Long Term Care - What's Your Plan?
THE COUNSELOR
Volume 4 • Issue 5 • June 2014
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month's issue will discuss Long Term Care Planning. If you are interested in learning more about the ideas and processes discussed in this newsletter please contact us for an initial consultation.
One of the most difficult issues for families to address is the issue of long term care for a parent or spouse. The questions of who is to provide the care and how it is to be paid for can be overwhelming. As part of the estate planning process, consideration should be given to the potential long term care needs.The Associated Press-NORC Center for Public Affairs Research undertook a study of Americans aged 40 and over in 2013 to better understand the attitude of the public concerning long term care. The study determined that few are prepared for long term care and even fewer understand its potential costs. A follow-up survey was conducted earlier this year. Some of the findings are as follows:
7 out of 10 believe they can rely on their family to provide the care they need.
Among those who expect to provide care to a family member, only 3 out of 10 believe they are prepared.
6 out of 10 favor a government sponsored long term care insurance.
Only 29% are extremely or very confident that they will have sufficient resources to pay for needed care.
Those in the survey tended to underestimate the average cost to live in a nursing home while overestimating the cost to live in an assisted living community or have a home health aid.
Americans also tend to overestimate the benefits of Medicare when it comes to long term care.
Most are more likely to plan for their funeral than ongoing living needs.
What is Long Term Care?
With what appears to be a lot of misinformation out there, it is probably good to start with some basics. What is long term care? Long term care is the need for assistance with the normal activities of daily living that extends for a period longer than 100 days. Activities of daily living (ADLs) include things like eating, bathing, dressing, and toileting. An ongoing difficulty with independently performing two or more ADLs is a benchmark for determining if someone is in need of assistance.While many think of long term care as nursing home care, in reality, long term care is provided over a continuum. Long term care usually begins in the family home and may advance over time to an assisted living facility and finally to a nursing home.
How Much Does Long Term Care Cost?
The costs of long term care can vary widely depending upon the level of care and where you live. For example, according to a recent study, in Utah the average cost of a private room in a nursing home is $73,000 while the cost of a private room at an assisted living facility is $36,732. Those same services are $85,136 and $39,300, respectively, in Idaho. In Arizona it is $84,957 and $37,800. These states are all below the national average of $87,600 and $42,000. No matter where you are, long term care can involve a significant cost and therefore requires planning.
What’s Your Plan?
There are four resources from which the costs of long term care are paid for:
1. Personal Assets
2. Family
3. Insurance
4. Medicaid
Whether you have thought about it or not – you have a plan. Your plan involves paying for your long term care with one or more of the above resources. Many think that their health insurance or Medicare will cover the costs of long term care. This is a mistake. Medicare and private health insurance generally only provide for short term care in a nursing home or rehabilitation facility.
The first thing to look at in establishing your plan is your income stream. Most individuals have some source of continuing income in retirement. This could be from social security, pensions, retirement plans, rentals or a variety of other sources. Depending on your situation, your income may be sufficient to cover your long term care needs. If not, the shortfall will need to come from somewhere. This is where the real planning comes in. Some individuals may have sufficient assets to more than make up the shortfall – many do not. While relying on family may be an option, this may be a tremendous burden. Another option is insurance.
Does the agreement bind all owners and the business entity?Have the spouses agreed to accept the terms of the agreement with regard to community property/marital interest?Are there any provisions conditioning ownership or acquisition based on family relations or other factors?Did you address non-competition, non-solicitation, and confidentiality?Is there a provision for how the purchase price is determined (valuation)?Is there a provision for how the purchase price will be paid?Is your agreement adequately funded – i.e. how will a buy-out be paid?Will the purchase be funded by life insurance?Has life insurance been purchased?Are appraiser qualifications specified?Is the appraiser selection method specified?Did you address the death of an owner?Did you address the disability of an owner?Did you address the divorce of an owner?Did you address the bankruptcy of an owner?Did you address the failure of an owner to perform expected duties?Did you address the retirement or other voluntary withdrawal of an owner?Did you address the right to sell to a third-party purchaser?Did you specify the method of resolving disputes?Did you address expulsion of an owner?Did you address dissolution of the company?
Long term care insurance is insurance specifically designed to cover the cost of long term care expenses. Like many policies, the cost will be heavily influenced by age and health. The cost of the policy is also influenced by how long the benefit pays out. The policies can be set up in a variety of ways, all of which will also influence the cost. Historically, long term care insurance has generally been a win-lose proposition. You either benefit from the insurance you purchased or you don’t. Some might even say this is a lose-lose, since winning means you have lost your ability to perform at least two of your ADLs. However, you can now buy insurance policies that allow you to have the best of all worlds. Many companies now offer a life insurance policy with a long term care rider. This means that if you do not need to utilize the long term care benefit your family receives the death benefit of the life insurance. Additionally, some carriers will even provide for a return of premium option – basically a money back guarantee. This allows you to deposit a lump sum into the policy and thereby increase your benefits. If it turns out you need the money, you can get it back.
Many people plan to utilize Medicaid to cover the cost of long term care. There are important drawbacks to understand about relying on Medicaid as your plan. While specific Medicaid laws vary from state to state, it is generally a needs based program where an individual is required to meet certain criteria in order to become eligible. There are citizenship requirements. There must be a medical need. A Medicaid applicant cannot have more than the allowable amount of assets. Typically this is no more than $2000 in addition to exempt assets such as a personal residence. There are also special rules when dealing with a married couple. Many states also employ an income cap in determining eligibility.In addition to whether or not a person meets the eligibility requirements, other drawbacks exist for those who are eligible:
Accessibility of care – not all providers will accept Medicaid recipients or have limited spaces.
Quality of care – the quality of care received by private pay customers is generally greater than Medicaid recipients.
Availability of options – Medicaid may not cover certain options that would otherwise be available to private pay customers.
Viability of Medicaid – given the strained budgets of our present day, there is a strong likelihood of significant changes to the Medicaid program. It is unknown what the impacts will be.
Many people will engage in planning to position themselves for eligibility for Medicaid. This is often done by giving assets away. While the ethics of this can be debated, it should be noted that such planning is positioning the person to qualify for a lower level of care that may not even exist in the same form. Additionally, any such transfers that occurred within five years of the application date can impact eligibility.
Conclusion
Planning for your long term care needs includes looking at all four resource areas (personal, family, insurance, and Medicaid) and determining which will best fit your situation. Life insurance with a long term care rider can be an effective way of making up a short fall in income. However you decide to approach your long term plan, it is important that you have a plan and that you discuss this plan with your family. If you would like to talk more about the ideas in this article please give us a call.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.