Planning Ahead: Practical Financial and Estate Planning Considerations

• Publication year: 2014

Planning Ahead: Practical Financial and Estate Planning Considerations

by Christopher R. Dang, Derek T. Kamiya, Scott C. Suzuki, Eric S.T. Young

Planning for lifetime events and death is a complicated undertaking. Given the myriad situations and events that could negatively impact a client's financial and personal well-being, attorneys must help their clients plan pro-actively to successfully navigate these obstacles. Although every client's situation is unique, this article highlights some common practical financial and estate planning issues for attorneys to consider during the planning process. The areas of long-term care planning, asset protection planning, and fiduciary responsibility elicit the most inquiry from clients and thus are the focus of this article.

LONG-TERM CARE PLANNING

Retirement planning generally focuses on reviewing a client's financial net worth to determine whether such income and assets will allow a client to live comfortably for their remaining lifetime. Traditional estate planning focuses on the distribution of a client's assets at death. Planning for retirement or death would not be complete, however, without also a discussion about long-term care planning. Serious thought should be given to preserving a client's assets from the cost of long-term care expenses during life. This topic is of particular importance in Hawaii given the aging of our population.

Why is long-term care planning so important?

Long-term care is expensive. Now that "death taxes" affect so few individuals,¹ long-term care is perhaps the single most expensive threat to the value of an individual's estate for which most individuals can plan. There are approximately 41.4 million persons aged 65 or older in the United States.² Nearly one-quarter of this population has a disabling condition.³ At any given time, roughly three percent of the United States population is in a nursing home,⁴but approximately 70% of people over 65 will need long term care services at some point in their lifetime.⁵ The average duration of nursing home placement is approximately 835 days from the date of admission,⁶ and although research varies, at least one report states that the cost of a single day in a nursing home in Hawaii can be $580.⁷ Because the costs of long-term care can be stag-gering,⁸ individuals should consider a variety of planning opportunities.

How do you finance long-term care?

How a client approaches long-term care planning depends on personal preferences and many other variables such as the client's age, family support system, and financial assets. In terms of covering the cost of long-term care, there are essentially three options: (1) private payment, (2) third-party payment, or (3) government benefits. More often than not, it is the advisor who first broaches the subject. An estate attorney, particularly versed in elder law issues, will likely discuss the possibility of utilizing government benefits such as Medicaid. A financial advisor would likely discuss long-term care insurance as the best option. A mortgage advisor would likely suggest the benefits of a reverse mortgage. Generally speaking, there is no one perfect option. Sometimes the best planning involves the combination and utilization of these various options.

Medicaid Planning: An Overview

There are several government benefit programs that could help pay for a client's long-term care.⁹ The single largest payer of long-term care costs, however, is the Medicaid program.¹⁰Generally, Medicaid provides critical health care coverage for those who cannot afford it. There are many rules to determine eligibility and some of these rules are designed to prevent abuse of the system. It is important to remember that there are many types of benefits through the Medicaid program, and each type has unique eligibility rules.¹¹As beneficial as the Medicaid program may be, it has always been, and continues to become, increasingly complicat-ed.¹² Over the past year, there have been significant changes to the Medicaid program, including but not limited to changes stemming from the Affordable Care Act. These changes are reflected in Chapter 17 of the Hawaii Administrative Rules, which generally governs the State's Medicaid program.¹³Due to the complexity of the eligibility requirements and the frequency with which the rules change,¹⁴ it is critical to not only thoroughly understand the rules, but also to stay current. With a current knowledge of the programmatic rules, attorneys can provide valuable assistance to clients who wish or need to qualify for Medicaid.

Medicaid eligibility, at its core, is a simple test of an individual's assets and income. If an individual is able to afford his or her own long-term care, the individual will not need Medicaid. If an individual is unable to afford his or her own care, the governing agency must determine why the individual does not have sufficient means to pay. By utilizing strategies to maximize wealth in "exempt" assets¹⁵ and to transfer assets that are not penalized,¹⁶attorneys may help clients accelerate eligibility and/or preserve the value of a client's estate.

Medicaid planning, however, can sometimes conflict with traditional estate planning concerns. For example, a traditional estate planning goal is to avoid probate. A traditional method to address this concern would be to have the client convey title to the client's home into a revocable living trust. This strategy is inconsistent with Medicaid planning because the value of a home is generally an exempt asset, and for Medicaid eligibility purposes, title cannot be held by a revocable living trust.¹⁷

Traditional estate planning through use of separate trusts for husband and wife may also be problematic, particularly when the surviving spouse is trying to become Medicaid eligible. A surviving spouse is likely named as beneficiary of a deceased spouse's Irrevocable Trust, often referred to as a Bypass, Exemption, Family, or Credit-Shelter Trust. The value of these trust assets are "countable" when the beneficiary applies for long-term care assis-tance.¹⁸ Helping a client qualify for Medicaid could be complicated by the existence of such a beneficial interest.¹⁹In planning, a practitioner may want to consider a testamentary trust²⁰ for the benefit of the surviving spouse or an outright distribution to the surviving spouse to permit the surviving spouse to independently address long-term care planning.

Another traditional estate planning goal is to make gifts during life or transfer a client's estate, upon death, to the client's intended beneficiaries. Utilizing certain transfer of asset strategies to qualify for Medicaid may negate a client's other intentions. For example, a client may want to divide the value of the estate among multiple children, but for Medicaid eligibility purposes, only have one child be eligible to receive exempt transfers. Certain transfers may also result in other planning challenges, such as eliminating a step-up in cost basis on appreciated assets and the loss of control over certain assets and decisions.

What is the value of assets my clients can maintain and still qualify for Medicaid for long-term care services?

The Social Security Administration and the Centers for Medicare and Medicaid Services routinely publish the answers to this question, usually annually, to reflect cost of living adjustments.²¹As of the drafting of this article, an individual applying for long-term care Medicaid assistance may only have $2,000.00 in assets, not including exempt assets. The spouse of an applicant is allowed to maintain up to $117,240.00 in other assets, as well. While the applicant's home is generally an exempt asset, this exemption is only applicable up to $814,000.00 in equity.

In long-term care planning, it may also help to counsel a client about annuities. There are numerous benefits to annuity contracts, including, if established pursuant to the governing rules, re-categorizing an individual's countable assets into income for long-term care Medicaid purposes.²² In general, the funds used to purchase an annuity are either countable as assets,²³ or considered to be transferred, resulting in a penalty period.²⁴ Medicaid planning with annuities usually involves the purchase of an actuarially sound, immediate, irrevocable, unassignable annuity that names the Hawaii Department of Human Services as a remainder beneficiary in the first position, or in a position behind the community spouse and the institutionalized individual's minor or disabled child.²⁵

In addition to retaining the above asset rules, there are unique rules establishing how the income of a married couple may be applied. Generally, an individual's income must be applied to his or her long-term care bills as part of a cost share.²⁶ If the individual is married and the individual's spouse is not institutionalized, however, the individual's income may be used to bring that individual's spouse's income up to $2,931.00 per month.²⁷

If a client gives away his or her assets, can that person qualify for Medicaid for long-term care purposes?

Clients interested in medical assistance for coverage of long-term care services should consider that there is a penalty period if the client or the client's spouse transferred an asset for less than fair market value within sixty months (5 years) of applying for the assistance.²⁸The sixty-month period is referred to as the "look-back period."²⁹ The total uncompensated value of all transfers made during the look-back period will be used to calculate a penalty period, which is the amount of time during which Medicaid will not provide assistance for coverage of long-term care services to the client.³⁰

Given the foregoing rule, it is not impossible for a client to qualify for Medicaid if the client has given away assets. Some strategies involve planning ahead (i.e. making transfers outright or into an Irrevocable Trust at least five years prior to applying for...