Trusts can Protect you from Long-Term Care Costs

[The following article was written by Attorney Nick Lutz of Marshall, Parker and Weber]

Consumers who are nearing retirement age can be bombarded with information about how to protect their assets from loss to future care needs. Their insurance salesman says one thing. A neighbor warns about the cost of nursing home care and tells a horror story about a family member who lost everything. Friends at the beauty salon share what they’ve done to protect themselves and family in case they need nursing home care in the future.  With all of this information overload, it’s a wonder clients in this age range can think clearly about long-term care planning issues at all.

For individuals worried about long-term care costs destroying their financial legacy, meeting with an elder law attorney is time well spent. Elder law attorneys can provide important advice and clear up the misconceptions and half-truths that are often packaged in barber shop talk.

Although each case is different, one strategy elder law attorneys frequently propose involves trust planning to protect assets from nursing home costs. Below, I outline some common scenarios where trust planning may be appropriate.

You Want to Leave a Legacy

In most instances, the primary purpose of asset protection trust planning is to leave a legacy to children or other family members. The staggering cost of nursing home causes parents to worry that their assets will be depleted, leaving nothing left to pass on. Asset protection trust planning provides a solution for this by allowing parents to transfer assets out of their name using a safe arrangement.

Assets transferred to an appropriately drafted asset protection trust more than five years prior to filing a Medicaid application do not need to be disclosed. This makes it easier to qualify for Medicaid and shelters the assets transferred to the trust.  

Another reason asset protection trusts allow families to leave a legacy is that under current law real estate transferred to a specially structured trust should not be subject to the Medicaid Estate Recovery program. Because of this, asset protection trust planning is a good strategy for families whose home is their most valuable asset.

You Are Considering Giving Your Home to the Children

If you are considering transferring your home to your children, or “selling” your home to them for a dollar, you should consider trust planning instead.

Outright transfers of assets are risky. Often, clients engage in these types of transfers without knowing all of the potential risks and consequences. There is a five year look-back period on the transfers of assets for less than fair market value when an individual applies for Medicaid to help pay for long-term care expenses. Transferring the home to your children may also expose it to your children’s life circumstances – their divorce, personal injury claims, or drug, alcohol, and gambling addiction can all create situations where you are no longer secure in your home. Once you transfer property to another person outright, they own it and can do what they want with it.

Transferring your home to an asset protection trust is safer because it will not be subject to the life circumstances of your children and you can retain the right to live at the property for the rest of your life.

You Are Comfortable Relinquishing Some Control of Assets

Trusts are legal arrangements where a settlor (trust creator) transfers assets to a trustee to manage for the benefit of the trust’s beneficiaries.

Settlors of asset protection trusts generally retain certain powers, such as the power to change the distribution scheme to beneficiaries, remove the trustee(s), and to direct that the trustee(s) make gifts to the beneficiaries during the life of the settlors.

In order for the trust to protect assets, however, settlors must give up some power as well. The settlors will not have unfettered access to the trust assets and what is transferred in cannot be distributed directly back to them. The trust must be irrevocable so that the settlors cannot receive the assets directly by revoking or “undoing” the trust. Finally, settlors must entrust the day-to-day management of the trust assets to the trustee(s).

Prospective trust settlors must understand that in order to gain protection, they may need to give up some control. For clients who do not mind this arrangement, the power to shelter assets from the cost of long-term care is awesome.   

You Did Not Purchase Long-term Care Insurance

Nursing homes are usually paid one of three ways – privately from the resident’s savings, by long-term care insurance, or through government benefits.

Long-term care insurance and asset protection trust planning are both strategies for early planners. Like any insurance product, there is a screening process for long-term care insurance applicants. The poorer your health and older you are, the less likely you are going to be to get an affordable policy. This, coupled with the phenomena of increasing premiums has traditionally made long-term care insurance a difficult product for agents to sell.

While long-term care insurance makes sense in some circumstances, for many clients asset protection trust planning is a better alternative. Clients who, because of their health, could not qualify for an affordable insurance policy can engage in trust planning. It is also good for clients who did not, or do not wish to pursue long-term care insurance but do want to plan to leave a legacy.

Conclusion

If these common scenarios sound like things you have been considering, you should schedule an appointment with an elder law attorney to discuss your options. Trust planning is not the only tool that can be used to protect assets from the cost of long-term care; however, it can offer tremendous power and flexibility for many families.

If you reside in northeastern or central Pennsylvania, an attorney at Marshall, Parker & Weber would be happy to meet with you to discuss your options and help you determine if trust planning is appropriate for you.

Medicaid's Spousal Impoverishment Allowances for 2017

The cost of care in a nursing home can devastate the lifetime savings of a married couple. In recognition of this problem Congress passed a law in 1988 which was intended to limit the "spousal impoverishment" that can result when one spouse becomes a nursing home resident.  

Under this Medicaid law, minimum amounts of financial resources and income are protected for a spouse who is still living in the community. These protected amounts are adjusted each year to account for inflation. The adjustments are based on a Labor Department measure of inflation.   

In October of each year the Labor Department publishes the consumer price index for all urban consumers, all items, U.S. city average (the CPI-U) for the month of September. Using that figure it is possible to calculate the Medicaid 2017 Community Spouse minimum and maximum resource allowances and maximum income allowance.

What are Community Spouse Resource and Income Allowances?

In general, when your spouse is in a nursing home or needs assistance with home care under a Medicaid Waiver program (like Pennsylvania’s Aging Waiver program) he or she will not qualify for Medicaid benefits until your combined financial resources are reduced to a certain level. That permitted level of so-called “available resources” varies depending on your financial circumstances.

Where one spouse is in a nursing facility the general rule is that the community spouse can keep ½ of the amount of available resources that were owned by the couple on the date of admission to the nursing facility. However, this standard protected “Community Spouse Resource Allowance” is subject to a ceiling and a floor. My projection of the  ceiling and floor amounts for 2017 are set out below.

In addition to being allowed to keep the resource allowance, the community spouse is also entitled to have a certain level of income called the Monthly Maintenance Needs Allowance. This income allowance is also subject to a ceiling and a floor. If the community spouse does not have the required level of income, that spouse may be allowed to keep some of the institutional spouse’s income. If the income diverted from the institutionalized spouse is still insufficient, the community spouse may be able to keep additional resources.

What are the Resource and Income Allowances for 2017?

Although the 2017 figures have not yet been formally announced by the Centers for Medicare and Medicaid Services (CMS), by law they are based on the consumer price index for all urban consumers published by the Bureau of Labor Statistics (the CPI-U) for September of the prior year. The CPI-U for September of 2016 has now been released. This allows me to provide readers with my unofficial calculation of the community spouse resource and maximum income allowance for next year.

In 1988, the Medicaid law established the initial community spouse resource allowance at levels of $12,000 minimum and $60,000 maximum for 1989 based on the CPI-U for September 1988. The initial maximum income allowance was set at $1,500. The law provides that these levels be increased by the same percentage as the percentage increase in the CPI-U between September 1988 and the September before the calendar year involved.

The 2017 Allowances

The CPI-U for September 1988 was 119.8. The CPI-U for this September (September 2016) was 241.428 or higher by a factor of 2.015 [241.428/119.8= 2.015] This allows me to project that the spousal protection allowance figures for 2017 will be as follows:   
 

Minimum Community Spouse Resource Allowance for 2017 = $24,180.

Maximum Community Spouse Resource Allowance for 2017 = $120,900.*

Maximum Community Spouse Monthly Income Allowance for 2017 = $3,022.50. (Note: The Minimum Monthly Income Allowance remains at $2,002.50 – it will be adjusted on July 1, 2017. The income allowances are higher for residents of Hawaii and Alaska.)

Readers should understand that the Community Spouse Resource Allowance is a starting point for planning. A community spouse can typically protect resources far in excess of his or her resource allowance through Medicaid planning techniques such as the purchase of a Medicaid qualified annuity. (Be sure to consult an experienced elder law attorney before purchasing an annuity for purposes of qualification for Medicaid benefits.)

The allowances discussed in this post can be calculated from the September CPI-U. But they have not yet been formally announced by the Centers for Medicare and Medicaid Services (CMS). It is possible that CMS could ultimately announce figures that are slightly different than those above. But my projections have been correct in the past and I have a reasonable degree of confidence in them.

Further Information:

Spousal Impoverishment (from Medicaid.Gov website).

The law governing these protected amounts is found at 42 U.S.C. §1396–5.

Consumer Price Index Data from 1913 to 2016

* To illustrate, here is how I did the calculation for the Maximum CSRA for 2017:

241.428/119.8= 2.0152587

Round to 3 decimal places = 2.015

2.015 X $60,000 = $120,900 (the maximum CSRA for 2017) 

The Family Farm and Long Term Care

[The following article was written by Attorney Matthew Parker, of Marshall, Parker and Weber]

Many families have a farm that has been in the family for generations. Title to these farms is often transferred as an inheritance to one or more of the children in the next generation. 

In the past, the biggest threat to keeping the farm in the family was the inheritance tax.  Thankfully, the Federal Estate Tax system now has an exemption from tax of over $5.4 million and the Pennsylvania Inheritance Tax system has a family farm exemption from tax, provided certain conditions are met.   

Today, the biggest threat to family farms is the cost of long term care. In-home care as well as nursing home care can cost over $9000 per month. That cost can consume the savings of the average family very quickly. Many families turn to the Medicaid program to help pay for their loved one’s care. 

However, Medicaid has many complex financial qualification rules. In addition, the Medicaid Estate Recovery Program seeks to recover the amount of Medicaid paid to the person who received the benefit. The Medicaid Estate Recovery Program allows the government to place a lien on any real estate owned by the Medicaid recipient after death. Given the high cost of long term care, the lien could be over $100,000 and dramatically affect the ability of a family to pass on a family farm to the next generation.   In some cases, the farm may have to be sold to pay off the lien. 

To protect the farm, families need to change ownership of the farm from the current aging generation to the younger generation well before a long term care crisis occurs.  In the past, transferring the farm directly to children was the preferred plan.  Today, the risk of financial distress, divorce, death and dysfunction with children (and in-laws), has pushed parents to seek another option to an outright transfer of ownership. 

The irrevocable asset protection trust has become the preferred method of protecting the family farm. Title to the farm can be transferred to an irrevocable trust and sheltered from the Medicaid Estate Recovery Program. An irrevocable trust also provides protection from the risks associated with children’s lives, such as divorce. The children will take title to the farm only at the death of the parents. These trusts also permit the parents to live at the farm for the rest of their lives, allow for the sale of the property to a child or other person, and provide advantageous capital gains treatment of the farm.  

Of course, asset protection trusts should be created well before a long term care crisis.  There is a five (5) year look back for transfers of real estate under the Medicaid rules.  However, if the transfer to the trust is done five (5) years prior to applying for Medicaid, that transfer will not affect eligibility for Medicaid benefits. Skilled elder law attorneys can help you plan in advance with asset protection trusts and save the family farm for future generations.  

Pennsylvania Fine-Tunes Power of Attorney Law

Pennsylvania has revisited its law pertaining to the requirements for signing and notarization of powers of attorney.

HB 665 was signed by the Governor on October 4, 2016. It becomes Act 103 of 2016. The new law modifies Chapter 56 of Title 20 (the Decedent’s, Estate’s and Fiduciaries Code) and Title 57 (Notaries Public) of Pennsylvania Consolidated Statutes.  Here is a quick overview of the changes resulting from this new law.

Chapter 56 of Title 20 deals with powers of attorney other than advance health care directives.  (Chapter 56 was also modified earlier this year by Act 79 which was enacted in July).  

Chapter 56 Power of Attorney Execution Requirements

Section 5601 of Title 20 lays out formal rules that must be followed in signing powers of attorney in Pennsylvania. The new Act 103 specifies that:

• A person who is signing a power of attorney for someone else cannot sign by mark;
• A lawyer who takes the acknowledgement of the person signing the power of attorney cannot also be one of the required witnesses to the power of attorney. The notary law is clarified to do away with the implication that a lawyer who acknowledges a power of attorney must also be subscribing witnesses. [*Lawyers: see below for Jeff’s comment on this change].
• Powers of attorney used in commercial transactions are exempt from many of the requirements of Chapter 56.    

Exemption of Some Powers of Attorney from Chapter 56 Requirements

Section 5601(e.1) of Act 103 exempts certain commercial and business oriented power of attorneys from some of the formalities required by Section 5601; and from various duties that are placed on an agent. This means that the power of attorney requirements of Chapter 56 regarding execution, notice, and acknowledgment, and the provisions specifying an agent’s duties do not apply to those types of power of attorney.

Section 5601(e.2) of HB 665 restates the exemption of powers of attorney that exclusively provide for health care decision making and mental health care decision making from many of the requirements of Chapter 56 (i.e. sections (b)(3)(i), (c) and (d) and section 5601.3).

The new law takes effect immediately. The exemptions set out in Section 5601(e) apply retroactively to January 1, 2015.  

Related Information

PA Changes Law on Powers of Attorney and other Probate Code Matters

*Jeff’s comment.  The principal’s signature must be acknowledged before a notary public or other individual authorized by law to take acknowledgments. Section 5601(b)(3)(i). An acknowledgment may be taken by a lawyer who is a member of the bar of the Supreme Court of Pennsylvania if the document is thereafter certified to an officer authorized to administer oaths. (See 42 PA.C.S. § 327(a)). The statutory short form that is sufficient for this purpose is set out in 42 PA.C.S. § 316(2.1)) and is modified by Act 103.  

The principal’s signature must also be witnessed by two individuals. Section 5601(b)(3)(ii) provides that a witness shall not be the notary public or other person authorized by law to take acknowledgments before whom the power of attorney is acknowledged.

The lawyer may not serve in the dual role of taking the acknowledgment and serving as a required witness. If a notary is not available, the lawyer may take the acknowledgment (and then later certify), but may not also be one of the two required witnesses. Two other witnesses are required.

This prohibition may be inconvenient for lawyers. Prior to recent changes in the law, lawyers would sometimes both witness and acknowledge the principal’s signature (and have the document notarized at a later time). This was particularly helpful for lawyers in solo practice and where the power of attorney was signed as part of a home or nursing home visit. It reduced the number of people who needed to be involved. But the current Pennsylvania law opts for protection of the principal over convenience for the lawyer. If the notary is not present and the lawyer is taking the acknowledgment, there must be two other qualified witnesses.

To qualify a witness must be (1) 18 years of age or older, (2) not be the individual who signed the power of attorney on behalf of and at the direction of the principal, (3) not be the agent designated in the power of attorney; (4) not be the notary public or other person authorized by law to take acknowledgments before whom the power of attorney is acknowledged. Note that it appears that in many situations a spouse or child of the principal could be qualified to serve as a witness on the power of attorney so long as they meet the other requirements.