Estate Planning for Senior Health Care - Needed by Rich and Poor Equally
As we Americans live longer, we increase our chance for suffering dementia or other mental incapacities in our waning years. You will be shocked to know that 50% of people age 85 and over have Alzheimer's. Physical incapacities and chronic disease also increase with age. To ignore estate planning for senior health care is to ignore the inevitable and act foolishly.
Any failure in this regard will most likely burden your family. So your estate planning for senior health care is for them, not you.
You must decide beforehand to whom you will give the power to handle your affairs when incapacity happens - or even before as you become increasingly unsure of your own judgment or ability. Therefore, mental and physical incapacity is essential to address in your estate planning. For this and a number of other reasons, we hope you see that estate planning is not just for the rich.
Estate Planning Documents You Need
Years ago, you needed to hire an attorney to get these estate planning for senior health care documents prepared. However, in almost every state, these documents are now standardized and you can either download these free online for your state or buy them inexpensively in a stationary store.
Power of Attorney
The person you select as your "attorney in fact," the person that will act on your behalf, can be your adult child or anyone else; but you should trust him or her implicitly. You give this power by forming a "power of attorney" - through a document - whereby you select a person to act for you. But be sure you assign the type of power you want that person to have. Let's consider the different types of power.
A power of attorney may be a limited power of attorney, restricted to one specified act or type of act. Or it may be a general power of attorney entitling that person to make all your decisions.
If you grant the power of attorney to take effect before you are mentally or otherwise incapacitated, under the common law, it becomes ineffective when you become "incapacitated." If specify that the power should continue with the selected person, it is called a durable power of attorney.
In some states, a durable power of attorney can also be a "Health Care Power of Attorney" or "living will" that empowers the attorney-in-fact to make health care choices for you, up to and including terminating care that keeps a critically and terminally ill patient alive. New York State has enacted a Health Care Proxy law that requires a separate document be prepared to appoint one as your health care agent.
In some states, it is possible to grant a springing power of attorney. This power only takes effect after you become incapacitated. After that, it is identical to a durable power, but cannot be activated before incapacity -- it only "springs into actions" upon incapacity. Use it to allow a spouse or family member to manage your affairs in case illness or injury makes you unable to act. If a springing power is used, you should specify exactly the event that causes the power to spring into effect.
Unless you make the power of attorney irrevocable, you may revoke the power of attorney by telling the attorney-in-fact that it is now revoked. You should then notify others that the power was revoked, especially those who the attorney-in-fact may have contacted representing himself as your agent.
Some individuals who have acquired a power of attorney unscrupulously waste or steal the assets of vulnerable individuals such as the elderly. You have surely heard of this type of elder abuse. If you are unsure of how well someone will handle your affairs, you may want to grant him power of attorney only for a while to see how he or she does. If you have any doubts about an individual's integrity, make a different choice.
The term 'Medicaid Planning' often refers to transferring your assets to qualify for Medicaid coverage of your long-term care costs. Yearly nursing home costs - almost $90,000 nationwide can quickly deplete your savings and just paying long-term care insurance premiums can be costly too. Those with assets below $1 million often do Medicaid long-term care planning.
Medicaid has become the major source of financing for long-term care paying nearly half of all nursing-home bills after residents run out of money. Most states require nursing-home residents to spend virtually all of their assets - down to as little as $2,000 - before they may qualify. Couples have a higher allowance if one spouse is healthy enough to remain at home.
Medicaid was intended to provide health care for the poor. However, many people have consulted clever attorneys who can get long-term care covered by Medicaid even when the senior is not poor. This is called "Medicaid Planning" and it desires consideraiton when estate planning for senior health care. People who use this type of planning figure that they have paid their share of income taxes and if they get ill, why not let the government pay for their care.
One of the ways to qualify for Medicaid long-term care is to appear poor. For example, one could gift their assets to their children. Or, they could remove assets from their estate and place assets in an irrevocable trust beyond reach.
So, to frustrate Medicaid Planning by those who are not poor, the government now requires that all asset transfers be completed 5 years (the 'look-back' period) before applying for Medicaid. Previously it was 3 years for transferring an asset to others directly and is grandfathered for such transfers made before February 8, 2006.
If you transfer assets out of your estate and apply for Medicaid within 5 years thereafter, you face a penalty from immediately collecting Medicaid benefits. The penalty requires you to pay whatever Medicaid benefits you receive for a number of months equal to the value you transferred divided by the monthly Medicaid benefit in the state you receive them.
So if you give $60,000 to family members in a state paying $6,000 monthly Medicaid benefits, you - or your family - will have to pay for the first 10 months of long-term care expenses before Medicaid payments begin.
You may consider setting up an irrevocable trust to remove assets from your estate but earmark trust income - but not principal - for living expenses to live at home. You can also leave some unprotected assets for your use and for initial long-term care costs.
If you require long-term care before the 5-year look-back period passes, then the beneficiaries can take an advance on their trust inheritance or sell the house to raise cash for care costs. If you make it beyond the 5 year look-back period, the trust principal is protected and you can receive Medicaid benefits as soon as any unprotected assets are spent down for Medicaid costs.
Even if you need help within the 5 year period, you can draw up a caregiver agreement to pay a relative for caregiving services - as driving to medical appointments, helping with household chores and coordinating or providing care. These 'reasonable' payments help draw down your assets closer to the point of Medicaid eligibility while passing cash on to a family member.
Long-Term Care Planning - Other Options
There has been a lot said in our past posts regarding how long-term care insurance is an important part of estate planning for senior health care. After all, with long-term care expenses averaging almost $90,000 per year, most people need the protection. But have you ever thought about how long-term care insurance may perhaps help you protect the assets you hope to give to your loved ones?
Preserve the step-up in cost basis
Did you buy property years ago that has grown significantly in value? If you are forced to sell to pay long-term care expenses, you will face a capital gains tax. On the other hand, long-term care insurance might let you keep your property, pass it to your heirs, and avoid the tax.
Avoid taking a loss
What if you own investments that have suffered losses over the past few years? Perhaps you don't want to sell them because you believe they will recover and were just part of the market's downturn. Long-term care insurance can provide the liquidity you may need without forcing you to sell your assets and take a loss.
The above expenses of capital gains tax or selling at a loss are costs not often considered when people think about long-term care insurance. They look only at the expense of paying premiums for insurance but ignore these other, likely larger potential costs.
Tax-free transfer to heirs
Some long-term care insurance companies offer a "return of premium at death" option. If you never need long-term care, all of the premiums you paid will be returned to your heirs (this feature not available in all states).
Since return-of-premium is an insurance death benefit, it will be income tax-free for your beneficiaries. And if you are not the policy owner, it should not be included in your taxable estate.
Estate planning for senior health care may be the most important planning for your retirement years as the failure to plan can readily result in misery for yourself and family.