From Medicaid qualification to powers of attorney, retirees face a variety of health care concerns that require assistance from both financial advisors and lawyers. Advisors help clients accumulate and spend assets, but to protect those assets against rising health care costs, they must often consult attorneys.
For better or worse, late-life health care crises also spur many clients to get their legal affairs in order. How will my assets be spent if I’m cognitively impaired? What will remain of my nest egg if I use Medicaid for nursing care? What will happen to my estate when I’m gone? These are all questions clients may ask as their health deteriorates, and you can add value by providing answers – or least pointing them to people who can.
While you’ll often refer out to attorneys, a basic understanding of clients’ legal concerns is in order. With a cursory knowledge of wills, trusts, powers of attorney and Medicaid, you can help clients and their families plan intelligently during some of the most trying times of their lives. Just as importantly, you’ll be able to help younger retirees plan ahead, making sure they have their legal ducks in a row well before crisis strikes.
Wills, trusts and estates
A will is, in short, a state-governed legal document that outlines who will receive a deceased person’s probate estate – the assets that are only in their name when they die. A court oversees the validation and administration of the will, and the document becomes a part of public record.
On the other hand, trusts go into effect immediately upon creation, and they can remain private. A trust contains only assets that were transferred into it, and those assets are held by a trustee until they’re transferred to a beneficiary at a specified time. That time may be before or after the owner’s death, and there may be multiple sets of beneficiaries.
Wills can be amended any time during a client’s life, but trusts get a little more tricky.
“The question isn’t whether or not you should make a trust, but what type of trust you should have,” says Michael Guerrero, senior benefits advisor with Elder Care Resource Planning.
Trusts can be revocable or irrevocable. The former keeps assets in the grantor’s estate, while the latter permanently removes them.
Irrevocable trusts might make budgeting tougher in the short term, but they offer greater asset and tax protection. Most notably, transferred assets are protected from Medicaid recovery and subject only to the five-year look-back rule. Ultimately, clients who time their transfers and Medicaid applications just right can minimize or eliminate their nursing care costs.
Perfect timing is hard, of course, and it’s tough for clients to predict when they’ll need to relinquish their assets in favor of Medicaid-covered care.
Still, “There are mechanisms that allow for gradual release of assets upon incompetence,” says Guerrero. “It’s a conversation that should happen as early as possible with an attorney or long term care benefits planner.”
Another important consideration is the interplay between wills, trusts and the assets to which they refer. For instance, will directives are usually inferior to other beneficiary designations.
“If I’m the beneficiary of someone’s life insurance policy, even if their will says it goes to their three kids, I’m the one who gets it,” says Laura French of the French Law Group. “The way a client has structured their assets needs to work hand in hand with their will and trusts.”
Powers of attorney
Even the most thorough wills, trusts and asset plans won’t cover everything, and clients need third parties who can speak on their behalves. For most, the durable powers of attorney will be necessary – one for health care and one for finances.
“With end-of-life issues, I think powers of attorney can be even more important than wills and trusts,” says French. “If you don’t designate someone to carry out your wishes, the ensuing arguments and contests in probate court can actually be more disruptive to a family than the death itself.”
These powers aren’t to be confused with living wills and DNRs, which are used to spell out clients’ wishes about life-prolonging care. The health care durable power of attorney names an agent who can make a broader set of medical decisions, though they must follow the client’s preferences to the extent they are aware of them. Likewise, the durable power of attorney for finances names an agent to manage a person’s financial affairs if they’re incapacitated. Allowable tasks range from sorting mail and depositing checks to filing taxes and managing retirement accounts.
While advisors won’t be composing powers of attorney, they should ask their clients if they’ve recently updated theirs.
“Custodians of accounts won’t honor powers of attorney forever, especially if they get too old or vague,” says Richard Petellier of the Help to Retire Group. “I’ve seen a three-paragraph POA that had nothing to say about retirement accounts, yet that couple’s assets were almost all in their 401(k). If the wife wants to take $50,000 out of her incapacitated husband’s account, the custodian is going to think twice.”
Bottom line: Designated beneficiaries will get their money when an accountholder passes away, but without a well-written POA, they may not be able to use those funds for health care costs in the meantime.
Medicaid: eligibility and recovery
Medicaid can be a viable way to pay for nursing care, but it comes with a host of legal complexities that can be tough for advisors to navigate alone.
“There’s an important distinction between Medicaid qualification and Medicaid recovery,” says French. “Assets may not be countable for eligibility purposes, but when a wife and husband both die, those assets may be subject to recovery.”
Now mandated at the federal level, recovery is the process whereby the states recoup Medicaid-covered costs from deceased people’s estates. Some states only look at probate estates for recovery, while others include assets to which the deceased had any legal title – including jointly held assets. “You might have three different $100,000 accounts, all treated differently,” says Petellier.
Regarding eligibility, a common misconception is that clients can’t qualify for five years after they’ve transferred their assets.
“The penalty isn’t five years; the look-back window is,” says French.
The penalty period is determined by dividing the value of assets transferred within the last 60 months by the average monthly cost of care in that state. Depending upon timing, then, the penalty could be longer than five years, or it could be nothing – even for a client of considerable means.
Ultimately, it’s critical that clients retitle their assets appropriately for both qualification and recovery purposes. Moving assets into an irrevocable trust is a popular option, but if any of those funds stand a chance of making it back to the client or spouse, Medicaid may be able to take a cut after their death.
“Many elders mistake transferring assets to a trust as a cure-all, but it’s not,” says Petellier.
Moreover, “The Medicaid compliant annuity is a tool you probably won’t need, but that all advisors should be aware of for couples in urgent need of long-term care,” says Guerrero.
Designed to convert a spend-down into an income stream, this product is an immediate, irrevocable annuity that doesn’t count against an individual’s Medicaid eligibility.
A “short-term planning tool that complements trusts and advance directives,” according to Gurrero, it allows the healthy spouse to convert otherwise countable assets into non-countable monthly payouts. When it’s too late to purchase long term care insurance – and too late to transfer assets without a significant Medicaid penalty – this annuity may be a client’s best hope.
Roles, responsibilities and partnerships
With so many legal complexities to consider, how can advisors help during late-life health care crises?
“The advisor can provide two roles complementary to the attorney,” says Petellier. “Run calculations to see what the client can afford, and monitor what’s being done with the client’s money.” Elder financial abuse is all too common, but advisors are well-positioned to safeguard clients’ accounts.
“I would also encourage advisors to make sure their clients do in-house powers of attorney,” adds French. “Most major financial institutions have internal POA forms for financial decision-making, and the FA should go through those with their clients.”
Finally, both elder law attorneys and financial advisors can better serve clients by acknowledging their complementary skillsets.
“We find it’s a really good partnership and requires a little bit of professional modesty,” says Guerrero. “Let down the barriers and recognize that each can do a portion of the client’s work better.”