You’ve worked hard all your life, been retired for quite a while, but now the old bod’ is wearing out and you need help. Your fixed income isn’t enough to pay for in-home assistance so you scour the area for facilities and settle on a facility in Oregon City. However, you and your wife’s $4000/mo. income- which seemed handsome before –is no match for the $6000 monthly fee. Your liquid assets are quickly kaput. You go on Medicaid. Five years later you die. Your wife remains healthy until her death a year later. The kids inherit your $500,000 “farm”, right? Nope.
Ever hear of the ominously named Omnibus Budget Reconciliation Act and, specifically, the 1993 Estate Recovery Mandate for:
- Nursing home or long term care
- Home and community based services
- Hospitalization and prescriptions (at state’s option)?
This provision requires States to go after Medicaid beneficiaries’ assets to recover the State's costs of proving your care.
Ironically, the act was modeled after Oregon, which has had estate recovery provisions since the 1940’s. But here’s why you find this so interesting: In the above example, assuming Medicaid pays 100% of your nursing home costs for the 5 years, that’s $360,000 ($6000 x 12 months x 5 years). Plus, you had to be hospitalized twice for those heart attacks, at $25,000 each (they were having a special) for a total of $410,000. Before any of your estate passes to anybody, Oregon is there with its pre-death TEFRA recovery lien to collect its $410,000. The three kids get $30,000 each; $30,000 each from your lifetime of labor and frugality.
Naturally it’s not that simple. You can retain some property and income, called “exempt assets” as shown below. Until your spouse dies you can keep:
- Up to $1911/mo. gross income
- $104,400 in “Community Spouse Resource Allowance” (“community” means the spouse is not institutionalized)
- a home
- a car
- household goods
- business property & business real estate
- prepaid burial provisions up to $1500
The State can take the following nonexempt assets:
- Cash over $2000
- Stocks, bonds, IRA’s, Keogh’s. CD’s, T-bills, T-notes, Savings bonds (you get the picture)
- Whole life insurance
- Vacation homes
- Second vehicles (kiss the Harley goodbye, Grandma).
“Well”, you might say, “I’ll just give all my stuff to my kids before the State comes knocking on my door.” Trouble is, with a few exceptions, if you do that within 60 months of your application to Medicaid then you will be subject to penalties. Say for example you give your $200,000 in CDs to the kids just before you go on Medicaid. Based on a $5360/mo. formula, Medicaid would then deny benefits for 200,000/5360 = 37.31 months, requiring you to spend $200,000 of your own money anyway, assuming you even have it. If you do not, they will recover it from your spouse’s estate.
What can you do about this? Here are some advanced planning ideas, the first of which just received an additional boost for Oregonians this year, and I’ll discuss that one first because it’s the easiest no-brainer solution.
#1: BUY LONG TERM CARE INSURANCE !
Let me confess. This is an area of significant frustration for me, not just from the behavior of other people but my own as well. If you know in advance that there is a 100% chance a specific event will take place in the future then of course you would prepare for that event now, right? Rarely. For example, I’m never ready to do my taxes until mid-April the following year. Never. And we all know about the following certainties. Someday,
- We will stop working
- We will be unable to care for ourselves
- We will die
Sure, for some unlucky folks (or lucky, depending on your point of view) all three may happen simultaneously. But for most of us these stages will happen in this order: we will stop working, we will need assistance, we will die. And for the really unlucky (and their unlucky families), the middle period will be the longest.
The odds of a male needing long term care in his lifetime are one in three. For the women, the odds are one in two. Yet why is it that only about 8% of eligible Americans take responsibility and do something about this? And why do even fewer take other advanced steps to deal with it? It’s not fun to think about these things while watching American Idol (Actually, I much prefer thinking about disability and death versus watching American Idol.)
Here is why you should buy long term care insurance as soon as possible:
- I really need the business. No, even though that’s true, you should never buy a financial product to meet the needs of the salesperson no matter how much he begs. Seriously, here are the real reasons:
- The Government will not take care of you. The Government is sending ever stronger signals that you’d better be self-sufficient, signals in the form of tax deductions, credits, estate protection, etc. It’s not going to get any better in the near future. You buy long term care insurance with your health in addition to your premiums. Once you need it, it’s too late to buy it. You are reaching out with the long arm of foresight to keep a door open for yourself in the future, the door to choice and security.
- You can’t ever save enough. If, instead of buying insurance, you and your spouse just invested your premiums, and, could earn a consistent 6% rate over the next 20 years then you would have enough money to pay for about one year of care. For one of you. The average length of care is 3-5 years. Even the wealthy buy Long Term Care insurance because they understand the concept of risk transference, i.e. having an insurance company assume most of the risk of loss of their home, their cars, their assets & income. Just because you could afford to rebuild your burned up home doesn’t mean you should. The same is true for long term care.
- There is no advantage, at all, to waiting. No matter when you eventually buy Long Term Care Insurance, you will spend more in total premiums than if you buy it now. That’s because every eight years that you procrastinate, the premiums double. Lock them in now (caveat: not all policies have premium guarantees).
- The tax man will help you pay for it. Federal deductions and Oregon tax credits can reduce your total net premium cost by 50% or more. If offered as an employee or executive benefit, premiums are fully deductible to your corporation and benefits and premiums remain tax-free to the employee/executive.
- Long term care is already costing your company big bucks, $2772 per care giving employee per year.
- The State of Oregon, on January 1st, became a Long-Term Care Partnership state. Remember those State Medicaid liens? To the extent you collect benefits from your own Long Term Care insurance policy, those liens are eliminated, your assets shielded. For example, if your policy paid you $300,000 while you were in a nursing home, Medicaid would exempt that amount from its estate recovery.
#2: Have an attorney draft an Income Cap Trust for you. See http://www.dhs.state.or.us/spd/tools/program/osip/incap.pdf for a sample. This is an irrevocable living trust agreement that can help you qualify for Medicaid by diverting income into a trust, subject to certain limitations.
#3: Begin the legal transfer of assets to your heirs as soon as possible to take advantage of your $12,000 ($24,000 four couples this year) annual gift tax exemption. The limitation is not per donor, it is per donee. In other words, one person can give $12,000 to as many people as she likes. Such asset transfers are easy to screw up so don’t even try without consulting with an elder law and/or estate attorney.
#5: Consider charitable annuities and trusts, especially for highly appreciated assets such as real estate and stocks which you’ve owned for a long time. These arrangements can provide surprising benefits including guaranteed lifetime income, generous current and ongoing tax deductions, as well as the ability to do well while you’re doing good. In many cases you can be much better off by gifting rather than through an outright sale of an asset. A knowledgeable adviser can help you sort through the many options available here locally.
So, going back to our original example, wouldn’t you prefer that your three kids get $167,000 each- instead of a paltry $30,000 -out of your $500,000 estate? Then get smart, get help, and get going!
[DISCLAIMER: this is an unofficial opinion piece based on the author’s best knowledge of the subject. It is not intended to be legal interpretation of State or Federal law or tax regulatioins, nor is it intended or implied to be legal or tax advice. Consult with your elder law attorney and CPA to see how your specific circumstances might be affected]