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Starting Over

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When he answered my call, A. Todd Black, of Dogwood Capital Management in Cumming, Georgia, was relieved that it wasn’t about one of his elderly clients, a woman in the final stages of Alzheimer’s disease and near death. The client and her husband are the parents of one of Black’s best friends, and he became their planner in an effort to make their money last. Thanks to his planning, the woman was already in assisted living by the time her health failed. Her husband now has a rebalanced portfolio that is no longer all in CDs, but in a mix of equities and other investments that will help to see him through the rest of his life.

This couple’s planning needs are a microcosm of the issues faced by advisors with older clients. Indeed, as Boomers turn gray, their financial, health, and lifestyle concerns are likely to occupy more of advisors’ days. But planning for the elderly is a whole new ball game. Do you know the rules?

An advisor with younger clients may not spend much time on income-producing assets or long-term care. But with elderly clients, advisors may spend increasing amounts of time finding replacement income for pension plans gone south or checking up on the types and cost of assisted living facilities because a client needs to move to one.

According to the federal Administration on Aging, 35 million Americans–one in eight–are over 65. Those nearing 65 face retirement with shrinking portfolios, pensions, and health benefits, requiring major lifestyle adjustments. By 2030, 70.3 million Americans, or 20% of the population (see Table 1 on page 48), will be over 65. Many will be widowed; even more will have living spouses (see Table 2 on page 48). Widows and widowers have estate planning and inheritance issues; aging couples often face family complications from extended families resulting from divorce or widowhood and remarriage. This requires adjustments to financial plans.

With age, everything can change, even whether clients should remain in familiar surroundings or move to a place with greater access to medical and other assistance. Much depends not only on their health, but on their finances and their determination to remain independent. Sometimes they make unwise choices; it may fall to you to be the voice of wisdom and suggest a better alternative. Let’s zero in on some key concerns advisors with aging clients must address:

Where to Live?

Should your clients stay in their own home, or move to an assisted living facility? If they remain independent, should it be in a smaller house or condo, where maintenance is taken care of, or among the friends and familiarity of the old neighborhood?

If they move, will they sell their home, turn it over to their children, or deed it to charity? If they stay put, will they need a reverse mortgage or other financial strategy to help them pay the bills? Do they have long-term care insurance in case they need assistance at home for health problems or infirmities? Will they need modifications to the house to be able to stay there? Things like wheelchair ramps and wider doorway openings may even be covered by their LTC insurance policy. Do you know if they are?

If they deed the house to their children, will it be outright, or within a trust that gives them the right to live there? If they are contemplating Medicaid, will that gift fall within the look-back period? If so, how will their expenses be covered?

If they choose assisted living, what sort of residence do they want? What level of care? Such facilities offer levels from light housekeeping to skilled nursing. Will both spouses need extra care, or is one substantially healthier? Will their assets cover the facility they want to live in? If not, do they have LTC insurance to cover their anticipated needs?

Insurance Needs

Are your clients’ assets structured to offer protection to a surviving spouse? LTC insurance can be set up so that if one spouse does not use the coverage, or does not use the individual limit, the coverage is available for the other spouse. Are your clients paying for life insurance they no longer need? Policies to cover estate taxes or other needs that do not end when clients die must have correct beneficiary designations. If your clients are very elderly, some of their beneficiaries may already have died. Will policies still channel benefits correctly if this has happened, or should updated beneficiaries be named?

Do your clients have handicapped children or other dependents for whom they provide? If so, are assets correctly placed in trusts, or have other provisions been made to ensure comfort and care for beneficiaries? Are insurance policies in place and structured to properly fund trusts or other care? If not, now is the time to get all legal paperwork in place. H. Clyde Farrell, an elderlaw attorney in Austin, Texas, points out that “children with a disability, particularly mental incapacity,” are especially important to consider “so that those needs can be taken into account, providing for dispositions in trust rather than outright.”

Life insurance is not your only concern with elderly clients. Jana Hazelbaker of Harper Associates Inc., in Naples, Florida, cautions advisors to pay attention to elderly clients’ health coverage. “Obviously most medical costs are incurred at the end of life, so health insurance is of the utmost importance,” stresses Hazelbaker. Medicare Parts A and B are necessary, but not enough, she says, since Medicare doesn’t pick up all costs. There are 10 types of Medicare supplemental insurance, and they are very different from one another. If your client does any foreign travel, be sure the supplement they select covers emergency care overseas.

Medicaid Planning

More people will need Medicaid assistance as the cost of extended care rises. One year of nursing home care, according to the government’s Office of Personnel Management’s Web site, can cost anywhere from $33,000 (Texas) to $98,000 (New York), with the national average at $52,000; that average is expected to rise by 2030 to over $190,000. Farrell says, “I see a lot of things with clients thinking they need to transfer all assets for Medicaid, and that’s not true.” He points out that the stay-at-home spouse is entitled to a certain amount of income and assets; if planning is handled properly, “they can keep quite a lot.” However, he says, he’s “seen some transfers that were unnecessary and put the client in jeopardy. One specific mistake I see made over and over,” Farrell points out, “is advisors who tell people that revocable trusts have some sort of Medicaid benefits, which they truly don’t.”

Another area rife with trouble to Farrell is annuities. Another common planning mistake he sees is tying up assets, particularly in annuities, in a way that is hard to undo. Starting a fixed annuity paying on an irrevocable basis, he says, “really ties down resources and makes it difficult. It limits planning options later on, particularly if it’s done without regard to long-term care under the Medicaid program.” Another problem Farrell sees with annuities is that if they are deferred, there is an early withdrawal penalty. “Then we find we will have to withdraw all or most to do Medicaid planning, and the client can be pretty unhappy about that.”

In addition, “I see annuities purchased by people for Medicaid purposes,” he says. There’s “one specific situation in Texas where an annuity works really well, but I don’t think I’ve seen one case where it was done right if [the advisor wasn't working with a Medicaid specialist].” He explains that people are sold deferred annuities on the premise that the annuity will protect income if they enter a nursing home. “In some states there may be some truth to that,” Farrell concedes, but “in Texas there isn’t.” If one spouse needs nursing home care, he points out, in Texas (amounts vary from state to state) the other spouse would benefit from an immediate irrevocable annuity if income was above $2,232 a month. But if it is less than that, says Farrell, much of it can be protected without an annuity.

“For unmarried people in Texas, an annuity does no good at all,” he continues. It makes a person ineligible for nursing home care, or it ends up getting paid to the nursing home. “There has to be a remainder for it to work,” he says. Regardless of what state it’s in, he adds, there’s no need to buy it in advance. “You can always buy it at the time you make your Medicaid application.” There’s inherent deception, he says, in selling deferred annuities on the basis that they will help with Medicaid planning.

Farrell adds that it is a “huge mistake” for an older person to buy a deferred annuity because “the person who purchases it either pays no taxes or very low taxes, and the annuity goes to the kids, having to be distributed in five years” at a higher tax rate. It’s more helpful, he says, to get the person out of the annuity over several years, particularly if they have nursing home care or medical expenses. “They can get taxable income now while they can offset it with medical expenses and a 15% tax bracket.”

A person in a nursing home with an irrevocable annuity can still get Medicaid benefits, Farrell notes, but the annuity will go straight to the facility. However, if an annuity, particularly a deferred one, has been purchased improperly, the planner “may be able to negotiate with the insurance company, particularly if it was clearly an improper placement of funds.”

Power of Attorney

Black points out that powers of attorney must be current and acceptable to financial institutions. The elderly couple he has been planning for had durable powers of attorney executed in their home state of Illinois. But Charles Schwab & Co., he says, wouldn’t accept the wife’s because it wasn’t current enough. Black had intended to open a joint account in the name of both clients; instead he had to open it in the names of the father and son because the mother had Alzheimer’s and was no longer capable of executing a new power of attorney. “Whatever kid is leading the charge,” he warns, “that’s whom you’ll end up working with.”

Black warns about special problems dealing with a client diagnosed with Alzheimer’s disease. The complications can be endless. Farrell observes that many planners’ biggest mistake of omission “is failing to get into place powers of attorney and other types of planning for incapacity. It’s heartbreaking when someone comes in and has to get a guardianship because he didn’t get a power of attorney. Or even if he did, he didn’t take into account Medicaid or planning needs and there is no gifting provision.” Farrell adds that even if everyone knows that an individual would have made certain gifts to his spouse if he had thought about it, if the proper legal structure is not in place, there is nothing that agents can do to rectify the situation. At the other extreme, he warns, are gifts that are made that ought not to be. “It’s a good thing the law provides in most states,” he says, “that agents don’t have the power to make gifts, because most people don’t want their agents to have that kind of power. But there are situations where it would be very valuable.”

Lifestyle Concerns

Is your client exhibiting deterioration in physical or mental health? A change in personal habits or appearance can be a giveaway, as can the failure of a normally astute client to follow a conversation. Hazelbaker, who prior to becoming a financial planner spent 20 years in the long-term care profession, says that older clients might have diminishing capacities in any number of areas. “They might be undersocialized; they might not be getting the proper medicine, because they don’t go to the doctor or don’t vocalize their health issues to the doctor.” They might also have issues because of multiple doctors or pharmacies, she says.

Independence is a huge issue for seniors, she says. They don’t want to give it up “even when they know that they ought to, or that their lives would be less stressful if they did.”

One of her clients, she says, suffers from macular degeneration. “She should not be living alone,” says Hazelbaker, “but she’s hell-bent on remaining independent.” This has led to problems. The client continued to drive, even with deteriorated eyesight. Hazelbaker says an advisor might have to talk to a client’s children and let them know they can’t let this behavior go on. “It’s a liability issue for others, not just for her.”

Hazelbaker’s client was also unable to handle her finances. “She was trying to pay her bills and maintain her checkbook, but couldn’t see well enough to do it and was missing deadlines,” she says. Hazelbaker only found out about it when the client ended up in the hospital. She helped the woman pay her bills, “and saw the state of her check register and bank statements.”

In the early stages of Alzheimer’s, says Hazelbaker, it’s not unusual to see a person go through “significant amounts of money, especially if she lives alone and doesn’t have close contacts with family members or others. It’s very easy for someone to get into deep dark trouble before it’s evident there’s a problem.” Reasoning capacity is diminished, she says, and the disease itself affects each victim differently, taking some within two years and letting others linger for 20.

A client who behaves oddly, is challenged by concepts that formerly presented no problem, or who comes to meetings dressed inappropriately, could be a victim of dementia–or physical ailments. “Elderly adults are very susceptible,” she says. “Infection can cause confusion. So can dehydration or malnutrition.” While maintaining a client’s privacy is important, she stresses, it is also within the realm of a concerned planner–particularly a life planner–to remind an elderly client to get a physical each year.

Estate Planning

Have your clients made wills or updated them recently? Are they–and you–clear on where they want their money to go?

Have they discussed possible bequests with their families? Is philanthropy important to their planning process? Many clients hesitate to address end-of-life issues, but for the aging, such matters are more urgent. If your client owns a family business, are succession plans or transfers of ownership worked out? If not, now is the time to discuss it. If money is left for children or grandchildren, be sure legal issues are resolved. Often a conference among advisors, such as the attorney handling wills and other legal documents, the CPA who may do tax planning, and the advisor, is necessary. Otherwise, money planned for a grandchild’s college education or to build a new wing at a hospital may end up going to pay estate taxes or to the wrong beneficiary.

When one spouse dies, what will become of the money he or she has come into? Is it properly protected from taxes? Have plans been properly structured to allow the surviving spouse to leave assets to her own beneficiaries? Another factor to consider is the emotional one. Widows and widowers do not always act rationally about inherited money. Is your client’s money safe from rash judgment? (See “Table for One,” July 2001.)

Hazelbaker says perhaps the greatest fear elderly people have is outliving their money. “As planners, we have been focused on building up this nest egg. But if someone has a nest egg she could never spend and if we’re encouraging that, I’m not sure that’s the best thing we could do for that individual. It’s about quality of life.” Often, she says, it’s better for the client to spend the money so she can “spend her days in a way that is personally meaningful.” Often people are so focused on leaving a legacy, it may never have occurred to them that they don’t have to. She says she has asked clients, “In my doing this plan for you, do you intend to pass on some chunk of money, to the extent of your ability, to your heirs? Or is it your intent to die broke? I’ve had people look at me and say, ‘You mean I can do that?’” Let them understand that they have a choice. They don’t have to put every penny away.

Family Matters

Clients with living family members may let you in for a roller coaster ride if they haven’t discussed their wishes with relatives. Alternatively, you may be dealing with family members who think they know what is best for their elderly relative, even if that relative is perfectly able to decide matters for himself. Says Hazelbaker: “Many elderly don’t want to share information with their kids.”

Authority issues resulting from old behavioral patterns in place for years can also complicate planning for elders. Says Hazelbaker, “It’s helpful to understand the family dynamic, although you don’t want to get into family counseling.” In fact, she has suggested that a family resolve its internal issues, so that the situation can be addressed in an appropriate manner and the elderly relative can have as good a quality of life as possible.

“Blended families” resulting from second and subsequent marriages also have complex dynamics. Attorney Farrell notes that this is a bigger problem for older clients; “the older the client, the older the children are likely to be.” Farrell says that one of the first things he does is to get a complete view of the family, particularly whether any children are deceased, and then identify grandchildren from those deceased children to take into account during planning.

Be aware that extended families can cause extended problems, such as when a child is heir to a portion of a parent’s company but is also involved in divorce proceedings. Depending on how the bequest is structured, the ex-spouse could walk away with partial ownership in the family business, while the divorced child is left out in the cold.

Planning for the elderly is complex. Each factor affects many others; the law of unintended consequences brings unforeseen outcomes. Even if you deal with variations of their planning needs daily for younger clients, the impact decisions can have on elderly clients can be far out of proportion to the impact those decisions have for younger ones. Be aware of the need to proceed carefully, and seek the best resources you can find. Your clients, and their families, will be grateful.