Later life living definitely has its advantages. In the United States, elderly Americans enjoy an extended life span, better health, retirement and a higher standard of living than any generation before them. Many older Americans will live well into their 70s and 80s without any significant health problems. Living so long is not without its downside, though.
The problem is commonly referred to as the “optional estate tax of the middle class,” also known as nursing home expenses and Medicaid confiscations. As people age, their physical and mental health inevitably decline. For some, the process will end relatively inexpensively. For others, a slow decline will translate into a very expensive later life period, including a residency in an assisted care facility of some sort.
The average estate will not survive an average nursing home residency. To pay for the costs of the nursing home residence, the estate will be exhausted to zero and Medicaid will kick in at that point to pay the difference. An entire lifetime of hard work and thrift will be surrendered to the state for the resident’s last few years of life. The generation below them will not see any transfer of wealth and for some that will have very detrimental effects on their lives.
Compare this situation to that of a person who has never worked hard or been thrifty. They have never had any money or wealth, because they never worked for it. When they go into the nursing home, they have absolutely nothing to worry about, because they don’t have anything to lose. When they die, they have nothing and their heirs get nothing from them. What is the difference between a person who has worked all their life and a non-working spendthrift if the one who has worked fails to plan? The difference is absolutely nothing! A lifetime of hard work will net the same result as the person who never worked and never saved. It is inherently not fair. That is why late life planning concerning assisted living is so important.
Nursing Home Expense
Nursing home or assisted living does not come cheap. A recent survey found that the average nursing home residency costs the resident $3,500 per month. The average stay in a nursing home is two and a half years, making the nursing costs approximately $105,000. Combine this with the cost of medical bills, spending money and special care, and the time spent in a nursing home costs nearly $250,000.
Medical insurance does not cover this expense. People requiring care are generally required to pay for their stay in a nursing home with their own money. A due payment of $3,500 per month is a challenge for nearly every family. Families try different avenues to pay the expense. With planning, the assets of the estate can be saved.
The Typical Situation
As mentioned before, the typical estate will not survive a nursing home stay. This is because a nursing home stay usually does not involve planning at all. This is because people do not like to deal with difficult issues and tend to ignore them. Eventually, their health fails and they must go to a nursing home.
Then, the payments begin. Cash is paid first. After cash is exhausted, liquid assets are sold. These assets include retirement accounts and stocks. Next, hard assets are sold. These include business interests and, finally, the home as a last resort to pay the expenses. After the assets are completely sold off, Medicaid takes over the payments if the stay is that long.
What Planning Can Do
With planning, estates can survive and be passed to the next generation. Planning can involve long-term insurance, gifting and exemptions. People facing a nursing home stay can choose one of several tools and strategies. The degrees of planning range from simple to aggressive. Simple plans can rely on exemptions and a small amount of insurance, while the more aggressive plans rely on gifting and large amounts of insurance. The more wealth one has accumulated, the more aggressive a position that individual will want to take regarding planning for the late years of his or her life.
Gifting, Insurance and Exemptions
Three tools are available for a long-term strategy. The first is gifting. In an aggressive strategy, gifting is used to rapidly reduce the amount of wealth in an estate and not allow the governing agency to attach to the gifts. This is done by giving the gifts at least three years prior to entering a nursing home so the look back period will not apply.
Fortunately, there are no formal requirements to giving a gift other than making sure the gift is actually delivered. Claiming a gift has been given from a bank account while the money is still in the account of origin simply will not pass as a gift because it has not been delivered. Giving a gift can be as easy as handing a friend or relative cash in an envelope. However, transferring a residence effectively while guaranteeing the rights of the elderly requires more sophisticated measures. Typically a life estate with a remainder deed is executed to protect the elder’s interest and the heir’s interest.
Another consideration when giving a gift for late life care planning is that the federal gift tax exemption amounts do not apply. Gifts of $12,000 per year are allowed for estate and gift tax planning purposes. However, this exemption does not apply for Medicaid purposes. Anything given away is subject to look back provisions and can be used to find an ineligibility period. The key to giving gifts is to have the gifting done early enough so as to not interfere with the look back period.
The second tool is insurance. Long-term care insurance can be purchased generally at any time in life. However, the older an individual is, the more costly the coverage will be. The purpose of long-term care insurance is to cover costs resulting from a stay in a nursing home and to protect the elder’s estate from confiscation.
The way long-term care insurance works is this: whatever amount is applied to the total nursing home expenses from long-term care insurance is also an additional exemption to the estate. For example, if an estate is worth $1 million and a purchase for $1 million in long-term care insurance is made, the entire estate escapes confiscation. The policy underlying this is to encourage people to buy insurance to protect their estate and to alleviate the state from having to pay for the expenses associated with long-term care which are particularly expensive even for a governing body to cover. Many insurance companies carry long-term care insurance.
The last tool available involves exemptions. Typically, what is exempt from the government involves a small amount of money, to some degree the person’s home, a small amount of income, and various odds and ends. Exemptions are extremely useful in that they need not be planned for three years in advance, or a lifetime in advance. They can be used in every phase of planning strategy including up until the day of taking up nursing home residence and beyond. Even if the elderly person did not know of the exemptions, they can be used. This is why exemptions are extremely important in estate planning.
Using the Tools to Solve the Problem
When planning an estate, all of the planning tools should be used to achieve the best result. Unfortunately, the longer an individual waits to start planning, the less that can be done to save the estate. Therefore, the best way to plan for late life care is to start early.
If the planner is generally in good health, it is best to take a longer approach. Utilize all of the tools. Give gifts aggressively, but stick with any other estate plans that may be in existence. Purchase long-term care insurance. Given a long time before nursing home stay, the rates will be more reasonable than if the affected person is older and nearer to approaching the care period. The long and short of it is that it is best to start planning early for a potential nursing home stay.
Those with a short time before care may have to abandon the strategy of gifting. If gifts are made too close, usually with three years of the stay or admittance, the governing body will divide the amount of the total gifts by the average costs and determine an ineligibility period. Insurance options may also have to be abandoned in later life. Long-term care insurance only gets more expensive with time. This leaves only the exemptions to rely on in the lattermost hour of planning. When planning with a shorter time frame, many options disappear, but planning can still be effective, even in the last hour.
While a longer period of health is certainly fortunate, late life estate planning can be complicated. Don’t be a victim of a poorly planned estate. Your spouse, children and others are counting on your actions.
|Meet the Author
Dr. Bart A. Basi is president of the Center for Financial, Legal & Tax Planning, located in Marion, Illinois, and on the Web at www.taxplanning.com. Marcus S. Renwick is director of research and publications with the firm.