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October 07, 2007 at 04:00 PM
Estate planning financial advisors must consider long term care insurance as part of their solution or they risk their clients’ financial well being.
Why? The answer has to do with the new rules created by the most sweeping changes in Medicaid in a long time. This legislation is the Deficit Reduction Act of 2005, which was signed into law in early 2006.
If you don’t want to be embarrassed, replaced, or even worse, sued, as a result of these changes, then make sure you are the first person who calls, e-mails, or otherwise contacts your clients to suggest a meeting between you, them, and the attorney who helped draft their estate planning documents. The estate plan needs to be LTC-friendly in light of current law. If it’s not, the client could end up just trading death tax avoidance for LTC insurance expenses.
Starting at the federal level of Medicaid, the new rules pass down the framework of how each state will qualify people for assistance. The changes were sweeping, and most agents keyed in on the changes that affected them directly.
For instance, annuities are no longer exempt assets. Generally, lump sum refunds, long-term annuitization with children as beneficiaries and other planning techniques were interfered with.
No doubt, some designs still hold value; and some states will likely be friendlier than others concerning how they interpret the federal rules. But generally, annuities took a hit.
Furthermore, look-back periods, used in assessing qualification for Medicaid, changed; and the home–which previously was exempt–became exempt up to a limit in value.
The potentially biggest change of all appears to be mostly overlooked: The gifting “look back clock.” Under the old rules, most states had a monthly divisor that was the amount of value that the client could transfer to a child each month that would become instantly exempt. Furthermore, in a lot of states, one could round down, thus allowing even larger monthly amounts to slip under the rules limit on a monthly basis. This allowed passing a great deal of wealth over a short period of time without interfering with a successful Medicaid application.
All of that has now changed. Here’s an example of the problem under the new rules:
A couple, Greg and Doris, are in their advanced years, ages 80 and 83. They are quite settled in life and have 5 children, all married. They have a fairly large estate, $1.8 million and the advisor and attorney drafted a trust (under the old rules) doubling their $1 million exemption to $2 million in a common A/B trust. Their estate mostly consists of their home’s value and some stock.
To keep the estate from growing, the initial advice was to gift $10,000 per child (now $12,000) and also use gift splitting. This would allow them to give $20,000 to each child totaling over $100,000 a year exempt from using Federal Estate Tax Unified Credit.
Over the next 4-year period, following that advice, the couple gave away the annual amounts. During that time, their health began to fail. Greg was the first to need health care and Doris could not attempt home care, so they privately paid for LTC. With their fixed expenses rising and care costing over $70,000 per year, their estate rapidly shrunk. When Doris also became ill and needed care, their LTC expenses doubled to over $150,000 per year. Due to these events, plus medical inflation, their “well ran dry.” They had paid a lot of money for their health care and had legitimately spent down, so the family applied for Medicaid–only to be denied.
The reason is that under the new rules, the Medicaid clock hadn’t started ticking when the annual gifting took place each year. Instead, the clock started when the application was made and after Doris had been placed into a nursing facility.
Specifically, the $10,000 per child, split, or $100,000 per year over the last 4 years, was federally exempt in regard to the unified credit but not for Medicaid purposes.
