NEEDING AND PAYING FOR LONG-TERM CARE

Transcription

1 NEEDING AND PAYING FOR LONG-TERM CARE Jason A. Frank Frank, Frank & Scherr, LLC Elder Law, Estate and Special Needs Planning 1400 Front Avenue, Suite 200 Lutherville, MD DEFINING INCAPACITY There is no statutory definition of capacity Several instances in Maryland where incapacity is defined Minors (persons under age 18) are deemed incompetent under the law Adults are presumed by law to be competent 1

2 DEFINING INCAPACITY: HEALTH CARE DECISION ACT A competent individual means a person who is: At least 18 years of age or who has the same capacity as an adult to consent to medical treatment Who has not been determined to be incapable of making an informed decision An adult patient incapable of making an informed decision means the inability of an adult patient to make an informed decision about the provision, withholding, or withdrawal of a specific medical treatment because the patient is unable to: Understand the nature, extent, or probable consequences of the proposed treatment or course of treatment Make a rational evaluation of the burdens, risks, and benefits of the treatment or course of treatment Communicate a decision Md. Code Ann., Health-Gen STANDARD FOR APPOINTMENT OF GUARDIAN OF PROPERTY & PERSON GUARDIAN OF PROPERTY A guardian of property shall be appointed if the court determines that: The person is unable to manage his property and affairs effectively because of physical or mental disability; and The person has or may be entitled to property or benefits which require proper management Md. Code Ann., Est. & Trusts GUARDIAN OF PERSON A guardian of person shall be appointed if the court determines from clear and convincing evidence that a person lacks sufficient understanding or capacity to make or communicate responsible decisions concerning his person because of any mental or physical disability; and no less restrictive form of intervention is available which is consistent with person's welfare and safety Md. Code Ann., Est. & Trusts

3 DEFINING INCAPACITY: TESTAMENTARY CAPACITY STANDARD The testator must have sufficient strength and clearness of mind and memory to know, in general, without prompting: Nature and extent of the property of which he is about to dispose Nature of the act which he is about to perform Names and identity of the persons who are to be the objects of his bounty and relation towards them Slicer v. Griffith, 27 Md. App. 502 (1975) BURDEN OF PROVING: LACKED MENTAL CAPACITY Evidence produced to show lack of testamentary capacity must relate to mental condition of the testator at the time the will was executed If the testator had a lucid interval during the time the will was executed, this may be sufficient evidence of testamentary capacity Tyson v. Tyson, 37 Md. 567 (1873) PAYING FOR LONG-TERM CARE (LTC) LTC = Range of services and supports to meet personal care needs of people with a chronic illness or disability Most LTC is not medical care, but rather assistance with basic personal tasks of everyday life, A.K.A. activities of daily living (ADLs) and instrumental activities of daily living (IADLs) ADLs = Bathing; Dressing; Using the toilet; Transferring Caring for incontinence; Eating IADLs = Housework; Managing money; Taking medication; Preparing and cleaning up meals; Shopping for groceries or clothes Most health insurance plans do not pay for LTC Medicare only provides LTC for the first 100 days after a qualifying hospital stay 3

4 CHRONICALLY ILL INDIVIDUAL IRS defines a chronically ill individual to mean any individual who has been certified by a licensed health care practitioner as Being unable to perform (without substantial assistance from another individual) at least 2 ADLS for a period of at least 90 days due to a loss of functional capacity Requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment Benefit trigger for tax qualified long-term care insurance (LTCI) policies Trigger for tax deductibility of LTC services 26 U.S.C.A. 7702B TAX DEDUCTIBILITY OF MEDICAL EXPENSES Federal Taxes: taxpayers can deduct only the amount of their medical and dental expenses that is more than 10% of their adjusted gross income There is a temporary exemption from Jan. 1, 2013 to Dec. 31, 2016: for individuals age 65 and older and their spouses are allowed to deduct unreimbursed medical care expenses that exceed 7.5% of adjusted gross income. Medical expenses of a spouse and/or dependents may be included when figuring tax deductibility of care costs A person generally qualifies as one s dependent for purposes of the medical expense deduction if: That person is related to the taxpayer or lived with the taxpayer for the entire year as a member of the household That person was a U.S. citizen or resident, or a resident of Canada or Mexico for some part of the calendar year in which the tax year began The taxpayer provided over half of that person s total support for the calendar year The taxpayer can include the medical expenses of any person who is a dependent even if the taxpayer cannot claim an exemption for the dependent on his or her return 4

5 TAX DEDUCTIBILITY: WHAT ARE MEDICAL EXPENSES? Medical care expenses include amounts paid for the: Diagnosis, cure, mitigation, treatment, or prevention of disease Treatments affecting any part or function of the body Must be primarily to alleviate or prevent a physical or mental defect or illness Long-term care expenses are deemed medical expenses when a licensed medical professional certifies that a patient: Needs assistance with ADLs for a period of more than 90 days; or Has severe cognitive impairment for more than 90 days Pharmaceuticals are included as medical expenses if prescription drugs Includes premiums for insurance that covers expenses of medical care and amounts for transportation to get medical care TAX DEDUCTIBILITY: WHAT ARE MEDICAL EXPENSES? Taxpayers can include wages and other amounts paid for nursing services Services need not be performed by a nurse so long as the services are of a kind generally performed by a nurse Includes services connected with caring for the patient s condition, such as giving medication or changing dressings, as well as bathing and grooming the patient Services can be provided in one s home or another care facility, such as a continuing care or assisted living facility 5

6 PAYING FOR LTC: LTC PLANNING Due to extreme cost of LTC, few individuals can afford to pay out-of-pocket for these services 2015 Average annual rate for nursing home care in Maryland is $110,230 for private room and $101,379 for a semiprivate room At a 3% interest rate per year, each person should have $3 million saved to personally pay for LTC out of income alone LTC INSURANCE (LTCI) INDUSTRY LTC services are the single greatest uncovered catastrophic financial risk faced by today s elderly Unlike acute medical care, LTC is not adequately insured in the private market Dramatic changes in both population demographics and in advancing medical care are affecting LTC insurance (LTCI) market Less than 8% of Americans had LTC insurance policies in 2014 LTCI policies sold in 2014 down 24% from 2013 LTCI policies are getting pricier, harder to find and increasingly difficult to justify as a worthwhile purchase Cost of private LTC insurance policy is based on type and amount of services covered and how and when the policy is bought 6

7 INHIBITED GROWTH OF LTCI MARKET SUPPLY BARRIERS Lack of Distribution Inability to Manage Risks Rising Health Care Costs DEMAND BARRIERS Unawareness Consumer Myopia Affordability Benefit Limitation Medicaid Safety-Net Coverage INHIBITED GROWTH OF LTCI MARKET: SUPPLY BARRIERS Lack of Distribution Big losses on improperly priced policies have prompted insurers to exit LTCI business entirely 12 companies remain in the market, compared with 100 just over a decade ago Inability to Manage Risks LTCI underwriting is very different than traditional health products Continuing shortage of individuals trained to underwrite this risk Rising Health Care Costs Rising healthcare costs have elevated private LTC insurers payout ratios and low interest rates have made it tough to make a profit Over the Past 5 Years: Nursing home care rose 4% per year. Assisted living costs increased 4% annually Wages of home health aides rose 1.4% annually 7

8 INHIBITED GROWTH OF LTCI MARKET: DEMAND BARRIERS Consumer Myopia Many people mistakenly believe that either Medicare or general health insurance will provide adequate protection against LTC costs Many individuals do not believe that they will require LTC and resist paying for care that may or may not be needed for several more decades People resist buying LTCI because it provides no benefit if they do not need services ( use it or lose it policy) Affordability Product cost and certain policy features make LTCI not worthwhile for the majority of Americans In 2014, less than 8% of Americans had LTCI policies due to the combination of Many people either can t afford LTCI premiums or worry that benefit limitations might make it not worthwhile Benefit Limitation Daily benefit limits (average $150 daily benefit) Maximum benefit periods (average 3 year benefit period) Benefit Triggers Certified as Chronically Ill 90 Day Elimination Period EFFORT TO PROMOTE LTCI PURCHASE: LONG-TERM CARE PARTNERSHIP PROGRAMS Deficit Reduction Act of 2005 (DRA) created the Qualified State Long Term Care Partnership Program Authorized state governments to modify Medicaid eligibility rules to offer special Medicaid asset disregards for people who purchased a qualified LTCI Partnership policy from a private company Partnership" refers to the collaboration between the public sector (state government) and the private sector (insurance companies) in funding long-term care needs Purpose of the partnership programs are to reduce Medicaid cost by increasing the number of people covered by private LTCI Designed to reduce Medicaid expenditures by delaying/eliminating need for people to rely on Medicaid for LTC services 8

9 EFFORTS TO PROMOTE LTCI PURCHASE: HYBRID PRODUCTS Many life insurers now are selling hybrid products, making LTC benefits available with life insurance and retirement-income annuities Hybrid policy: typically packages LTC coverage with a universal life-insurance policy or a fixed annuity If LTCI benefits are not used, can still benefit from life insurance or annuity. If LTCI benefits are used, annuity or death benefits will be reduced HYBRID PRODUCTS: LONG-TERM CARE ANNUITY MOST HYBRID DEFERRED ANNUITIES OPERATE THIS WAY: Purchasers put money ($50,000 is about the minimum) into an annuity Purchasers choose the amount of LTC coverage they want (usually % of the face value of the annuity) and how long they want the coverage to last (usually 2-6 years) Purchasers also must choose if they want inflation coverage which will affect the maximum duration of the plan EXAMPLE 60-year-old purchases a $50,000 LTC annuity with 5% inflation protection compounded annually with a 200% coverage maximum and a 6 year benefit period His initial long-term-care coverage maximum is $100,000, double the premium he paid. Under the 5% inflation-protected scenario, if no withdrawals are made over 20 years at a 3.5% compound interest rate, minus administrative fees, he would have $265,330 available in LTC insurance or a monthly maximum of $3,685 If this person never needs LTC, then the annuity can be redeemed for its accumulated value when it matures at 20 years or it can be left to accumulate further interest and the LTC policy will remain enforce When this person dies, his heirs will inherit the greater of the accumulated annuity value, if there have been no withdrawals, or the single premium he paid initially less the amount of LTC paid 9

10 HYBRID PRODUCTS: LIFE LTC INSURANCE Typically sold as a universal life contract that requires a single premium and that funds an accelerated death benefit rider to pay out long-term care benefits if needed One-time lump sum deposit amount rather than the traditional monthly or systematic premium payments According to the American Association of Long-Term Care Insurance the average cost of a single-premium combination policy is $75,000, Once the premium is inside the universal life insurance policy, the account value earns an interest rate (typically at least 4%) on a tax-deferred basis, building up a cash reserve that can be used tax free to cover nursing or homecare costs The policy provides a pot of money for LTC that s equal to several times the premium payment The policy s death benefit will be reduced (which means less money for your beneficiary ) according to how much of the LTC benefit is used. Any money not spent on nursing care benefits will be distributed to beneficiaries on an income tax-free death benefit under Internal Revenue Code Section 101(a)(1) PAYING FOR LTC: REVERSE MORTGAGES Reverse mortgages enable homeowners to use equity accumulated in their homes to produce additional income or create an available pool of funds to draw on Provides a way to increase monthly income and/or available resources Loan debt is secured by the equity the homeowner has built up in the home and is payable with interest at the end of loan term. It is called a reverse mortgage because the balance due on the loan increases during the life of the loan Interest rates can be either fixed or adjustable Some products combine reverse mortgages with annuities, giving a continuing source of income, even if owner sells or vacates the home 10

11 PAYING FOR LTC: REVERSE MORTGAGES Loan amount depends on the following factors: Age of homeowners Value of home Interest rate Loan term Loan costs if financed Any outstanding liens to be satisfied A reverse mortgage loan matures when: Borrower dies Title to the property is conveyed and no other borrower retains a long-term leasehold Borrower fails to occupy the property for more than 12 consecutive months and the property is not the principal residence of at least one other borrower An obligation of the borrower is not performed PAYING FOR LTC: REVERSE MORTGAGES Federal Home Equity Conversion Mortgage (HECM) Program: Reverse Mortgages offered through U.S. Department of Housing and Urban Development (HUD) via Federal Housing Administration (FHA) Due to substantial stress in HECM program, Reverse Mortgage Stabilization Act was signed into law in August 2013, authorizing major changes to HECM program including: Initial Draw Limitation: Limit on amount of money that can be withdrawn in the first year. Exceptions for mandatory or legal obligations Financial Assessment: Financial assessment is now required before granting loan approval so borrowers can demonstrate credibility Set-Asides: Based on the results of financial assessment, lenders may place portion of loan funds into set aside account to pay future charges Non-Borrowing Spouse (NBS) Protection: New rules designed to protect NBSs from being evicted following the death of their HECM borrowing spouse 11

12 PAYING FOR LTC: CONTINUING CARE RETIREMENT COMMUNITIES CCRCs provide a continuum of care, from independent living to nursing home care. All of a resident s health care needs can be taken care of either within the community or arranged for by the community CCRCs generally require an extensive agreement between the resident and the CCRC The CCRC charges: Refundable entry fee ranging from $60,000 to $600,000 Monthly fees from $900 to over $5,500 Type A ( Flat Fee) vs. Type C (Fee for service) CCRC TYPE A Under a Type A CCRC contract, a resident typically pays an upfront entrance fee and an ongoing monthly fee to live in an independent apartment and receive certain services and amenities Typically involve high entrance fees but limit future cost increases for long-termcare services by prepaying for long-term care limiting risks if care costs skyrocket Residents who require assistance or health care may receive some services in their apartment or they can transfer to an assisted living or skilled nursing portion of the community without increasing their monthly fee Monthly fees may vary according to inflation and costs, but fees are unrelated to a resident s use of care and services Tax Advantages: Portions of the non-refundable entrance fee and unreimbursed monthly fee in excess of 7.5% of AGI are deductible as prepaid medical expenses. The logic underlying both deductions is that payments entitle residents to lifetime health care as part of their residential agreement, so a portion of their expenses really represents the cost of future healthcare benefits To qualify for this deduction, residents must sign a lifelong care contract with a CCRC To calculate deductible, use the percentage allocated to medical care provided in the facility s statement of annual operating costs 12

13 PAYING FOR LTC: MEDICAL ASSISTANCE (MA) LTC MA LTC (AKA Medicaid ) is a means-tested benefit program designed to assist families or individuals with limited resources and income pay for their medical needs and LTC Technical Eligibility Requirements: U.S. Citizenship (birth certificate, Certificate of Naturalization, or Certificate of Citizenship) Maryland residency Aged (at least 65 years old), blind or disabled 13

14 MEDICAL ASSISTANCE (MA) LTC: MEDICAL ELIGIBILITY Nursing Home Level of Care = Nursing Home Transmittal No. 237; A/R must require, on a regular basis, health-related services above the level of room and board. These services include: Hands on assistance to safely or adequately perform 2+ ADLs; or Supervising an individual with cognitive deficits in performing 2+ ADLs and 3+ IADLs; or Supervising an individual both in performing 2+ ADLs and because the person also exhibits at least two behavioral problems such as: wandering, hallucinations, aggressive behavior, disruptive behavior, and/or self-injurious behavior MEDICAL ASSISTANCE (MA) LTC: FINANCIAL ELIGIBILITY Income must be less than cost of institutional care Assets must be less than $2,500 for an individual If there is a couple, and one spouse is in nursing home and other is not, community spouse can keep between $23,844 and $119,220 Only Countable resources are considered Certain resources are excluded including: Home, as long as A/R s residence immediately prior to institutionalization A/R intends to return home Equity interest is no greater than $552,000 One burial plot $1,500 specifically set aside for burial arrangements or an irrevocable funeral pre-paid trust (without dollar limit) Whole life insurance with a maximum face value of $1,500 and a cash value of less than $1,500 Term life insurance without limit provided it is without cash value Rental Property: 50% of rent goes to cost of care; other 50% goes to maintaining rental property 14

15 MEDICAL ASSISTANCE (MA) LTC: FINANCIAL ELIGIBILITY Penalty for transferring assets: 5-year look back for transfers made after February 8, 2006 Transferring or giving away assets for less than FMV will result in period of ineligibility Current penalty is one month of ineligibility for every $7,940 transferred Asset Protection strategies Transfer and wait 5 years Gift and Return (or demonstrate funds were used to pay for care) Gift and Annuity Gift and Promissory Note Gift and Special Needs Trust *For spousal: A single premium immediate annuity for community spouse; pay debt *When both spouses are in a nursing home: shift assets to higher income spouse and qualify the other for MA immediately MEDICAL ASSISTANCE: HOME AND COMMUNITY-BASED SERVICES COMMUNITY FIRST CHOICE Medical Eligibility: Nursing Home Level of Care CFC is a state plan benefit and not a capped waiver. Individuals on SSI automatically qualify CFC is NOT available to Medicare Beneficiaries unless also receiving SSI benefits or can spend down income to $350/month on medical expenses Services include: Personal Assistance; Personal Emergency Response Systems; Technology; Environmental Assessments; Accessibility Adaptations; Consumer Training; Supports Planning; Transition Services; Nurse Monitoring; Home Delivered Meals; Items that substitute for human assistance HOME AND COMMUNITY-BASED OPTIONS WAIVER Medical Eligibility: Nursing Home Level of Care MALTC benefits for individuals at home or assisted living facilities 5,405 waiver slots. Has been closed to community applicants since 2003 In order to apply, must be invited to apply from registry; or be on MALTC benefits in a nursing home for more than 30 days 30,000+ people currently on registry with a 100 year waiting list Provides assistance with payment for: Assisted Living; Medical Day Care; Family Training; Case Management; Senior Center Plus; Dietician & Nutrition Services; Behavioral Consultation and CFC services; General Medical Assistance coverage; Home Care and other Services through CFC 15

16 HOME AND COMMUNITY-BASED SERVICES: COMMUNITY FIRST CHOICE TECHNICAL ELIGIBILITY Participant must reside in a community residence, defined as having: A lease or other legally enforceable agreement providing similar protections Access to the community and community services Control over choice of roommates Choice of if and when to receive visitors Access to food at any time Privacy and locks FINANCIAL ELIGIBILITY A/R must meet either: Community Medicaid: Individual: Income cannot exceed $350/month & Asset Limit: $2,000 Couple: Income cannot exceed $392/month & Asset Limit: $3,000 Medicaid coverage is automatically given to individuals receiving SSI benefits HCBOW participants are also eligible to receive CFC Services HOME AND COMMUNITY-BASED OPTIONS WAIVER (HCBOW) FINANCIAL ELIGIBILITY Categorically Needy: Income may not exceed $2, (300% of SSI + $20.00 income disregard ) Assets must be less than $2,000 Medically Needy: Income must be less than cost of institutional care If A/R s income exceeds $2,219.00, able to spend down with incurred medical expenses Assets must be less than $2,500 COST OF CARE CONTRIBUTION No cost of care contribution required if receiving HCBOW services at home Cost of Care Contribution in Assisted Living: The following items are allowed as deductions from A/R s available income Personal needs allowance Cost of room and board (max $420/month) Health insurance premiums Spousal and/or Family Allowance Uncovered Incurred Medical Expenses 16

17 SPECIAL NEEDS PLANNING TOOLS: THE ACHIEVING A BETTER LIFE EXPERIENCE (ABLE) ACT In December 2014, Congress passed the Achieving a Better Life Experience (ABLE) Act which aims to ease financial strains faced by individuals with disabilities An ABLE account is a type of tax-advantaged account that can be used for disabilityrelated expenses for the account s designated beneficiary, who must be blind or disabled ABLE accounts are intended to supplement, not supplant, benefits provided through private insurances, Medicaid, and SSI ABLE accounts will not affect eligibility for most federal means-tested benefits If an eligible individual s State of residence does not have an ABLE program, but has contracted with another State, an ABLE account can be opened through that other State s ABLE program In December 2015, the Social Security Administration released a new Program Operations Manual System (POMS) section governing the agency s treatment of ABLE accounts for SSI beneficiaries Eligible individual can be the designated beneficiary of only one ABLE account upon the death of the designated beneficiary, the funds remaining in the ABLE account are used to reimburse the state for certain Medical Assistance To be eligible, designated beneficiary s disability must have occurred prior to the age of 26 SPECIAL NEEDS PLANNING TOOLS: ABLE ACCOUNT LIMITATIONS IRS limits the total annual contributions any ABLE account can receive from all sources to the amount of the gift-tax exclusion in effect for a given calendar year For 2016, the limit is $14,000 Any person can contribute to an ABLE account, which is defined to include an individual, trust, estate, partnership, association, company, or corporation For SSI, only the first $100,000 in an ABLE account will be disregarded Assets above $100,000 will count as resources under SSI If recipient s assets exceed $100,000, SSI benefits will not be terminated, but will be suspended until the resource fall below $100,000 During the special SSI suspension period, the recipient s: SSI benefits are suspended without time limit (as long as remains otherwise eligible) Eligibility for Medical Assistance is maintained and not compromised SSI eligibility does not terminate after 12 continuous months of suspension 17

18 SPECIAL NEEDS PLANNING TOOLS: ABLE ACCOUNTS IN MARYLAND The Maryland General Assembly passed legislation creating the Task Force on Maryland's ABLE Program. The Task Force will develop a plan for implementing the Maryland ABLE program The Task held six public meetings between Jun 1 and December 1, and provided a final report and legislative recommendations to the General Assembly on December 1, 2015 Maryland does not yet have a functioning ABLE program. The General Assembly will need to pass a law, approved by the Governor, to create a program. MANAGING ASSETS: FEDERAL SPECIAL NEEDS TRUSTS (SNTS) Intended to protect Beneficiary s eligibility for public benefits and pay for goods and services not covered by public benefits 1396p(d)(4)(A) Trust: First Party because the SNT is funded with applicant/recipient (A/R) s money and the A/R is the beneficiary Must be established by a parent, grandparent, legal guardian of the A/R, a court, or a person or administrative agency May not be established by A/R or A/R s POA Must be for sole benefit of A/R, who must be under 65 years of age and disabled Must contain payback provision 18

19 MANAGING ASSETS: FEDERAL SPECIAL NEEDS TRUSTS (SNTS) Intended to protect Beneficiary s eligibility for public benefits and pay for goods and services not covered by public benefits 1396p(d)(4)(c) Trusts: First Party because SNT is funded with A/R s money and A/R is also the beneficiary A.K.A. Pooled Asset Trust: Accounts in the trust are managed individually but pooled for investment purposes Must be created and managed by non-profit association Can be established by A/R, a parent, grandparent, legal guardian of A/R, or court or administrative agency Must be for sole benefit of A/R, who must be disabled Must contain pay back provision MANAGING ASSETS: FEDERAL SPECIAL NEEDS TRUSTS (SNTS) Intended to protect Beneficiary s eligibility for public benefits and pay for goods and services not covered by public benefits 1396p(c)(2)(B)(iii) and (c)(2)(b)(iv) Trusts: Third Party because A/R is the grantor but not the beneficiary Must be created by the A/R or A/R s spouse Payback provision is not required (c)(2)(b)(iii): Beneficiary is A/R s disabled or blind child (c)(2)(b)(iv): Beneficiary is any disabled individual under 65 years of age 19

20 MANAGING ASSETS: MARYLAND SPECIAL NEEDS TRUSTS (SNTS) Unlike Federal SNTs Maryland SNTs are not authorized under the Social Security Act Grantor will be subject to Medical Assistance (MA) transfer penalty upon the creation of a Maryland SNT Types of SNTs available in Maryland: Common Law SNTs (In a 1979 case, MD Court recognized and established the extent of protection afforded by a discretionary, testamentary trust) Maryland Discretionary Trust Act Trusts Testamentary SNTs MANAGING ASSETS: MARYLAND SPECIAL NEEDS TRUSTS (SNTS) MD DISCRETIONARY TRUST ACT Trusts created according to Maryland Discretionary Trust Act are excluded in resource determination for Medicaid eligibility Beneficiary may not have any interest in trust property that can be assigned or attached Trust document transfers property in writing to another person and identifies: Recipient of the property as trustee Beneficiary of the trust Property as being transferred under MD Discretionary Trust Act Not a wise asset protection strategy unless the grantor is a millionaire or has at least 5 years of long-term care insurance TESTAMENTARY SNTS If surviving spouse is beneficiary of testamentary SNT created by predecedent spouse: Trust principal is considered unavailable for purposes of meanstested benefit eligibility if terms of testamentary SNT provide no access to principal for beneficiary s benefit Beneficiary s eligibility for benefits may be compromised if access to the principal is discretionary Medicaid requires a disabled surviving spouse beneficiary of a testamentary SNT established by a pre-decedent spouse to elect against the will and take the statutory share Failure to take the elective share will be deemed a transfer subject to a penalty 20