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LTC Vs. Estate Planning: The Gloves Are Off

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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.

Under the old calculation methods, these federally exempt annual gifts would also generally only take a few months to become exempt for the purposes of Medicaid (gifting calculations under the old rules allowed dollars to become exempt over a 2- to 4-month period each year). Under the new rules, all gifts are added up by each state and kept in a total “gifting pocket book” and, though federally exempt in regard to the unified credit, they are not necessarily exempt in the Medicaid look-back gifting rules.

In this case, $400,000 was determined to be over the amount allowed for Greg and Doris and their application for assistance was denied. Because the stock market had trended down, they were forced to sell their home at far below the market value for quick cash. The $100,000 per year they had given to their children had been used to purchase an insurance policy inside an irrevocable life insurance trust (ILIT) which did not allow access to cash values. The insurance also did not have adequate cash values, even if the trustees (the kids) did decide to take loans or surrenders.

This is a regularly used tool in unified credit gifting plans modeled by many professionals. The moral to this sad story is that gifting is now only federally exempt, but not necessarily state exempt in regard to Medicaid.

Every estate plan that includes gifting needs to be revisited. Even gifts to charitable remainder trusts or charities could force people to be disqualified if planners are not careful. Every advisor out there needs to be sharp if they are suggesting gifting as part of their planning techniques, and they need to revisit any of their old clients who they helped in the past.

In the estate plan set up for Greg and Doris, Medicaid was the LTC insurance component. Now, Medicaid is unattractive for such situations.

The advisor who is first to bring the LTC insurance problem to the attention of the client is going to have new sales opportunities with the client. Similarly, the “wiser advisor” who sends a short letter or article to local attorneys or CPAs about this topic may pick up multiple new clients all at one time–because the advisor has alerted the attorney or CPA who previously wasn’t paying attention. Almost any ILIT owner who previously was able to ignore the LTC part of the planning scenario can no longer disregard the subject.

For the advanced LTC specialist, there are endless opportunities to not only sell LTC insurance to solve an existing trust problem, or to include LTC insurance as part of a new plan now being put in place, but also to cross-sell over into some very large life cases.

Also, rather than sell LTC insurance as a personal policy in a properly worded or amended trust, the trustees could decide to pay for LTC insurance as a trust expense. They could also possibly replace an older policy purchased before the last life expectancy table change and replace it with a policy that has accelerated benefits built into the life policy, making a new sale with a bundled solution.

The old policy could be a 1035 exchange or possible life settlements sale by the trustees enabling them to use more cash to fund the new policy–however the math and circumstances dictate. It depends on the overall goals of the family, the size of the estate and whether or not the goals of the client are to shrink the estate rather than possibly risk the tax-free transfer of wealth being diminished by acceleration of benefits.

No matter whether the client wants to purchase a policy personally or in the trust, consider replacing the life policy with a new, better priced traditional policy or use the opportunity to add LTC insurance benefits to the life policy. But the advisor needs to bring the new problem to light.

So, talk to your clients, lawyers and CPAs. Ask if they have or are doing “Medicaid-friendly” plans. When they say “What do you mean?” you know you just opened the door.

This article originally appeared in the July issue of LTC e-Wire, an online publication of National Underwriter Life & Health. You can subscribe for free to this monthly e-newsletter by going to .

Paul A. Dyer, CRFA, LUTCF, is CEO of Master Mentors LLC, an agent mentoring firm in Bangor, Me. His e-mail address is .


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