $20,00 in annual income would not be eligible for a special monthly pension for being housebound. However, if the surviving spouse is able to show annual income of $20,000 and unreimbursed medical expenses of $25,000, the veteran would be eligible for $9,696 in annual death pension with housebound allowance (paid on a monthly basis) because the surviving spouse has negative IVAP.

Does the Surviving Spouse Require the Aid and Attendance of Another?

If a surviving spouse can show, through medical evidence provided by a primary care physician or facility, that he or she requires the aid and attendance of another person to perform activities of daily living, that surviving spouse may qualify for an additional monthly death pension allowance commonly referred to as “aid and attendance.”

The VA defines the need for aid and attendance as:

• Requiring the aid of another person to perform at least two activities of daily living, such as eating, bathing, dressing or undressing;
• Being blind or nearly blind; or
• Being a patient in a nursing home.

Table 2 below shows the applicable pension amounts for each type of VA pension available to a surviving spouse.

Practice Tip: The maximum death pension for a surviving spouse is $1,056 per month ($12,681 per year). The VA pays this amount directly to the surviving spouse regardless of where he or she is living.

Qualification

As stated above, the VA looks at a surviving spouse’s total net worth, life expectancy, and income and expenses to determine whether the spouse should qualify for special monthly pension. Unlike Medicaid, there is no look-back period and no penalty for giving assets away. However, one must use caution when considering a gifting strategy to qualify a surviving spouse for death pension benefits as this will cause a period of ineligibility for Medicaid which could be as long as five years. Other Medicaid planning strategies may apply when trying to qualify a surviving spouse for death pension with aid and attendance.

Practice Tip: The client’s trusted advisors must work together to determine the best combination of strategies and financial products that will gain eligibility for monthly death pension but not disqualify the client from Medicaid.

An illustration. James, age 82, is the surviving spouse of a World War II veteran. James’ total monthly income consists of Social Security income of $1500 per month. James was diagnosed last year with dementia and now lives in an assisted living facility as he needs help bathing, dressing and taking his medication. The assisted living facility costs $3000 per month. James has liquid assets totaling $100,000.

James’ IVAP:
Income $1500
Unreimbursed recurring medical expenses $3000
Total IVAP ($1500)

The maximum monthly benefit that James could qualify for is $1,056 – death pension with an allowance for aid and attendance. Because James has a negative IVAP of $1500, he is eligible for the full death pension with aid and attendance benefit. However, his assets are too high. But because James has negative income of $1500, one option may be to take a portion of his liquid assets and convert them into an income stream through the use of an immediate annuity or promissory note. As long as James’s IVAP remains a negative number or $0, he can qualify for the full death pension with aid and attendance amount.

The Application Process

While the application process for special monthly pension can be agonizingly slow – some applications take over a year before the VA makes a decision – the benefit is retroactive to the month after application submission. Having the proper documentation in place at the time of application (for example, discharge papers, medical evidence, proof of medical expenses, death certificate, marriage certificate and a properly completed application) can cut the processing time in half.

Practice Tip: Benefits are retroactive to the month after application submission. Therefore, it is imperative for potential claimants to seek legal help immediately to become eligible and to apply as quickly as possible.

Other Benefits

Dependency and Indemnity Compensation (“DIC”). DIC is a monthly benefit paid to a surviving spouse whose veteran spouse died (1) while on active duty, (2) from a service-related injury or disease, or (3) from a non service-related injury or disease, and who was receiving or was entitled to receive VA compensation for a totally disabling service-connected disability for the 10 years immediately preceding the veterans death, or since the veteran’s release from active duty and for at least 5 years immediately preceding death, or for at least one year before death if the veteran was a former prisoner of war who died after September 30, 1999.

Like death pension, DIC is a monthly payment provided to the surviving spouse. However, the surviving spouse does not have to prove a medical need, nor are there income or asset limits for DIC. The basic monthly rate of DIC is $1,154 for an eligible surviving spouse. See Table 3 below for the definition of “surviving spouse” for DIC purposes.

Burial Reimbursement. A surviving spouse who paid for a veteran’s burial and/or funeral may be eligible for partial reimbursement if the veteran’s death was due to the following:

• The veteran died because of a service-related disability,
• The veteran was receiving VA pension or compensation at the time of death,
• The veteran was entitled to receive VA pension or compensation, but decided not to reduce his/her military retirement or disability pay,
• The veteran died while hospitalized by VA, or while receiving care under VA contract at a non-VA facility,
• The veteran died while traveling under proper authorization and at VA expense to or from a specified place for the purpose of examination, treatment, or care,
• The veteran had an original or reopened claim pending at the time of death and has been found entitled to compensation or pension from a date prior to the date of death, OR
• The veteran died on or after October 9, 1996, while a patient at a VA-approved state nursing home.

Reimbursement for Service-Related Death. VA will pay up to $2,000 toward burial expenses for deaths on or after September 11, 2001. VA will pay up to $1,500 for deaths prior to September 10, 2001. If the veteran is buried in a VA national cemetery, some or all of the cost of transporting the deceased may be reimbursed.

Reimbursement for Nonservice-Related Death. VA will pay up to $300 toward burial and funeral expenses and a $300 plot-interment allowance for deaths on or after December 1, 2001. The plot-interment allowance is $150 for deaths prior to December 1, 2001. If the death happened while the veteran was in a VA hospital or under VA contracted nursing home care, some or all of the costs for transporting the veteran’s remains may be reimbursed.

Conclusion

Time is of the essence for surviving spouses who may be eligible for benefits available through the Veterans Administration. Failing to apply as soon as possible after a veteran’s death could result in the loss of monthly payments the surviving spouse would otherwise be eligible to receive. It is imperative for those who work with surviving spouses of veterans to be aware of these benefits and to help potential claimants obtain legal help to qualify for these benefits. If you know of someone who may be eligible, please give us a call – we would be happy to help!

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Proposed Cuts

As has been widely reported, the Obama Administration is offering to cut tens of billions of dollars from Medicare and Medicaid as part of the negotiations to reduce the federal budget deficit. The depth of the cuts depends on whether Republicans will accept any increases in tax revenues.

It appears that hospitals and nursing homes will be the unwilling recipients of some of the cuts, as Administration officials and those involved in the negotiations say that the cuts can come from health care providers like hospitals and nursing homes without directly imposing new costs on needy beneficiaries or overhauling either program. Some of the proposals being considered are:

• Gradually eliminating Medicare payments to hospitals for uncollectible patient debt. Medicare currently reimburses hospitals for 70% of debt resulting in patients failing to pay deductibles and co-payments and the hospitals have made reasonable efforts to collect.
• Reducing Medicare payments to teaching hospitals for the cost of training doctors, caring for sicker patients and providing specialized services such as trauma care and organ transplants.
• Reducing the federal share of payments to health care providers treating low-income people under Medicaid and the Children’s Health Insurance Program.

Lawmakers opposed to the cuts say it would impair access to care for the poor and shift costs to the states that are already facing a huge expansion in Medicaid eligibility and enrollment beginning in 2014 under the terms of the health care reform legislation passed last year. Hospital executives say that additional cuts (besides the reduction in Medicare payments already part of the health care reform legislation) will result in hospitals discontinuing services and increasing charges to patients with private insurance.

Proposed Cuts Will Limit Access to Health Care

CBS News recently reported on the impact of the potential health industry cuts. Doctors are among the many who are very concerned about any additional health industry cuts. Dr. David Ansell, Chief Medical Officer of Chicago’s Rush University Medical Center told CBS News, “People are dying because they don’t have simple access.”

Ansell explained that he is seeing a growing number of patients with Medicaid or Medicare who can’t find doctors willing to treat them, and the problem is the government’s low reimbursement rates. One study by the Colorado State Task Force found that a doctor earning $100 through private insurance would be paid about $71 through Medicare, and about $50 through Medicaid.

CBS called 40 primary care physicians at random to test whether doctors are limiting the patients they will see based on their method of insurance. 95% of the physicians polled said they accept new patients with private insurance, 78% still accept Medicare patients, but only 13% see patients who are on Medicaid.

With additional cuts to Medicare and Medicaid, it is clear that access to health care will be severely limited to those on Medicare, and more so for those who receive Medicaid.

Governors Speak Out Against Medicaid Cuts

The National Governors Association wrote the President and congressional leaders involved in the budget negotiations urging them not to cut Medicaid funding. Responding to reports that the target for 10-year total Medicaid reduction is in the neighborhood of $100 billion or $10 billion a year, the Chair of the National Governors Association wrote, “Make no mistake: these reductions are significant and cannot be absorbed into state budgets or simply passed on to providers of health services for our Medicaid populations.”

The Benefits of Medicaid Access

In the first ever study of its kind, the National Bureau of Economic Research, a private, not-for-profit, nonpartisan research organization, released a working paper with results of a study conducted in Oregon to determine the effects of Medicaid on recipients. The study began in 2008 when Oregon opened a waiting list in its Medicaid program to low income adults who had previously been ineligible for enrollment and then drew names by lottery from the 90,000 who signed up.
What the study found in part was that Medicaid could lead to better self-reported physical health and lower medical debt. “We find that in this first year, the treatment group had substantively and statistically significantly higher healthcare utilization (including primary and preventive care as well as hospitalizations), lower out-of-pocket medical expenditures and medical debt (including fewer bills sent to collection), and better self-reported physical and mental health than the control group,” the study said.

The authors of the study, including researchers from Harvard, MIT and the Oregon Health Study Group, caution against generalizing these estimates to other contexts, like the planned Medicaid expansion as part of the health care reform legislation passed last year. The study covered approximately 10,000 low-income uninsured adults, relative to a total Oregon population of about 3.8 million, with 650,000 uninsured and around 200,000 low-income adult uninsured. “Our estimates are therefore difficult to extrapolate to the likely effects of much larger health insurance expansions, in which there may well be supply-side responses from the healthcare sector,” the study noted.

The working paper for “The Oregon Health Insurance Experiment: Evidence from the First Year” can be ordered from the National Bureau of Economic Research website.

Why Everyday Americans Need Medicaid

The Center for American Progress recently published the top 10 reasons why everyday Americans should pay close attention to the House Republican proposal to cut Medicaid and completely restructure it into a block-grant program. A few of the reasons are noted below, with the full text of the article available at http://www.americanprogress.org/issues/2011/07/medicaid_middle_class.html.

The current proposal for a Medicaid block-grant leaves the states holding the bag on Medicaid. If a block-grant program were implemented, states would be forced to spend $266 billion more on Medicaid from state revenues just to maintain current eligibility and services.

Block-granting Medicaid would threaten the safety net for middle-class families whose family members have suffered a serious illness or face extended long term care due to old age or disability. The Center notes that many disabled and elderly Medicaid enrollees come from middle-class households and include individuals with physical and mental disabilities, victims of catastrophic accidents and nursing home residents. While these individuals make up 25% of Medicaid enrollees, they account for approximately 2/3 of Medicaid spending.

Block-granting Medicaid could impoverish the spouses of many nursing home residents. If a block-grant program were implemented as proposed, the spousal impoverishment provisions that currently exist to protect the spouse at home will be repealed.

Block-granting Medicaid could affect the economic security of millions of middle-class families with parents needing nursing home care. Without Medicaid, families would have to face huge nursing home bills once the resources of the family member are exhausted, care for the loved one at home, or leave their loved one without care. These limited choices will have great implications on family finances including home ownership and the ability to send children to college.

Conclusion

Despite numerous documented benefits of Medicaid and Medicare, these programs face severe financial cuts and restructuring. Now more than ever it is important for seniors and their loved ones to work with trusted legal counsel to come up with a comprehensive plan that will cover how they will access health care and how it will be paid for.

Please contact us if you would like additional information on any of the topics addressed in this newsletter or if you would like to discuss a specific issue.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

The impetus for this subject matter is the result of a recent case in the 9th Circuit Court of Appeals, essentially the far Western states, but the legal principles stated in the case are, for the most part, uniform among the states.

9th Circuit and the Alter Ego Doctrine – In re Schwarzkopf

Q1. How are trusts used for asset protection?

A1. Actually there are multiple ways that trusts are used for asset protection. In this case, the Debtor created three trusts, two are primarily discussed, the Grove Trust and the Apartment Trust, for the benefit of their daughter. This type of use for asset protection is termed a third party settled trust. By that, is meant that the beneficiary of the trust is someone other than the Settlor. It is generally believed that if the Settlor sets up a trust for someone else that the assets in the trust are protected from the creditors of the Settlor.

Q2. What is the theory that protects the assets from the creditors of the Settlor?

A2. Generally, a person is entitled to give their property to anyone they wish, provided the gift is bona fide, and not considered a transfer intending to “hinder, delay, or defraud” a creditor. We will deal with “hinder, delay, or defraud” in subsequent Advisors. If the gift is to a trust for the benefit of a beneficiary, other than the Settlor, the trust usually prohibits the beneficiary from pledging, selling, assigning, or otherwise disposing of the trust property or the beneficiary’s interest in the trust. This limitation was devised to keep beneficiaries, deemed spendthrifts, from wasting their interest in the trust. Thus, such trusts are referred to as “Spendthrift Trusts.”

Q3. How does the alter ego doctrine enter in the asset protection for third party spendthrift trusts?

A3. Now to the meat of the matter, we prefer, when we can, to use language quoted from the case we are discussing, Schwarzkopf in this instance, to provide the explanation. As a general rule, the judges do a better job of explaining what they mean than we would reporting it second hand, so here goes:

Note how the court is beginning to illustrate the control that Michaels had over the trustee, Briones, and how the assets of the Grove Trust were distributed to Michaels, despite the fact that Michaels’ daughter was the alleged beneficiary. The court continued:

The court clearly provides a trail of facts that will, most certainly be used to find that the Grove and Apartment Trusts was the alter ego of Michaels, and his creditors will be able to access the assets of the Grove and Apartment Trusts to satisfy their claims. The final holding is:

The Apartment Trust was found to be invalid for, essentially the same rationale, but the alter ego doctrine is more fully explained in the Grove Trust circumstances.

Q4. So, is it true that not recognizing the formal relationships between a Settlor and the Trust, and failing to respect those relationships likely will impose the alter ego doctrine on the Settlor?

A4. Couldn’t have said it better myself.

This issue of The ElderCounselor™ focuses on one case study to illustrate how much more difficult the issues can be when a child with a disability is involved in the marital split, and how important it is to have someone knowledgeable in government benefits and special needs planning issues participate in the proceedings.

The Facts

Consider the following situation: Husband and wife divorce in 1996, when their child, who is disabled, was 4 years old. The husband was ordered to pay approximately $2,800 per month in child support (considered to be about three times an ordinary child support order based upon his assets and income) for the life of the child. While it is unusual to see lifetime child support payments, and the award was larger than is customary, the husband agreed to this primarily because of the guilt he felt around the divorce. He also knew that his daughter was disabled and would require as much help as possible.

Fourteen years later, in 2010, the daughter turns 18 years old. The husband has since remarried and had another child. He feels he can no longer continue to make child support payments at the current level, and in fact his current wife now assists him in making these payments each month.

The husband wishes to seek a modification of the child support award, and he hires the attorney that handled his divorce years earlier to file the court papers seeking a downward modification of child support payments. The theory behind seeking this downward modification of child support payments is twofold. First, the husband would like to argue that since his daughter has just turned age 18, she can now qualify for Supplemental Security Income (SSI) benefits. Second, his daughter could receive services through a Medicaid waiver program, but her income from the child support payment could prevent her from qualifying. Therefore, the husband would like to know if establishing a court-ordered special needs trust to receive the child support payments would protect the child support payments from being counted as income to the daughter.

Can the Daughter Qualify for SSI?

During the course of the proceedings, the wife appears to be the only person testifying as to the question of whether her daughter can qualify for SSI benefits and the utility of creating a special needs trust for her daughter. According to the wife, her daughter cannot qualify for SSI benefits due to the so-called deeming rules, pursuant to which a parent’s income and assets are deemed to be available to the child for purposes of determining the child’s eligibility for SSI benefits. The husband argues that the wife should apply for SSI for their daughter, but she refuses to do so, citing the deeming rules as an obstacle to her daughter’s eligibility, and arguing that her own work income and $400,000 in assets will result in a denial of eligibility.

Without expert testimony, the court may have determined that the daughter was not eligible for SSI benefits, based solely on the testimony of the wife, who had apparently “done her own research on the issue.” In fact, the deeming rules stop when a person turns age 18 under CFR Sections 416.1165 and 416.1851, and their daughter could qualify for an SSI benefit of up to $674, plus any additional state supplement. With this testimony now on the record, the husband is able to argue, credibly, that his daughter is entitled to a monthly SSI benefit of $761 and, if she were to avail herself of this benefit, then this increased income should be taken into account by the court in evaluating husband’s request for a downward modification of the original child support payment.

Can a d4A Trust Hold the Daughter’s Income?

The second major issue in this case pertained to the daughter’s income surplus for Medicaid purposes. As a Medicaid recipient, daughter’s income (solely in the form of child support payments she received from her father) could have prevented her from receiving Medicaid benefits as an adult. The husband wanted the court to order the creation of a self-settled special needs trust under 42 USC Section 1396p(d)(4)(A) (often referred to as a “d4a trust”), and have the child support payments irrevocably assigned into the newly established trust, thereby eliminating any surplus income.

Unfortunately, the husband and wife could not agree on the establishment of a d4A trust. The wife questioned whether such a trust could legitimately receive child support payments. She also testified that she may move to a different state to be with family, and that such a move would require a payback to the first state, reducing available trust funds that would be needed to care for her daughter. What the wife didn’t realize was that under the Social Security Program Operations Manual System (POMS) Section SI 01120.200G(1)(d), an irrevocable assignment of child support payments (i.e., as a result of a court order), is not income for SSI purposes, and therefore would not count for purposes of determining daughter’s SSI or Medicaid eligibility, or the amount to be received under either program.

In addition, there is no such requirement for payback when a Medicaid recipient and d4a trust beneficiary moves from one state to another, a point that was made through expert testimony. The only time payback to any state would be required is when the disabled daughter dies.

The Lesson Learned

The issues in the case study above make it clear that when a child with a disability becomes part of a divorce proceeding, difficult issues arise that warrant the expertise of elder law and special needs planning attorneys. Matrimonial or family law attorneys will very likely not possess the expertise needed to address these issues.

Please contact us if you would like additional information on any of the topics addressed in this newsletter or if you would like to discuss a specific issue.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Immediate Cuts on the Horizon

According to the National Council on Aging (NCOA), the proposed spending cuts in HR 1 would harm senior citizens by severely cutting initiatives that help older Americans sustain their economic independence and health. HR 1 includes:

• Cuts of approximately $525 million in services specifically for low-income seniors (including a 64% cut to the Senior Community Service Employment Program);
• Cuts of approximately $1 billion in funding for Community Health Centers that serve seniors;
• Cuts of $390 million for home energy assistance;
• Cuts of $305 million for Community Services Block Grants that currently assist 2.3 million seniors;
• Cuts of $1 billion to programs that include senior volunteers; and
• Cuts of $625 million to the Social Security Administration (estimated to be over $1 billion by the Social Security Administration as noted below).

The NCOA is deeply concerned by the 64% cut to the Senior Community Service Employment Program (SCSE). According to NCOA, this is the only major job program that is targeted specifically to helping disadvantaged older adults who need to remain in or return to the workforce to avoid financial crisis. The cut proposed in HR 1 would result in the loss of over 83,000 part-time jobs. “For older adults aged 55-64, who cannot yet claim Social Security, the loss of this program could be particularly devastating,” said Jim Firman, president and CEO of the NCOA.

According to the NCOA, the $390 cut in the Low Income Home Energy Assistance Program will force older Americans to make life and death decisions between buying food and medicine or home energy.

AARP’s Response to the Proposed Cuts

The American Association of Retired Persons (AARP) is particularly concerned with the immediate cuts contained in HR 1. AARP President W. Lee Hammond testified March 9 in front of the Senate to urge Congress not to cut funding for the Social Security Administration (SSA). As part of his testimony, Lee pointed out that the SSA received nearly 3,225,000 disability claims in 2010, the highest in its 75-year history. But instead of additional funding to assist with the increased workload, the agency is instead faced with aggregate funding losses of over $1.093 billion.

Hammond noted that AARP is also greatly concerned about the other cuts contained in the proposal, testifying, “While SSA funding is of great importance, we have equal concern for many other vital health care services and economic security programs, including severe proposed cuts to home energy assistance, nutrition programs and Medicare premium assistance for low income seniors. The budget reflects the priorities of this nation, and any budgetary cuts will impact people, not just programs.”

The Threat to Senior Volunteer Programs

HR 1 eliminates funding for the Corporation for National and Community Service (CNCS) and the programs it administers, including the Retired and Senior Volunteer Program, the Foster Grandparent Program, and the Senior Companion Program (collectively the “Senior Corps”). CNCS’s budget of about $1.1 billion includes $111 million for the Foster Grandparent Program, $63 million for the Retired and Senior Volunteer Program and $47 million for the Senior Companion Program.

The Foster Grandparent Program connects older volunteers with opportunities to provide one-on-one mentoring, nurturing and support to children with special needs, exceptional needs or who are academically, socially or financially disadvantaged. The volunteers themselves derive significant emotional and health benefits as a result of providing these services. Foster Grandparents may serve between 15 and 40 hours per week, and low-income volunteers receive a small stipend to help defray the costs of volunteering.

In 2010, approximately 29,100 Grandparent volunteers delivered 24 million hours of service to more than 137,000 children.

The Retired and Senior Volunteer Program (RSVP) provides volunteers to work with nonprofit and public organizations, trains seniors to help them live independently, and provides volunteers to mentor more than 16,000 children. RSVP volunteers are non-stipend volunteers. The average federal cost per volunteer is approximately $140 per volunteer. RSVP also raises funds by applying for grants.

The Senior Companion Program provides volunteers who offer companionship and support to thousands of older and frail adults, helping them to remain independent and in their own homes at a cost much lower than institutional care. They transport clients to medical appointments, help shop for food and basic necessities, and provide companionship to offset isolation. Senior Companions, who receive a modest hourly stipend, also provide respite to family caregivers.

What’s in Store for 2011

A short term continuing resolution was passed in late February to avoid a government shutdown. That resolution will expire on March 18, when it is expected a second short term resolution will be put into place until the House and Senate can agree on permanent cuts to the fiscal 2011 spending bill. Then focus will turn to the 2012 budget, which many believe will target entitlement programs like Medicaid and Medicare.

The Target on Entitlement Programs in 2012

In a March 3 interview with The Wall Street Journal, House Speaker John Boehner said House Republicans’ upcoming budget proposal would curb entitlements, including Social Security and Medicare, acknowledging the political risk of taking on such popular programs. Boehner also stated Republicans would do their best to persuade voters that this is a necessary step.

Medicaid cuts could also be coming. There is support within the Republican party to turn Medicaid into a block grant program. This would mean states would be given a lump sum of money to distribute as they see fit. Once the money is used up, there would be no additional Medicaid enrollees until the next fiscal year.

Mississippi Governor Haley Barbour, widely thought to be a Presidential candidate in 2012, recently testified U.S. House Energy and Commerce Committee on the benefits of turning Medicaid into a block grant for the states. A portion of that testimony is below:

The states need the flexibility and authority to craft innovative programs to provide medical care to our neediest citizens. But to do so, we need Congress to cut the red tape states must wade through to implement new programs and save money on what we already do. Through greater flexibility in the management of Medicaid, states might be able to reduce substantially the hidden tax increases that forced expansion of the program will impose. Our citizens should not have to wait years for agencies in Washington to green light new healthcare solutions. We need relief now.

Conclusion

The coming years could bring great economic challenges for our senior population. Looming cuts to programs directly benefitting seniors are on the horizon, with more planned for the future. Now more than ever it is important for seniors and their loved ones to work with trusted legal counsel to come up with a comprehensive plan that will cover how they will access health care and how it will be paid for.

Please contact us if you would like additional information on any of the topics addressed in this newsletter or if you would like to discuss a specific issue.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Tax Code Changes

Interestingly, the year 2010 began with Congress failing to act, which resulted in no estate tax for decedents dying in 2010. The collateral effect of this failure to act was the return of carryover basis rather than stepped-up basis for assets owned by a decedent. (A prior issue of The ElderCounselor™ analyzed these changes in detail.)

While assets in a wholly owned grantor trust were eligible for the modified carry-over basis (up to $1.3 million for a single decedent and $3 million for a married spouse), life estate interests did not receive the same favorable treatment and would have been ineligible for a step-up in basis at the death of the life estate holder. In late 2010 Congress finally acted, passing new laws that provided in part for a $5 million estate tax exemption, a $5 million lifetime exemption for gifts, a 35% tax rate for both estate and gift taxes, and full basis adjustment to date of death value.

However, executors for those who died in 2010 have the option of electing no estate tax with a modified carryover basis (unlimited step-down for loss assets and a limited step-up of $1.3 million plus $3 million for assets passing to a spouse). Executors have an additional nine months after the enactment date to decide, file an estate tax return, pay taxes and make disclaimers.

Planning Note: The executor of an estate in 2010 with less than $5 million can elect to administer the estate under the new laws that provide full step-up in basis for all property, including property in which a life estate was reserved by the decedent or property held in a wholly owned irrevocable grantor trust.

Additional income tax provisions. Individual tax rates will remain at 2010 levels (10, 15, 28, 33 and 35%) for two more years. If no action had been taken, all of those tax rates would have increased.

Tax on long-term capital gains remains at 15% for two more years, and would have increased to 20% without the 2010 changes. In addition, taxpayers will not see their itemized deductions or personal exemptions limited due to income levels in 2011 or 2012.

The above changes expire in two years. On January 1, 2013, if Congress does not act again, the gift, estate and GST exemptions will be $1 million (adjusted for inflation) and the top tax rate will be 55%.

Health Care Reform

In March 2010, the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Affordability Reconciliation Act of 2010 (“The Act”) were signed into law making sweeping changes to health care as we currently know it, including the introduction of new programs aimed to assist older Americans with long term care.

A number of changes were made to the Medicare program. For example, older adults will no longer have to pay out of pocket for preventive care services such as cancer and diabetes screenings. Effective January 1, 2011, all deductibles and co-insurance for preventive benefits will be eliminated. Medicare recipients will also receive one free annual wellness visit.

Other notable Medicare changes include closing coverage gap in the Medicare Part D prescription drug benefit, often called the “doughnut hole,” by 2020. Beneficiaries who fell into the doughnut hole in 2010 were scheduled to receive a $250 rebate, followed by increasing discounts on certain prescription drugs in the years to follow.

The Act also included changes to Medicaid, including a plan to offer incentives to states that implement or increase home and community based services.

Finally, the Act included offering government-operated long term care insurance plans to working adults whose paychecks would be deducted unless they opted out.

The Act will most likely come under fire in 2011 with some leaders in Congress vowing to pursue repeal.

Planning Note: An attempt to repeal health care reform could take place in 2011.

New Requirements for Self-Settled Special Needs Trusts

Due to a change in the Program Operations Manual System (“POMS”), beginning October 1, 2010, the assets in a self-settled special needs trust drafted on or after January 1, 2000, will be considered available for SSI or Medicaid purposes if the trust contains early termination language (language that provides for termination during the life of the special needs beneficiary). However, the new rule also provides a safe haven for those trusts that do contain early termination language.

To fall within the safe haven, the trust must contain language providing for repayment to the state (with other allowable expenses either prior to or subsequent to reimbursement) upon termination of the trust. Normally, repayment to the state occurs at the death of the special needs beneficiary.

Pooled trusts that only allow payment into another pooled trust upon early termination are acceptable under the new POMS.

Trustees of any self-settled special needs trust must act quickly, as a trust that does not comply with the new POMS must be amended within 60 days of discovering the problem, otherwise the trust assets will be deemed available for Medicaid or SSI benefits and those benefits could be lost.

Planning Note: All self-settled special needs trusts drafted on or after January 1, 2000, should be reviewed to ensure compliance with the new POMS.

Conclusion

2010 held many changes in the elder law, estate planning and special needs planning areas. With new leadership in Congress it is probable that the next few years will also be filled with additional changes that could significantly impact both our senior population and anyone living with a disability. Great care must be taken when planning for individuals and married couples to take advantage of opportunities that have been presented and to avoid pitfalls created by the numerous law changes.

Please contact us if you would like additional information on any of the topics addressed in this newsletter or if you would like to discuss a specific issue.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Most Individuals Will Face At Least a Temporary Disability

Study after study confirms that nearly everyone will face at least a temporary disability sometime during their lifetime. More specifically, one in three Americans will face at least a 90-day disability before reaching age 65 and, as the following graph depicts, depending upon their ages, up to 44% of Americans will face a disability of up to 4.7 years. On the whole, Americans are up to 3.5 times more likely to become disabled than die in any given year.

Planning Note: Many people fear what will happen to them if they become disabled. Discussing options and planning early (while capacity is not an issue) will help bring peace of mind and alleviate some of the fear surrounding this issue.

Many Persons Will Face a Long Term Disability

Unfortunately, for many Americans the disability will not be short-lived. According to the 2000 National Home and Hospice Care Survey, conducted by the Centers for Disease Control’s National Center for Health Statistics, over 1.3 million Americans received long term home health care services during 2000 (the most recent year this information is available). Three-fourths of these patients received skilled care, the highest level of in-home care, and 51% needed help with at least one “activity of daily living” (such as eating, bathing, getting dressed, or the kind of care needed for a severe cognitive impairment like Alzheimer’s disease). The average length of service was 312 days, and 70% of in-home patients were 65 years of age or older. Patient age is particularly important as more Americans live past age 65. The U.S. Department of Health and Human Services Administration on Aging tells us that Americans over 65 are increasing at an impressive rate:

The Department of Health and Human Services also estimates that 9 million Americans over age 65 will need long term care this year. That number is expected to increase to 12 million by 2020. The Department also estimates that 70% of all persons age 65 or older will need some type of long term care services during their lifetime.

The Alzheimer’s Factor

Alzheimer’s is growing at an alarming rate. Alzheimer’s increased by 46.1% as a cause of death between 2000 and 2006, while causes of death from prostate cancer, breast cancer, heart disease and HIV all declined during that time period.

In 2010 The Alzheimer’s Association published a report titled, “Alzheimer’s Disease Facts and Figures” that explored different types of dementia, causes and risk factors, and the cost involved in providing health care, among other areas. In this report were some eye-opening statistics:

• An estimated 5.3 million Americans of all ages have Alzheimer’s disease. This figure includes 5.1 million people aged 65 and older and 200,000 individuals under age 65 who have younger-onset Alzheimer’s.
• One in eight people aged 65 and older (13%) have Alzheimer’s disease.
• Every 70 seconds, someone in America develops Alzheimer’s. By mid-century, someone will develop the disease every 33 seconds.
• The number of people aged 65 and older with Alzheimer’s disease is estimated to reach 7.7 million in 2030 – more than a 50% increase from the 5.1 million aged 65 and older currently affected.
• By 2050, the number of individuals aged 65 and older with Alzheimer’s is projected to number between 11 million and 16 million – unless medical breakthroughs identify ways to prevent or more effectively treat the disease.

Planning Note: There is no treatment available to stop or slow the progression of Alzheimer’s. There are five drugs currently approved by the U.S. Food and Drug Administration that temporarily slow the worsening of symptoms for approximately six to twelve months in about half of the patients who take the drugs.

Caregivers are at risk of developing health problems. There were approximately 10.9 million unpaid caregivers (family members and friends) providing care to persons with Alzheimer’s or dementia in 2009. According to the Alzheimer’s Association, those persons are at high risk of developing health problems, or worsening existing health issues. For example, family and other unpaid caregivers of people with Alzheimer’s or another dementia are more likely than non-caregivers to have high levels of stress hormones, reduced immune function, slow wound healing, new hypertension and new coronary heart disease.

Spouses who are caregivers for the other spouse with Alzheimer’s or other dementia are at greater risk for emergency room visits due to their health deteriorating as the result of providing care. A study mentioned in the 2010 Alzheimer’s Association report found that caregivers of spouses who were hospitalized for dementia were more likely than caregivers of spouses who were hospitalized for other diseases to die in the following year.

Receiving care. According to the National Nursing Home Survey 2004 Overview, the national average length of stay for nursing home residents is 835 days, with over 56% of nursing home residents staying at least one year. Significantly, only 19% are discharged in less than three months. Those residents who were married or living with a partner at the time of admission had a significantly shorter average stay than those who were widowed, divorced or never married. Likewise, those who lived with a family member prior to admission also had a shorter average stay than those who lived alone prior to admission.

While a relatively small number (1.56 million) and percentage (4.5%) of the 65+ population lived in nursing homes in 2000, the percentage increased dramatically with age, ranging from 1.1% for persons 65-74 years to 4.7% for persons 75-84 years and 18.2% for persons 85+. According to the U.S. Census Bureau, in 2009, 68% of nursing home residents were women, and only 16% of all residents were under the age of 65. The median age of residents was 83 years.

Planning Note: Many seniors or their loved ones will require significant in-home care lasting, on average, close to a year. For those requiring nursing home care, that care lasts, on average, nearly 2 1/2 years! Not surprising, the older the senior or loved one, the more likely he or she will need long term care – which is significant given that Americans are living longer.

According to the MetLife 2010 Mature Market Institute, current estimates indicate that nearly 1 million people live in approximately 39,500 assisted living residences in the U.S. The average age of an assisted living resident is 86.9 years old, and the median length of stay in assisted living is 29.3 months.

Long-Term Care Costs Can Be Staggering

Not only will many individuals and families face prolonged long term care, in-home care and nursing home costs continue to rise. According to the 2010 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs national averages for long term care costs are as follows:

• Monthly base rate (room and board, two meals per day, house keeping and personal care assistance) for assisted living care is $3,293 or $39,516 annually, a 5.2% increase from 2009.
• Daily rate for a private room in a nursing home is $229, or $83,585 annually, a 4.6% increase over the 2009 rate.
• Daily rate for a semi-private room in a nursing home is $205, or $74,825 annually, a 3.5% increase over the 2009 rate.
• Hourly rate for home health aides is $21, unchanged from 2009.

These costs vary significantly by region, and thus it is critical to know the costs where the individual will receive care. For example, the average cost for a private room in a nursing home is much higher in the Northeast ($381 per day, or $139,065 annually, in New York City) than in the Midwest (only $174 per day, or $63,510 annually, in Chicago) or the West ($238 per day, or $86,870 annually, in Los Angeles).

Planning Note: Nursing home costs will consume many Americans’ assets. A recent Harvard University study indicates that 69% of single people and 34% of married couples would exhaust their assets after 13 weeks (i.e., 91 days) in a nursing home!

Long-Term Care Insurance May Cover These Costs

Unfortunately, many older Americans will either be medically ineligible for long term care insurance or unable to afford the premiums. In that event, more aggressive planning should be considered as early as possible to make sure life savings are not depleted as a result of having to pay out-of-pocket for care. With the help of an elder law attorney, a plan can be created that will protect much of the assets of an individual or couple that would otherwise be at risk of being depleted.

Planning Note: Elder law attorneys can assist individuals in creating a plan that will prevent the loss of one’s life savings to private health care costs. Often these plans involve the use of trusts (both revocable and irrevocable), expansive powers of attorney for financial and health care decisions, and other important legal documents.

All Planning Should Thoroughly Address Disability

When a person becomes disabled, he or she is often unable to make personal and/or financial decisions. If the disabled person cannot make these decisions, someone must have the legal authority to do so. Otherwise, the family must apply to the court for appointment of a guardian over the person or property, or both. Those who are old enough to remember the public guardianship proceedings for Groucho Marx recognize the need to avoid a guardianship proceeding if at all possible.

At a minimum, seniors need broad powers of attorney that will allow agents to handle all of their property upon disability, as well as the appointment of a decision-maker for health care decisions (the name of the legal document varies by state, but all accomplish the same thing). Alternatively, a fully funded revocable trust can ensure that the senior’s person and property will be cared for as desired, pursuant to the highest duty under the law – that of a trustee.

Planning Note: Seniors and their loved ones need properly drafted and well thought-out planning documents that address both their property and their person in the event of disability.

Conclusion

The above discussion outlines the minimum planning clients should consider in preparation for a possible disability. It is imperative that clients work with a team of professional advisors (legal, medical and financial) to ensure that, in light of their unique goals and objectives, their planning addresses all aspects of a potential disability. Please contact us if you have any questions or would like to discuss any information in this newsletter further.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Tip #1: Avoid disinheriting the special needs beneficiary. Many disabled persons receive Supplemental Security Income (“SSI”), Medicaid or other government benefits to provide food, shelter and/or medical care. The loved ones of the special needs beneficiaries may have been advised to disinherit them – beneficiaries who need their help most – to protect those beneficiaries’ public benefits. But these benefits rarely provide more than basic needs. And this solution (which normally involves leaving the inheritance to another sibling) does not allow loved ones to help their special needs beneficiaries after they themselves become incapacitated or die. The best solution is for loved ones to create a special needs trust to hold the inheritance of a special needs beneficiary.

Planning Note: It is unnecessary and in fact poor planning to disinherit special needs beneficiaries. Loved ones with special needs beneficiaries should consider a special needs trust to protect public benefits and care for those beneficiaries during their own incapacity or after their death.

Tip #2: Procrastinating can be costly for a special needs beneficiary. None of us know when we may die or become incapacitated. It is important for loved ones with a special needs beneficiary to plan early, just as they should for other dependents such as minor children. However, unlike most other beneficiaries, special needs beneficiaries may never be able to compensate for a failure to plan. Minor beneficiaries without special needs can obtain more resources as they reach adulthood and can work to meet essential needs, but special needs beneficiaries may never have that ability.

Planning Note: Parents, grandparents, or any other loved ones of a special needs beneficiary face unique planning challenges when it comes to that child. This is one area where families simply cannot afford to wait to plan.

Tip #3: Don’t ignore the special needs of the beneficiary when planning. Planning that is not designed with the beneficiary’s special needs in mind will probably render the beneficiary ineligible for essential government benefits. A properly designed special needs trust promotes the comfort and happiness of the special needs beneficiary without sacrificing eligibility.

Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (for example, a specially equipped van), training and education, insurance, transportation and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment & appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses: the sorts of things families now provide to their child or other special needs beneficiary.

Planning Note: When planning for a beneficiary with special needs, it is critical that families utilize a properly drafted special needs trust as the vehicle to pass assets to that beneficiary. Otherwise, those assets may disqualify the beneficiary from public benefits and may be available to repay the state for the assistance provided.

Tip #4: A special needs trust does not have to be inflexible. Some special needs trusts are unnecessarily inflexible and generic. Although an attorney with some knowledge of the area can protect almost any trust from invalidating the beneficiary’s public benefits, many trusts are not customized to the particular beneficiary’s needs. Thus the beneficiary fails to receive the benefits that the parents or others provided when they were alive.

Another frequent mistake occurs when the special needs trust includes a pay-back provision rather than allowing the remainder of the trust to go to others upon the death of the special needs beneficiary. While these pay-back provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save family members and loved ones hundreds of thousand of dollars, or more.

Planning Note: A special needs trust should be customized to meet the unique circumstances of the special needs beneficiary and should be drafted by a lawyer familiar with this area of the law.

Tip #5: Use great caution in choosing a trustee. Loved ones or family members can manage the special needs trust while alive and well if they are willing to serve and have proper training and guidance. Once the family member or loved one is no longer able to serve as trustee, they can choose who will serve according to the instructions provided in the trust. Families or loved ones who create a special needs trust may choose a team of advisors and/or a professional trustee to serve. Whomever they choose, it is crucial that the trustee is financially savvy, well-organized and of course, ethical.

Planning Note: The trustee of a special needs trust should understand the trustmaker’s objectives and be qualified to invest the assets in a manner most likely to meet those objectives.

Tip #6: Invite others to contribute to the special needs trust. A key benefit of creating a special needs trust now is that the beneficiary’s extended family and friends can make gifts to the trust or remember the trust as they plan their own estates. For example, these family members and friends can name the special needs trust as the beneficiary of their own assets in their revocable trust or will, and they can also name the special needs trust as a beneficiary of life insurance or retirement benefits. Unfortunately, many extended family members may not be aware that a trust exists, or that they could contribute money to the special needs trust now or as an inheritance later.

Planning Note: Creating a special needs trust now allows others, such as grandparents and other family members, to name the trust as the beneficiary of their own estate planning.

Tip #7: Relying on siblings to use their money for the benefit of a special needs child can have serious adverse effects. Many family members rely on their other children to provide, from their own inheritances, for a child with special needs. This can be a temporary solution for a brief time, such as during a brief incapacity if their other children are financially secure and have money to spare. However, it is not a solution that will protect a child with special needs after the death of the parents or when siblings have their own expenses and financial priorities.

What if an inheriting sibling divorces or loses a lawsuit? His or her spouse (or a judgment creditor) may be entitled to half of it and will likely not care for the child with special needs. What if the sibling dies or becomes incapacitated while the child with special needs is still living? Will his or her heirs care for the child with special needs as thoughtfully and completely as the sibling did?

Siblings of a child with special needs often feel a great responsibility for that child and have felt so all of their lives. When parents provide clear instructions and a helpful structure, they lessen the burden on all their children and support a loving and involved relationship among them.

Planning Note: Relying on siblings to care for a special needs beneficiary is a short-term solution at best. A special needs trust ensures that the assets are available for the special needs beneficiary (and not the former spouse or judgment creditor of a sibling) in a manner intended by the parents.

Bonus Tip: Stay up to date on changes in the law. The rules applicable to special needs trusts are constantly changing. Most recently, the Social Security Administration changed the rules on special needs trusts that are created using assets of the special needs beneficiary (called a “self-settled special needs trust”). The new Social Security regulations require certain provisions to be present in any self-settled trust drafted after January 1, 2000 that allows for early termination of the trust (termination prior to the death of the special needs beneficiary).

If these required provisions are not in the trust, the special needs beneficiary could lose SSI or Medicaid eligibility. The new regulations go into effect October 1, 2010. Please contact us if you have questions about the new regulations or if you would like more information on the changes.

Planning Note: A recent change in the Social Security Administration regulations governing self-settled special needs trusts could render some existing trusts invalid for SSI or Medicaid purposes. It is imperative to stay up to date on changes in the rules that apply to special needs trusts to ensure the benefits received by a special needs beneficiary are not jeopardized as a result of changes in the law.

Conclusion. Planning for a special needs beneficiary requires particular care and knowledge on the part of the planning team. A properly drafted and funded special needs trust can ensure that special needs beneficiary has sufficient assets to care for him or her, in a manner intended by loved ones, throughout the beneficiary’s lifetime. Please contact us if you have any questions or would like to discuss any information in this newsletter further.