Use a Trust to Avoid Probate

Common trusts to avoid probate are called "living" or "inter vivos" trusts.  A trust never dies, thus it is not subject to probate.  Most arrangements make the trust the owner of the property with the original owners as a trustees and beneficiaries.  Thus the property reverts to the estate at death.  Most people initiates these trusts to avoid probate.  Assets in these trusts, other than a primary residence, are transparent to Medicaid.  These trust assets are subject to Medicaid spend down rules.

The trust can be used in states where Medicaid recovery only uses primary residences passing through probate as being subject to recovery  However, a growing number of states do not recognize these arrangements to avoid probate estate recovery and go after primary residences in revocable trusts regardless  of ownership.

To do it right for these states requires an irrevocable trust with no life interest, set up five years or more before a Medicaid claim Very few people are willing to do these kinds of trusts.  Some people also include a so called "life interest' in property in arrangements where property is gifted or in irrevocable trusts.  The life interest gives them use of the property until their death even though they don't own it.  Medicaid in many states does not recognize life interest and the property is considered to be in the ownership of the person who gifted it and subject to look back rules and recovery.

We have already discussed the moral implicagtions of using Medicaid planning strategies for unfairly qualifying for Medicaid and shifting the burden of cost to the taxpayers.  New look back rules under the Deficit Reduction Act have effectively done away with gifting strategies used in the past to accelerate eligibility for Medicaid.  This does not mean that gifts cannot be used, but planning must be done many years in advance.  Under these new circumstances the whole concept of gifting in order to qualify for Medicaid probably makes little sense.

Medicaid Planning

A person facing the prospect of long term care with moderate income and assets may eventually have to rely on Medicaid to pay part or all of the cost of care.  Medicaid planning, using a qualified elder law attorney, allows you to correct inequities in the system.  Medicaid planning has gotten a bad name because some individuals, who would normally have too many assets to ever qualify for Medicaid, deliberately use it, many years in advance, to give away everything to their family so as to qualify for care, this strategy is just plain dumb.

Income Annuity in the Name of the Community Spouse

This technique relies on two Medicaid rules.  The first rule is that income between couples is attributed to the spouse who owns the income.  Unlike assets which have to be shared for Medicaid eligibility, income does not have to be shared.  For example if the total income of 4,000 a month the community spouse is not required to contribute any income towards the care of his or her spouse.  Medicaid will cover the bill less the $500 a month, which, less a monthly allowance, must be spent towards the cost of care.  The second rule allows a spouse to transfer any amount of assets to another spouse without penalty of losing Medicaid eligibility.

Using these two rules, here is how a Medicaid annuity strategy works.

The person needing long term care, the institutional spouse, applies to Medicaid in order to receive Medicaid services.  In this case suppose the couple has $100,000 of cash equivalent assets and owns a home and a car.  As long as the healthy spouse, the community spouse, lives in the home she can keep the home and the car and those assets do not prevent the institutional spouse from receiving Medicaid help.  In this example, the institutional spouse must spend $50,000 of the couple's assets down to less than $2,000 and have an income insufficient to cover the cost of care and then Medicaid will take over.

Once the Medicaid application has been submitted, instead of starting the spend down to $2,000 and then receiving approval and having Medicaid pick up the balance of the cost, the institutional spouse transfers his $50,000 to his wife.  This is allowable and will not disqualify the Medicaid approval process but it does not yet take away the responsibility to spend down the cash.  The community spouse then uses the money to purchase an immediate income annuity for a period equal to or less than the allowable life expectancy in the HCFA transmittal 64 table.  Assets have now been converted to about $800 a month in income.  The income belongs to the community spouse and does not have to be shared with the institutional spouse.  Therefore the spend down has been avoided.  Evidence of this transaction is presented to Medicaid and because the institutional spouse no longer has any attributable assets, Medicaid starts paying its share of the bill.

This strategy serves two purposes.  First, it may give the community spouse a larger income that she otherwise would have had under Medicaid rules.  Second, even though it represents income, the community spouse has managed to keep $50,000 that would normally have to be spent.

In the past, some planners have set up annuities that provide a remainder payout should the community spouse die too soon.  This is usually paid to the children and in the past was used as a way to transfer assets to the children without penalty.  Under the Deficit Reduction Act of 2006, the state must be named as beneficiary for any remainder payout.  This new rule discourages the use of these annuities to transfer assets to the next generation.

It is important for the planner to follow Medicaid guidelines in order to avoid a penalty.  If the payout period of the annuity exceeds the life expectancy in Medicaid tables, then the excess amount of total income payment over the life expectancy becomes a transfer for less than value and represents a penalty.  This in turn results in a penalty period equal to the amount of excess divided by the monthly Medicaid rate in that state.  Medicaid will not start paying for care until this penalty period has been met with someone else paying for that care.  It's important to use a qualified adviser to make sure you do all of this properly.

Home Health Agency Care

In the year 2000, about 12,800 home health agencies served approximately 8,600,000 clients across the United States.  In that year Medicare paid an estimated 85% to 90% of the total cost of home health agency services amounting to $8,7000,000,000.  Although current figures are not yet available, the number of home health agencies has been going up year after year as well as the number of clients being served.

Although home health agencies are privately owned, Medicare is the principle payer for their services.  Home health services through Medicare are available under parts A and B.  In order to qualify for Medicare home care a person must have a skilled need, must be homebound and there must be a plan of care ordered by a Physician.

Prior to 1997 Medicare typically paid for home care for as long as it was needed.  Prior to 1997 annual Medicare costs were almost double the amount cited above.  In order to save money Medicare has since gone to a prospective payment system where according to the plan of care, a certain amount of money is allocated to resolve the skilled need for the patient.

Monies are typically provided for a period of up to 60 days.  If the patient recovers sooner then money may have to be reshuffled to other patients who are not responding as well.  At the point where the patient does not respond or improve, no more Medicare money is forthcoming.  After Medicare cuts off, a person continuing to need long term care services must find sources other than Medicare.

In my next post I will explain what services a home health agency can provide.

Hey, Tom, What Else Should I Know?

No payments are due on a reverse mortgage while it is outstanding. The loan becomes due and payable when the borrower ceases to occupy their home as their principal residence.  This can occur if the senior, the last remaining spouse in cases of couples, passes away, sells the home, or permanently moves out of the home.  The home does not have to be sold to pay off the loan.  The borrower, or their heirs, can instead pay off the reverse mortgage and keep the home.  In any event the amount owed on the reverse mortgage cannot exceed the value of the home at the time that the loan must be repaid. Moreover, if the home is sold and the sale proceeds exceed the amount owed on the reverse mortgage, the excess proceeds go to the borrower or the borrower's estate.

As with any other mortgage, you hold the title and the bank holds a lien against the property.  There are no income or credit requirements for reverse mortgages.  Virtually anyone over age 62, with a home that qualifies can get the loan.  And there are no risks with the popular HECM loan.  It's fully insured by FHA.  The bank can't demand any more money from you or your family if it turns out there isn't enough equity to repay the loan.

Reverse mortgages generally don't produce enough money to pay for extended long term care.  A small loan, however, can produce enough in premium payments to leverage a large long term care insurance benefit.

What Costs Are Involved With A Reverse Mortgage?

The costs associated with getting a reverse mortgage include the origination fee, which can usually be financed as part of the mortgage, an appraisal fee and other charges similar to those for regular mortgages.  The money provided to you from a reverse mortgage is tax free; it is not income that you must pay taxes on.  However, the funds received from a reverse mortgage may affect your eligibility for certain kinds of government assistance, so you should check into this before getting a reverse mortgage.

Before applying for a reverse mortgage, you must first meet with a reverse mortgage counselor.  You may, however, first approach a reverse mortgage lender, who can provide you with the names of approved counseling agencies in your area.  A list of approved counseling agencies nationwide is posted on the Web by the U.S. Department of Housing and Urban Development.  The counselor 's job is to educate you about reverse mortgages, to inform you about other alternative options  available to you given your situation, and to assist you in determining which particular reverse mortgage product would best fit your needs if you elect to get a reverse mortgage.  In general, counseling sessions much be done face-to-face.  However, if you are seeking a Fannie Mae reverse mortgage you can do it by telephone.  In some areas, telephone counseling may be available for consumers seeking an FHA reverse mortgage.

Are Reverse Mortgage's For You?

A reverse mortgage is a special type of loan used by older Americans to convert the equity in their homes into cash.  The money obtained through a reverse mortgage can provide seniors with the financial security they need to fully enjoy their retirement years.

The reverse mortgage is aptly named because the payment stream is reversed.  Instead of the borrower making monthly payments to a lender, as with a regular first mortgage or home equity loan, a lender makes payments to the borrower.  While a reverse mortgage loan is outstanding, the borrower owns the home and holds title to it and does not make any monthly mortgage payments.

The money from a reverse mortgage can be used for anything: daily living expenses; home repairs and home improvements; medical bills and prescription drugs; payoff of existing debts; education; travel; long term health care; prevention of foreclosure; and other needs. If your home needs physical repairs in order to qualify for a reverse mortgage, a portion of the proceeds will be set aside for this purpose.

You can choose how to receive the money from a reverse mortgage.  The options are: all at once (lump sum); fixed monthly payments ; a line of credit; or a combination of a line of credit and monthly payments.  The most popular option B chosen by more that 60 percent of borrowers B is the line of credit, which allows you to draw the loan proceeds at anytime.

The size of the reverse mortgage that you can get will depend on your age at the time you apply for the loan, the type of reverse mortgage you choose, the value of your home, current interest rates and sometimes where you live.  In general, the older you are and the more valuable your home and the less you owe on your home, the larger the reverse mortgage can be.

In my next post I will discuss the costs involved with a reverse mortgage and the process in obtaining one.

Assisted Living as an Alternative

The term "assisted living" is a marketing tool that refers to a large number of different community living arrangements that also offer care.  There is no uniform regulation of these services from state to state.  Some states regulate on the basis of number of residents while other states regulate on the basis of services offered.  Not all states use the term assisted living for these living arrangements.  In the states that control services, some of those states allow very little in the type of services offered and residents in those states must go to a nursing home to receive more extended services.  On the other hand, some states allow assisted living to offer nursing home skilled services under certain conditions.  Obviously the services offered will affect the cost of care and the cost of an assisted living arrangement.  Also in some states assisted living costs includes the cost of long term care services and in other states the cost is charged in addition to room and board.

A large number of operation offering community living with care are invisible to the public.  They are small operations that don't advertise and probably fail to register with their state health department.  Their residents come to them via referrals from others.  For purposes of classification we will call these "board and care" facilities.

These are operations using a residential home and housing residents in bedrooms in the home, sometimes shared with another person.  Dining facilities, living room and bathrooms are shared.  Some of these operations are employer and employee companies but the vast majority are run by the people who own the home and have taken in aged boarders to supplement their income.  Long term care services are usually limited to what the owner operators can handle themselves.  To augment services, a number of these operations will bring in home health agencies to help with medical conditions.

Board and care operations naturally have  lower cost of operation and will charge their resident typically much less than the apartment-based assisted living facilities included in national surveys.  The surveys will not include these providers because they don't advertise, they don't list in the phone book and many have failed to license with their health department.

Full Time Care

Full time care can often be offered by informal care givers living with the patient. But this arrangement is not always in the interest of the care giver. Because of the demand on a care giver's time and attention, this arrangement will often result in the care giver suffering from depression, social isolation and the development of medical ailments. Again, the decision is often dictated by the lack of funds to pay for professional care. But when the need for care has progressed to fa full time basis, advisors or family should be looking to implement formal care delivery either in the home or in a facility. As with other care options mentioned in earlier posts a care manager could prove invaluable in selecting the setting and the care providers.

Depending on what causes the need for long term care a patient could start out at any point on the curve. For instance a stroke, injury or sudden illness may result in the immediate need for part time or full time care. On the other hand the slowly progressing infirmity of old age, the slow onset of dementia or a progressively deteriorating medical condition may only require occasional help; beginning with intermittent care from an informal care giver but gradually progressing to the need for full time formal care.

The care progression curve also illustrates and important principle with long term care. It takes time for the need for formal care to manifest itself. Short duration, long term care situation scan often be handled by health insurance or Medicare service providers. In addition, families may have the resources and the stamina to get through short periods of care without paying for help. As the days turn into months, the patient typically worsens and requires more attention and the ability of informal care givers weakens. Long duration care situations almost always result in the need for bringing in paid, formal care givers of for placement in a facility.

Although the need for long term care will happen to about one out of twso of us, that need may not be longer than a few weeks or for a few months. But none of us know whether our need for care will be of long duration or short duration and it is important when for for long term care to plan for the worst case scenario.