Paul Ferraresi

The Deficit Reduction Act 2005 (DRA), signed into law February 8, 2006, brings new rules that make it far more difficult for seniors in need of long-term care to get assistance from Medicaid. Currently, only 10% of Americans over the age of 65 own some type of long-term care protection, and only 17% of baby boomers have planned for long-term care needs. People assume their health insurance will pay LTC bills, but it won’t. Even those who qualify for Medicare benefits will only be provided with a maximum of 100 days of nursing home care, and individuals are eligible only when going to a nursing home immediately after a three-consecutive-day stay in a hospital. Then the first 20 days are covered, but a co-pay ($141.50 per day for 2011) will be required for the remaining 80 days. All benefits end after 100 days.

Currently, 49% of LTC recipients are relying on Medicaid, but keep in mind, while some in this group come from our nation’s poor, many in this group start out paying out-of-pocket then go on Medicaid after their assets are exhausted. Only 7% of people are actually paying for long-term care with private insurance coverage they have purchased. The government took a step to reduce Medicaid roles with the passage of the DRA, making Medicaid eligibility more difficult. The three-year look back is gone. Under the new law, the look-back period is five years for all transfers, and the beginning date for the penalty period is now the later of the date the person enters a nursing home or the date the person applies for Medicaid.

What this boils down to is the penalty period will not begin until the nursing home resident is virtually destitute.

Gifts made by seniors in the most innocent manner could jeopardize their eligibility for Medicaid even if it is legitimately needed. For example, a grandparent making a monetary gift to a grandchild for a wedding or college graduation could end up delaying their Medicaid eligibility.

Also, watch out for filial responsibility. Filial responsibility laws derive from England’s Elizabethan Poor Relief Act of 1601. This law required grandparents, parents and children, to the extent they were able, to support family members who could not care for themselves. Currently, 28 states have filial responsibility laws. Pennsylvania has re-enacted its law making children liable for support of their indigent parents, and other states are likely to follow suit.

The DRA of 2005 also affects the exemption of a person’s home, the use of interest-only annuities and the forgiving of loans.
• A person’s home, formerly exempt from Medicaid eligibility limits, will be counted as an asset if the equity in that home exceeds $500,000. States are allowed the option to increase that amount to $750,000.
• Some advantages in using interest-only annuities have also been eliminated. These annuities provided a small income during life and left the original investment to heirs upon the senior’s death. Under the new rules, the state must be named beneficiary of any leftover funds in the annuity for at least the amount of the medical assistance paid on behalf of the annuitant.
• A senior can no longer loan money to their children to get it out of their estate, then, forgive the loan. In order not to be considered a transfer of assets, the repayment of a loan or mortgage must be actuarially sound and cannot be forgiven or cancelled upon the death of the lender.

Projected growth in the senior population has caused states to seriously review Medicaid programs.

For a reasonable cost, life insurance with a long-term care rider can be purchased. This plan will provide funds for the insured should they need long-term care, protecting the loss of other assets they have worked so hard to accumulate. However, in the event no long-term care is ever needed, the insured has a death benefit to leave to heirs, enhancing even further the legacy they will be able to leave their loved ones.

Most people do not want to think about or discuss Estate Planning. The definition of Estate Planning is the process of getting resources to where you want them to go with the least cost and least problem.

This process includes risk management and a review of all your insurance coverage — life, disability, liability, long-term care. Also reviewed are tax planning, cash flow analysis, and much more.

You should not just look at your own life, but, you must consider the possible caring for elderly parents, multi-generational relationships, and other personal planning issues.

Most people think that simply drafting a Will solves all these problems. Far from it. Wills are not the best vehicle for carrying out one’s wishes.

In addition, one should do at least an annual estate review with their advisor to make sure that beneficiary designations are current and intended distributions match your current intentions.

With your advisor you should discuss how you want your finances handled if you cannot function or after you pass away.

To most people their estate is simple, but, I have seen fortunes wasted by people who do not understand what the laws are and how they can and will affect your loved ones. Let me give you an example…. If you are married with children, and, you do NOT have a Will…where do your assets go? Most people think all of it goes directly to the surviving spouse…. AH-OO-GA! Wrong Answer! See your advisor for the answer!

THE ESTATE TAX IS BACK

New laws have significantly changed the estate tax which is back after a one-year repeal in 2010. Under the new 2011 law, the first $5 million of an estate is tax-exempt, and amounts in excess of that limit are subject to a maximum 35% tax. The 2011 law, which is scheduled to expire at the end of 2012, also changed the rules governing gift and generation-skipping transfer taxes.

Does the new legislation affect estates that were processed during 2010, when there was no estate tax?
Executors of estates of individuals who died last year can elect either the 2010 law or the new 2011 law. The 2010 law has no estate tax, but estate assets are subject to “carryover basis”: Beneficiaries must pay capital gains tax on any appreciation in excess of $1.3 million when inherited assets are sold. Under the 2011 law, beneficiaries are not subject to carryover basis. However, the estate will pay up to 35% estate tax on the amounts inherited in the estate above $5 million.

Executors of estates worth less than $5 million generally should choose the 2011 law. But higher-value estates might be better served by the 2010 rules, because the tax on appreciation might be lower than the estate tax.

Under the new law, a surviving spouse inherits any unused portion of the deceased partner’s $5 million exemption, making up to $10 million of the couple’s estate tax-exempt. How might this new provision, known as “portability,” affect couples’ estate plans?
A couple with a large estate previously had to create a trust on the death of the first to die to take full advantage of each spouse’s estate-tax exemption. The portability provision eliminates the need for trusts for some couples; i.e., the surviving spouse can simply add the unused portion of the deceased’s exemption to his or her own, provided the law is still valid at the time of the surviving partner’s death, but only if a federal estate-tax return is filed when the first spouse dies. Like the rest of the legislation package, this provision is set to expire at the end of 2012, so it remains to be seen whether the portability clause will become permanent.

How does the new law change gift and generation-skipping taxes?
There are three components to the transfer-tax system. (1) A gift tax for transfers during life; (2) an estate tax for transfers after death; and (3) a generation-skipping transfer tax for gifts to individuals who are two or more generations younger than the donor, such as grandchildren or great-nieces/nephews. In previous years, the exemptions varied for the three components, which made gift planning complex. Under the new law, all three components have a tax-exemption limit of $5 million, with a 35% maximum tax rate for transfers in excess of that amount.

How might people proceed with their estate planning in light of these changes?
It’s impossible to predict whether the law will expire in 2013 as scheduled or will be made permanent. I generally encourage clients to review their estate plans every three to five years, but with the laws constantly changing, people need to pay even closer attention, and update wills and other estate documents any time there is a change in legislation.

The proposal for 2013 is to reduce the exemption amount back down to $1 million.

Visit with your Financial Advisor and Estate Attorney to decide on the appropriate strategy for you.

Many married people have never prepared a will, although they recognize that this is something that should be done. Perhaps the rather morbid title, “LAST WILL AND TESTAMENT,” has caused them to delay taking action.

If you do not prepare a will, the state will draw one for you, and chances are very good that your survivors will not like the provisions. The legal term for dying without a will is “intestacy,” and the distribution of your property will be based on the intestacy laws of the state in which you reside at the time of death.

In the absence of a will, the Probate Court will appoint an administrator, such as a family member or local attorney. Then after a complicated procedure, all of your assets will be distributed according to the state’s formula.

Your estate consists of personal property (furniture, jewelry, clothes, automobiles), investments (cash, savings, securities), real estate, employee benefits (group insurance, retirement or profit sharing) and other items such as the proceeds of a lawsuit against someone who accidentally caused your death.

You cannot rely on joint property title as a substitute for a will because it does not solve problems arising with the second death. Some forms of joint title do not pass entirely to the surviving spouse.

Having a will drawn can prevent family disputes, and will give you the opportunity to be certain that your property will be distributed promptly to the parties designated as beneficiaries.

Your will should designate an Executor to carry out your bequests efficiently and promptly and with less expense than if there had been no will. The will should also provide for flexibility in the administration of your estate. You may also wish to provide special bequests to non-profit organizations.

Having a will prepared will also help establish a relationship with an attorney, which could be extremely valuable in the future. Naturally, a will should be periodically reviewed and updated to reflect changing personal circumstances and new tax laws.

I found a great article by Joseph Gelband on estate planning that I want to share with you.

The federal estate tax may or may not become history after 2009; Congress is debating its fate. Meanwhile, it remains a subject worth tackling because no matter what your age or who is in charge of Congress several years hence, it’s better to be ready than to be caught unprepared. Read the rest of this entry »