WHEN SOMEDAY ARRIVES - The Elder Law Offices of Shields

Transcription

WHEN SOMEDAY ARRIVES
How to protect your loved one from ending up in
a nursing home and what to do if you can’t
James P. Shields, Esquire
Thomas J. Boris, Esquire
WHEN SOMEDAY
ARRIVES
How to protect your loved one from
ending up in a nursing home and
what to do if you can’t
JAMES P. SHIELDS, ESQUIRE
THOMAS J. BORIS, ESQUIRE
The Elder Law Offices of Shields & Boris
109 VIP Drive, Suite 102
Wexford, PA 15090
724-934-5044
724-934-3080 Fax
1-800-879-0984 Toll Free
Copyright ©2015 by James P. Shields
All rights reserved. No part of this book may be used or reproduced
in any manner whatsoever without written permission of the author.
Printed in the United States of America.
ISBN: 978-1-63385-079-8
Cover design by:
Madeline Sciullo and Jenna Beneski
Published by
Word Association Publishers
205 Fifth Avenue
Tarentum, Pennsylvania 15084
www.wordassociation.com
1.800.827.7903
CONTENTS
Introduction..................................................................................1
1Acknowledgements......................................................................3
2
The Hidden Woman’s Issue:
Why the Coming Long-Term Care and Tax Crisis
Could be Catastrophic to your
Legacy and to your Wife or Daughter.......................................5
3
Things Have Changed: Estate Planning 101..........................25
4
Guardianship: Living Probate..................................................29
5
Wills and Probate: What’s All the Fuss?.................................39
6
Pennsylvania Inheritance Tax..................................................49
7
Federal Estate Tax......................................................................53
8
In-Laws and Outlaws and Capital Gains................................55
9
The Hidden Risks.......................................................................59
10
Income and the Social Security Shuffle..................................63
111
Caring for an Aging Adult – Give Yourself a Break.............71
12
What Should My Estate Plan Accomplish to
Protect My Family’s Legacy?....................................................77
13
The Old Solution: Giving It All Away, Medicaid and
Long-Term Care Insurance.......................................................79
14
The New Solutions: Asset Based Protection Combined
with Powerful Legal Documents.............................................87
15
Conclusion: Take Action and Take Charge..........................107
About The Elder Law Offices of Shields & Boris ................133
INTRODUCTION
THIS BOOK is written for those concerned about long-term care. Today’s primary caregiver is
a woman, either the spouse of an ill husband or a daughter. Daughter caregivers are typically called the “sandwich
generation.” They are still raising their own children while
caring for aging parents. In fact, in 2013, 31.3% of children
aged 18 to 34 were still living with their parents.
We write this book for retirees and child caregivers as
a tool to allow you to stay at home as long as possible and
as a guide of what to do if you or a loved one cannot stay
at home.
We believe every family has a legacy to protect and
it is our job to protect that legacy. The greatest risk to
today’s retiree is a long-term care health crisis. We hope
you find this book helpful as a tool to prepare for what
the future holds.
Our firm was created in response to the sudden passing of partner James P. Shields’ mother in 1992. She died
with nothing in place. We began our firm to help people
plan ahead. We have helped thousands of families plan
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ahead. Over the years we have created strategic alliances
to become an integrated multidisciplinary firm dedicated
to helping our clients to protect their family legacy, to
leverage their assets and make their money last for a lifetime.
ACKNOWLEDGEMENTS
JIM AND I have been partners now for
over a decade and have learned so much from so many different people. We wish to personally thank the following
people for their contributions to our inspiration, knowledge and other help in creating this book.
First we thank God for giving us the natural abilities
to do what we do; our families who have always been there
from our home offices when we first started to our five offices across Western Pennsylvania, that we now have; our
staff for helping us keep our heads on straight and keeping us organized and on top of everything; our clients for
putting their trust and faith in us to create plans to protect
their families legacy; our current and past business coaches and business associates (John D. Laslavic and Wendy O.
Lydon of ThistleSea; Julieanne Steinbacher, Esq. of Steinbacher & Stahl; Don Quante of Wealth Protection Advisors, LLC.; and Greg Miller of Guardian Capital, LLC).
Finally I want to tell my business partner, who I consider my brother, thank you for being my mentor, always
being there for me over the past several years while I was
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dealing with my different health issues and ultimately
helping me reach my dreams of being a successful comprehensive estate planning and elder law attorney.
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THE HIDDEN
WOMAN’S ISSUE:
WHY THE COMING LONG-TERM
CARE AND TAX CRISIS
COULD BE CATASTROPHIC TO
YOUR LEGACY AND TO YOUR
WIFE OR DAUGHTER
THE LIFE EXPECTANCY of today’s
retiree is much longer than that of their parents. We live
longer now, which puts us at greater risk for needing help
or care along the way. To develop an effective plan for you
and your legacy, you need to identify the issues that will
have the greatest financial impact. The cost of disability
and long-term care is the number-one offender, so let us
explore what has now become the greatest financial threat
to middle-class Americans today.
The biggest and most obvious question for retirees and
for long-term care needs is usually money. How are we
going to pay for long-term care?
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ACCORDING TO METLIFE1 THE COST OF CARE
LOOKS LIKE THIS:
• The national average daily rate for a private room
in a nursing home is $248, while a semi-private
room is $222, up from $239 and $214 respectively
in 2011.
• The national average monthly base rate in an assisted-living community rose from $3,477 in 2011
to $3,550 in 2012.
• The national average: hourly rates for home
health aides was unchanged ($21); the average
hourly rate for homemakers and daily rates for
adult day services remained at $70.
IN PENNSYLVANIA, ACCORDING TO METLIFE,
THE COST OF CARE LOOKS LIKE THIS:
• The average daily rate for a private room in a
nursing home in Western Pennsylvania is $328
and for a semi-private room is $309.
• The average monthly base rate in an assisted living community in 2012 in Western Pennsylvania
was $2,200-$4,319.
• The average hourly rate for home health aides or
homemakers is $21.
Privately paying for long-term care means that seniors
would have to find an additional $28,560 to $148,555 per
1 The 2012 MetLife Market Survey of Nursing Home, Assisted Living,
Adult Day Services, and Home Care Costs
year in their budget for just ONE person to receive care.
Most of us, seniors or not, could not afford to privately pay
for our own care year after year.
Long-term care insurance will pay for in-home
care, assisted living, and nursing-home care. This is the
most appropriate and needed form of insurance protection
available to us today. Long-term care insurance should be
termed “lifestyle” insurance –it is NOT nursing-home insurance! If your vision of your later years includes sitting at
home in your own recliner, with your own remote control,
watching your own TV...well, you should be planning for
that future with long-term care insurance. In later chapters
we discuss all of the options related to long-term care insurance today.
Reverse mortgages (Home Equity Conversion Mortgages) have become one of the most popular and accepted
ways of paying for many different expenses, including the
cost of long-term care. Reverse mortgages are designed to
keep seniors at home longer. A reverse mortgage can pay
for in-home care, home repair, home modification, and
any other need a senior may have. Almost every successive
chapter in this book discusses the use of reverse mortgages
for seniors in some way. That is how important this cash
flow planning concept has become in recent years.
GOVERNMENT ASSISTANCE
Medicaid will pay for long-term care, but certain criteria must be met. It is important to seek the advice of a
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qualified financial professional and an elder law attorney
prior to applying for Medicaid.
VA Aid and Attendance Pension Benefit: The VA
Aid and Attendance Pension Benefit is available to certain
Veterans and their spouses who served during a period of
war. Both Medicaid and VA Aid and Attendance are discussed later in the book. If you have retired recently or
plan to retire within the next ten years, your retirement is
going to look very different from that of your father and
mother. The previous generation typically had traditional
pensions. They worked for one company and lived in the
same house for 35 years or more, enjoyed increases in social security, had smaller IRAs and made a lot of money
from CDs in the 1980’s. They wanted to retire, to travel
and either move or spend the winters in a warmer climate
like Florida. They expected their pensions and the government to take care of them.
WHO IS GOING TO TAKE CARE
OF MOM AND DAD?
According to a recent joint study conducted by Cornell and Purdue University and supported by the National
Institute on Aging, aging mothers are nearly four times
more likely to expect a daughter to assume the role of their
caregiver rather than a son if they become ill or disabled.
These mothers are also much more likely to choose
a child to whom they feel emotionally close and who has
values similar to their own, according to Karl Pillemer,
Professor of Human Development at Cornell, and Purdue
sociologist Jill Suiter, in the journal, “The Gerontologist”.2
Aging adults today who are on the threshold of needing additional assistance in the home are also aging adults
who tended to have larger families during their childbearing years. It is important, though often difficult, for seniors to talk with their adult children about expectations
and wishes. It is also important for adult children to talk
with each other about who will be assuming what role with
regard to helping Mom and Dad. Neglecting to discuss
this at all can lead to disappointment, confusion and disagreement between siblings.
Long-term care is a family issue, but it is more often
a woman’s issue. Throughout history, women have been
the caregivers in our lives. As we have seen, women also
live longer than men on average. From beginning to end,
women often care for family members young and old.
Now, as our population begins to age, it is even more important that we understand what lies before us.
Although we see the number of male caregivers
increasing all the time, the fact remains that, when it
comes to long-term care for our family members and our
spouses, today women carry the weight.
Daughters, daughters-in-law, wives, sisters and nieces
often accept the role of caregiver for aging adults in the
family. Across the U.S. there are women commonly referred
to as “the sandwich generation” who are playing dual roles
2 The Gerontologist 46:439-448 (2006) © 2006 The Gerontological Society of America Making Choices: A Within-Family Study of Caregiver Selection Karl Pillemer, PhD1, and J. Jill Suitor, PhD
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in their families. They are often mothers themselves in
addition to caring for their own aging parents. The level
of stress and frustration can be overwhelming. Careers are
being put on hold, and promotions passed up, in order to
accommodate the busy schedules of their children, and
their parents. Even so, there is still not enough time for
these women to meet everyone’s needs. A financial burden
results as well.
Women in America also tend to marry men who are
older than they are. Therefore, they often end up caring
for a chronically ill spouse in later years. When this happens, it is sometimes the case that all of the retirement
funding and assets are used to pay for the long-term care
needs of the “ill” spouse, leaving nothing in savings to
care for the “well” spouse later in life.
It is estimated that one out of every two women will
need long-term care at some point in their lives. One of
every three men will also require long-term care. So why
do more women need services? A woman’s life expectancy
is still longer than that of the average male.
HOW LONG CAN SENIORS BE CARED
FOR AT HOME – REALISTICALLY?
The answer to this question depends on many things,
but ultimately it depends on how much support seniors
have in their own community from family, friends, neighbors and religious organizations, and their ease of access
to the medical system. Cash flow, as previously discussed,
is another factor that determines how long seniors can stay
at home safely.
It is important to note that according to a study by
the National Association of Home Builders 50 + Housing
Council, for those owning single family homes, 35.9% of
households in the 55 to 64 age group reported difficulty in
at least one physical activity:
•
•
•
•
Difficulty in dressing (9%)
Vision or hearing difficulty (11%)
Difficulty in going out (11.9%)
Difficulty in walking, reaching, lifting, carrying, climbing stairs or getting around the house
(27.1%)
• Difficulty in remembering (12.7%)
• And difficulty in working (23.8%)
More than 45% of those 65 to 74 and 70% of households
75 or older reported difficulty in some activity.3
Set up properly, a senior can stay in his or her own
home for their entire life. As long as care can be paid for,
or provided by family members locally, and as long as the
living situation is safe and comfortable, seniors can stay
home. In this book, we will give you more information on
how this can be achieved.
What can be targeted as the cause of this crisis? Well,
Americans are indeed living longer than ever, and as the
3
March 2007, National Association of Home Builders 50 + Housing
Council Study – Aging Boomers May Be Hard to Budge From Current
Homes
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population ages, we can expect the need for long-term care
will increase proportionately. Since the 1960s, the average
life expectancy in the United States has increased almost
twenty years, and approximately 79 million baby boomers
turned sixty-five in 2011. According to the U.S. Census
projections, over the next thirty years, the number of people sixty-five and older will increase by 76 percent. This
means that by the year 2030, one in five Americans will be
a senior citizen. With an aging population facing increased
health care costs but with no insurance to pay for this care,
it is little wonder why we’re experiencing a crisis of epic
proportions.
For your parents, there was not much talk of nursing
homes back in the 1970s, and back then we’d never heard
of assisted living. From 1970 to 1990, nursing home expenditures in the United States increased faster than any
other health care costs of the country, with a 12.7 percent
annual rate of growth. In 1990, over 10 percent of Americans age seventy-five and older lived in nursing homes.
Although that number actually decreased to 7.4 percent by
2006, there are still currently more than 1.8 million people
living in skilled nursing facilities today.
This was not your mother and father’s retirement. Increased reliance on outside care facilities is due in part to
a shift in family demographics. In the 1960s and 1970s,
your parents and most of Pennsylvania’s high school graduates got jobs in steel mills or went to college in Pennsylvania and then stayed to work in the steel industry. Most
children did not move far away to find work, and families stayed close in small towns. When an elderly parent or
grandparent became ill, the entire family was close by, and
it was easier for children or grandchildren to help care for
them because they lived in the same neighborhood.
Times have changed. Steel mills closed. Companies
have downsized. Factories have shut down. Not only high
school and college graduates, but also many families have
been forced out of their hometowns to find work. Sons
and daughters now live spread out all across the country,
and when something happens to mom or dad or grandma
or grandpa, they are simply not around to help on a dayto-day basis. Medical advancements and improvements in
health care also increased life expectancy. We can now survive things like heart attacks and strokes that would have
killed us just forty years ago.
According to the Bureau of Labor Statistics, a married
couple in their mid-sixties has a 50 percent chance that
one spouse will live beyond his or her ninety-first birthday.
And while that might sound like a good thing, the demand
on our money to last longer as life expectancies increases,
as well as the need for health care to be provided both in
home and in facilities can be strenuous. The longer we live,
the more susceptible we will be to other illnesses that typically affect the aged, such as Alzheimer’s, dementia and severe mobility problems. These conditions do not respond
well to medications and surgeries and often do not have
cures. Instead, as these illnesses and conditions progress,
they often lead to a need for custodial care and can cause
an aging retiree to go to the poorhouse trying to pay for
that care.
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The average cost of nursing home stay in our area is
approximately $108,000 per year and these costs continue
to rise each year. This is a retirement expense that most
retirees never contemplated, and most financial portfolios cannot take that kind of hit. Government programs
like Medicare and Medicaid were not initially designed to
handle the number of retirees or those who are in need
of care today.
Without any help from the government or private insurance, how long would it take for your money to run out
if you get hit with a monthly bill of $8,700 or more? More
and more retirees who face the double whammy of declining health and rising life expectancy find they do not have
a way to pay for such care. This is the silent crisis facing
today’s retirees.
MEDICARE: THE VANISHING
GOVERNMENT BENEFIT
Despite the rapidly increasing need for long-term care
services and the rising cost of those services, most retirees
and their families are still shocked to learn that Medicare
does not pay for long-term nursing home or assisted-living
costs. They mistakenly believe that Medicare is going to
take care of them forever, as it had in the past. Unfortunately, this false sense of security contributes to inaction
and the failure to plan. This failure to plan can be financially devastating when disability strikes.
The maximum amount of skilled care that Medicare
will pay for is up to 100 days, but the average number of
days actually paid for is much less. Provided the patient
spends three days in the hospital and then is transferred
to a nursing home from hospital, Medicare will pay 100
percent of the first twenty (20) days of the patient’s stay
at a Medicare-certified skilled nursing care facility. After that, the patient is responsible for a co-pay of approximately $130 per day, and Medicare may pay the balance
due to the nursing home for an additional eighty days. Remember, the average daily cost is $293 per day. However,
Medicare’s continued payment is contingent on the patient
receiving rehabilitation and showing improvement with
that therapy. If you hit a plateau and stop improving, or
your therapist and physician determined that no additional
rehabilitation is necessary, (for example, a patient with dementia or Alzheimer’s who reaches a point beyond which
he or she continue improving) Medicare will stop paying
and leave the patient scrambling to find alternative forms
of payment, while jeopardizing his or her health care and
financial health in the process.
How is this possible? Why are some people bearing
enormous health care costs while others are having all their
bills paid by Medicaid? Medicare does not cover custodial
care if that is the only kind of care someone needs. Custodial care essentially includes assistance with basic activities
of daily living such as walking, toileting, eating, bathing
and grooming. It may also include assistance with oxygen,
medications, insulin shots, and caring for colostomy bag
or bladder catheters. So when retirees need help getting in
and out of bed, walking, bathing, getting to the bathroom,
taking medicine, or eating, the system abandons them.
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Medicare cares about you only if you are getting better.
If you need heart surgery, chemotherapy, or a hip replacement, Medicare pays. If you have Alzheimer’s or dementia
or are completely bedridden, Medicare does not pay. The
bottom line is if you can not get better, Medicare no longer
cares about you!
IF MEDICARE WON’T WORK
WHAT IS MEDICAID?
Medicaid is a federal program as implemented by each
state. As life expectancies and long-term care costs continue to rise, the challenge quickly becomes how to pay for
these services. Medicaid will pay in Pennsylvania for longterm skilled care as long as you are in a skilled care facility
and are broke. Being broke means being spent down to
$2,400 or $8,000 in total assets depending on income and
needed care.
Most people cannot afford to pay $8,700 or more per
month for the cost of care. Those who can pay may find
that paying for that care impoverishes the at-home spouse.
The reason to plan for Medicaid is twofold. First, you need
to provide enough assets for your own security as well as
that of your spouse and loved ones. Second, the rules are
extremely complicated and confusing, and the result is that
without proper planning and advice, many people spend
more than they should and thereby unnecessarily jeopardize their family’s security.
To qualify for Medicaid, applicants must pass fairly
strict tests on what assets they can keep and what assets
they have to spend. For a single person, all the assets
except for the home, personal property, and a small life
insurance policy have to be spent before qualifying for
Medicaid. The equity in a home is exempt up to about
$552,000 dollars.
This means that if your property is worth in excess
of $552,000, it would cause you to be ineligible for Medicaid. In addition, just because real property is exempt up
to about $552,000 doesn’t mean that after you pass away
Pennsylvania cannot put a lien on the property to be refunded for all the Medicaid monies they provided on your
behalf. So while Pennsylvania might not be able to force
you to sell your property to qualify for Medicaid, it can put
a lien on your property to get reimbursed for any Medicaid
they paid on your behalf after you pass away through a
program called “estate recovery.”
For a single person to qualify for Medicaid, they might
have to spend down to $2,400, depending on their income.
This means that all the assets including IRAs and the cash
value of life insurance policies must be less than $2,400 for
them to qualify for Medicaid. While Medicaid is a good
program, it does not pay for a number of things, including
dental, eyewear, haircuts, phone, or cable. A $45 monthly
allowance plus this $2,400 exemption is supposed to cover these costs, but $2,400 doesn’t go very far if you have
to replace hearing aids, dentures, or eyewear. If you have
not set aside some money to pay for these things ahead
of time, where is this money going to come from? Are
the kids going to pony up for your haircuts, your hearing
aid, your glasses, or your dentures? Do you really want to
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have to rely on your children’s generosity? Alzheimer’s and
dementia patients are renowned for losing glasses and dentures. This can cause quite an expense.
It is slightly different for married couples. When a
spouse is in a skilled nursing home, the healthy, or community spouse, is allowed to keep the house, having equity
up to about $552,000, one car, their own IRA or 401(k),
personal property, their own income, and one half of the
countable remaining assets up to $119,220.
Everything else is countable including the ill spouse’s
IRA or 401(k). So if a married couple has $100,000 in
countable assets, the healthy spouse will keep half of that,
$50,000, and the ill spouse would keep $2,400. Conversely,
if a married couple has $400,000 of countable assets, the
healthy spouse does get to keep half of that but gets to
keep only $119,220. Again, the ill spouse can keep $2,400.
This means that out of $400,000 of countable assets, that
the at-home spouse only gets to keep $119,220. This can
dramatically change the lifestyle of the surviving spouse.
The one thing Medicaid under Pennsylvania law will
not pay for is assisted living, so assisted living is all private
pay. Depending on the level of care in an assisted living
facility, the monthly cost can be anywhere from $2,500
to $5,000 per month or more, all paid out of your pocket
unless you are a wartime veteran or the surviving spouse
of a wartime veteran.
The average stay in a skilled care facility, depending
on who you listen to, is approximately thirty months. This
can be financially catastrophic. But the real risk is not entering a facility because no one wants to go to a facility.
Everyone prefers to stay at home. The real risk is that
we need some help to stay at home or need to figure out
how we are going to pay for some help in an independent
living facility or assisted living facility (called a Personal
Care Home in Pennsylvania). This type of assistance is all
private pay in Pennsylvania. So we see our job as putting a
plan together to stay at home as long as possible by maximizing resources first for home care, and only if that is not
possible, for assisted living. Only as a last resort, usually
due to medical necessity, would we consider a long-term
care facility.
Creating a comprehensive plan is like building a
house. First we have to set the foundation. The foundation to build from first, is sound and powerful legal
documents. Then we move to retirement income. After
retirement income is solved, we address paying for inhome care and assisted living. Only after that is solved
do we turn to maximizing wealth transfer for beneficiary
and tax concerns.
The largest risk is that Medicaid might not exist at all
when you need it, so you need to prepare. Our firm’s mission is to protect your family legacy. Whether that legacy
The one thing Medicaid under
Pennsylvania law will not pay for
is assisted living, so assisted
living is all private pay.
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is making sure you can pay for your own care or that your
spouse is taken care of when you pass away or that your
children or grandchildren receive an inheritance, we must
plan ahead to protect these assets from taxes, unnecessary
expenses, and catastrophic illnesses.
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THINGS HAVE
CHANGED:
THIS IS NOT YOUR
PARENT’S RETIREMENT
IF YOU HAVE RETIRED recently or
plan to retire within the next ten years, your retirement is
going to look very different from that of your father and
mother. The previous generation typically had traditional
pensions. They worked for one company and lived in
the same house for 35 years or more, enjoyed increases
in social security, had smaller IRAs and made a lot of
money from CDs in the 1980’s. They wanted to retire, to
travel and either move or spend the winters in a warmer
climate like Florida. They expected their pensions and
the government to take care of them.
Today’s retirees are more active, more concerned with
quality healthcare than warm weather. They have to live
off savings in retirement and do not have a significant
traditional pension. They have experienced booms and
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busts in the market between 1996 and 2014 and have had
to change companies three or more times in their career.
They are frequently taking care of ill parents or supporting children and/or grandchildren financially. Sometimes,
they are doing both at once, having 85 year old parents and
35 year old children living with them at the same time. In
fact, in 2013, 31.3 percent of children aged 18 to 34 were
living with their parents.
Most people are troubled by government spending
gone wild. They are skeptical of the market. They are
concerned that social security may not keep its promise
to them. They are convinced that their taxes will increase
in retirement rather than go down. They are worried that
they saved their IRA for the IRS. They are terrified that
a long-term health care catastrophe could financially wipe
them out. They are fearful that their children or in-laws
will waste an inheritance. They are anxious that their
spouse or the person they wish to manage their affairs if
they can’t will not be able to do so. They are ultimately
distressed that, because of the above, families will not be
able to stay financially self-reliant in retirement.
Typical or traditional estate planning attorneys are primarily concerned about one issue which is “death.” What
happens to your assets when you die? Obviously this is an
important issue that needs to be addressed. However, we
are more concerned about what if you don’t just quietly
pass away in the night but instead become ill and end up
being admitted into a long-term care facility. You may lose
everything and have nothing left to distribute upon your
passing. Do you believe that all of your problems can be
solved through just preparing legal documents? Do you
believe all of your problems can be solved by using just
financial plans or insurance products? The answer to all of
these serious questions is “No!”
The truth of the matter is that our complex times
require the integration of the proper insurance products,
financial plans and proper legal documents. When the
proper financial and insurance product is married together with the proper legal document, they are each made
more powerful.
Over the past decade, we have identified the seven
most common problems clients must solve to maintain
their legal security and financial self-reliance. The most
common problems are: risking guardianship, having
an outdated or “powerless” power of attorney, probate,
Pennsylvania Inheritance Tax, Federal Estate Tax, long
term care expenses, increasing income taxes, in laws, outlaws and creditors, loss of income on the death of one
spouse and market risk. We will address all these issues
in subsequent chapters and share our unique strategies to
solving them with you so you can maintain your independence and financial self-reliance.
What happens to your
assets when you die?
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ESTATE
PLANNING 101
Before we can talk about what proper
planning is, we first have to define the more general
term of estate planning. Most people believe that estate
planning is deciding what happens to your property
and assets after you die. This is what traditional estate
planning attorneys will discuss with you. However, after
helping thousands of families we have found that there is
a much more to it than just planning for death. We have
found that the more important question is what happens
if you LIVE. What happens if you live but become ill?
What happens if you require long term care in a nursing
home? What happens if you have to take care of your
parents and/or a spouse?
Due to changes in our laws and society in general, we
now need to plan not only for death but for sheltering our
assets from guardianships, probate taxes, cost of longterm care, loss of income and from market downturns.
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We must do much more than simply planning for death.
Quite frankly, we must plan for life!
My grandmother always said, “Clean up your
own mess.” Most of you can remember your mother
or grandmother saying this when you were a child.
Sometimes the simplest advice is the best. Essentially,
estate planning is simply cleaning up your mess.
The first step of estate planning is listing all your
assets, investments, life insurance, etc. We know what
you are thinking: It would be a lot of work to put all
this together! But let us tell you from experience, if it’s
difficult for you to find your own assets, imagine how
difficult it is for someone else to come in and put together
all the pieces of your estate after you die. Especially when
your family may have no idea what assets and accounts
you own. Avoid the mistakes of Jim’s family; both of Jim’s
parents passed away without anything in place.
So the first step in estate planning is to identify all
your assets including any checking accounts, savings
accounts, brokerage accounts, individual stocks, bonds,
CDs, life insurance policies, oil and gas leases, deeds to
property, etc. Next you identify who in your family you
want in control, who you want to receive the assets, how
you want them to receive them and when you want them
to receive them.
So what are some common estate planning
goals? We found the most common goals to be the
following:
•
•
•
•
•
•
•
•
•
•
•
To pay your own way;
To retain control of your property;
To stay at home as long as possible;
To protect you, your family and your assets if you
have a catastrophic illness;
To obtain for you all the benefits which you are
rightly entitled;
To get your assets transferred to the people you
love without any unnecessary costs or delays after
you die;
To avoid paying unnecessary tax;
To avoid unnecessary attorney’s fees and
court costs;
To avoid living probate, i.e. guardianship;
To avoid future market turndowns; and
To keep the plan as simple as possible.
We practice estate planning because we believe that
each family has a legacy to protect. Our clients undertake
estate planning because no one knows what the future
holds. So how do we believe estate planning should be
done? A few years ago, the best friend of Jim’s late mother
came to our firm to prepare her estate planning. When Jim
asked her what she wanted him to accomplish with her
estate plan, she simply said, “Jimmy, (anyone who knew
Jim before 1984 can call him Jimmy) just do for me what
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you would have done for your mom.” From that point on,
our firm has looked at each client as though they were our
parent sitting in front of us. We want to stack the deck in
your favor. We cannot control how the wind blows but we
can control our sails. Essentially what we’re doing is planning for the worst, hoping and praying for the best while
knowing that somewhere in between lies what will truly
occur. So where do we start?
...each family has a
legacy to protect.
4
GUARDIANSHIP:
LIVING PROBATE
Becoming incapacitated is a fate many
people consider to be worse than death. Without proper
planning, becoming incapacitated can have dire legal and
financial consequences for you and your family.
If you have an asset such as an individual retirement
account (IRA) and you become incapacitated, no one can
withdraw the money from your IRA because the account
is only in your name. Even if you need money to pay bills
or if the market is collapsing and your account needs to
be reallocated, no one can help in either of these events.
The only way for someone else to control your IRA if you
cannot is if that person has a proper power of attorney.
Now we realize that some of you are thinking, “I am
married, so my spouse can manage my affairs.” While that
might be true for certain “joint accounts”, it is not true for
any individual account such as an IRA, 401(k), 403b, Roth
IRA, individual bank account, individual annuity, individual stock, or individual investment account.
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Even though either owner of a joint investment account can close it, the check that liquidates the account
will be issued in the joint name. To deposit the check
would require the endorsement of both parties. However,
if one spouse is incapacitated, how can he or she endorse
the check?
The problem can be even worse. Not only may a spouse
not be able to obtain control of a retirement account, he
or she may not sell or transfer any real property owned
jointly. Let us illustrate what we mean. Let’s say dad is incapacitated, living in a nursing home where he will be for
the rest of his life. Mom is living in the big family house
all alone. Mom decides the house is too big and wants to
sell it. She finds a buyer for the property, but the problem
is that dad can’t sign the deed. Since the property is in
dad and mom’s name, both have to sign the deed to sell
the property. Without a proper financial power of attorney,
mom cannot just sign dad’s name to the deed. So what is
mom to do?
In Pennsylvania, mom would have to petition the court
to become a guardian of dad’s person and of dad’s estate.
In this procedure, the court gives mom the authority to
sign dad’s name. The problem with this process is that
it typically takes 90 to 120 days to accomplish at a minimum through the courts and will cost more than $5,000
or more in attorneys’ fees, paid doctors’ testimonies, and
court costs.
Over the long term, a guardianship also requires court
approval for certain transactions and causes court report-
ing requirements. The actual court procedures to establish
the guardianship can be difficult and uncomfortable.
In the court proceeding, mom typically hires an attorney and a doctor to provide evidence to prove that dad is
incapacitated. The doctors run through a series of questions about dad’s physical and mental capacity; everything
from memory to using the toilet. Then dad’s attorney presents evidence that dad is all right, and that he can manage his affairs and can properly use the restroom. Then
the court makes its decision. It is an ugly procedure. Many
times, more than one person wants to be appointed guardian. When this occurs, the court often appoints a third
party as an independent guardian. This may be a person or
entity that the family may not even know.
Sometimes, especially if you’re single, the person appointed as guardian isn’t necessarily the person you would
choose to make financial and medical decisions for you.
Instead of the person you want in charge, a loudmouth,
busybody relative who yells the loudest and gets to the
courthouse first may have himself or herself appointed as
your guardian. Remember, if you do not pick someone to
make decisions for you, the court will!
The person appointed as guardian has many responsibilities in addition to the care of the incapacitated person.
These include: having to report to the court at least annually as to how many times he or she visited the incapacitated person, the number of doctors’ visits, and having
to account for every penny of the incapacitated person’s
money as to how it was invested or spent. The guardian
may also have to obtain specific court approval for cer-
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tain transactions to make sure that the transaction is in the
best interest of the incapacitated person, such as the sale
of real property. In many states and in Pennsylvania, when
the incapacitated person passes, the guardian has to make
a final accounting to the court of all visits and account
where every penny was spent from the beginning of the
guardianship until the passing of the incapacitated person.
Guardianship is sometimes called “living probate” due
to the court’s involvement in the day-to-day affairs of incapacitated party. This process can be overwhelming for the
guardian, especially if the guardianship has been in place
for a long time. For example, we represented the estate
of an incapacitated client who died after having a guardianship in place for about eight years. He also had several rental properties that the guardian managed for many
years. The final accounting to the court had to list where
every penny went for over eight years, and this included
not only what was spent for the incapacitated person but
also where every rental penny and expense went for eight
years. Needless to say this was a lot of work and generated
large legal and accounting fees for the estate. When we
closed the file, it was over eight inches thick!
Had a proper “powerful” financial power of attorney been in place and appropriate legal advice sought and
given, all the above court requirements would have been
avoided. In the example above of the incapacitated dad, if
he had executed a proper financial power of attorney, mom
would have had the legal right to sign dad’s name, sell the
house, and manage all the financial affairs for herself
and her husband without unnecessary court involvement,
without delays, without unnecessary legal fees, expenses
and court costs.
Pennsylvania most recently changed financial power
of attorney requirements in July 2014, effective January
1, 2015, which required certain notices and acknowledgements. Pennsylvania’s power of attorney can also become
old or stale sometimes in as soon as six (6) months. This
means that if your power of attorney was prepared prior to
2015, you run the risk that a bank or financial institution
may not accept it. Therefore, if your power of attorney was
signed prior to 2015 and you still have capacity, you can
avoid problems by signing a new power of attorney.
There are other concerns about the financial power
of attorney as well. Not only can powers of attorney
not work because they become old or stale, but the
actual words of the power of attorney can render it
ineffective. For example, a power of attorney may allow
your agent only to make limited gifts. This means gifts of
$14,000 or less. (This is based on the IRS $10,000 gift per
person per year which is now $14,000). In fact, Pennsylvania’s state laws suggest that unless the power of attorney
specifically gives the power to make “unlimited gifts,” any
gifting powers are considered to be limited. So you need
to check the language of your power of attorney. Unless it
is specifically says “unlimited gifts”, you may have what we
call a powerless power of attorney.
Many attorneys suggest that having a limited power of
attorney might be good because it limits how much money
can be gifted out of your estate. However, the problem is
that sometimes we need to make gifts larger than $14,000
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for many purposes. To illustrate, let’s assume again that
dad is incapacitated and will live at a nursing home for the
rest of his life. For now, the largest asset for mom and dad
is the $300,000 family homestead. The family home is an
initially exempt asset in that it is protected from being used
to pay for debts and nursing home care costs. As do most
couples, mom and dad hold title to the property jointly.
The problem is if mom were to predecease dad, dad would
inherit the house and the house would be used to pay for
dad’s long-term care. (Or the state would recover all the
equity in the house at dad’s death during “estate recovery”
which will be explained in more detail later in this book.)
The technique we use to protect the house in case
mom passes away first is to have dad gift his half-interest
in the house to mom. Then mom disinherits dad so he
would receive only his statutory share, about 1/3 of the
estate upon mom’s passing. This means that if we have
a $300,000 house, dad would receive only $100,000 and
$200,000 would go to the children and be protected from
being used for his long-term care. (The hope is the children would use the $200,000 to supplement what dad
needs for his care).
However, it’s a big problem if dad is incapacitated and
has either no power of attorney or has a power of attorney
that permits only limited gifts. Since the house is worth
$300,000, for dad to gift his one-half interest, a gift of
$150,000 to mom would be required. (By the way, because
only gifts between spouses are exempt from a five (5) year
transfer penalty, the only person in the world we can give
dad’s interest to is mom.)
Since the power of attorney only authorizes limited
gifts of $14,000, we cannot gift the house to mom. This
leaves the house unnecessarily at risk to pay for long-term
care or to estate recovery. We can’t tell you how often
we’ve seen a healthy spouse living at home predeceased
the institutionalized spouse. Many care giving spouses run
themselves ragged taking care of the ill spouse which compromises their own health. A word of caution: If you are a
caregiver, please take time to take care of yourself. You are
your loved one’s best advocate. If your health is compromised, who then will serve as your loved one’s advocate?
Another common problem we see with the financial power of attorney is what we call the “springing
power of attorney” or “two doctor standard.” Essentially, the power of attorney document states that an agent
can make decisions on your behalf only after two doctors
put in writing that you are incapacitated. This is called a
“springing” power of attorney because it springs to life or
becomes effective only after two doctors put in writing
that you are incapacitated. The problem is that the Health
Insurance Portability and Accountability Act (HIPAA),
the healthcare privacy act, made doctors both civilly and
criminally liable if they release your medical information
to the wrong person or entity.
The intent behind HIPAA was to keep our medical
information private, but if a doctor or hospital releases information to the wrong person, they can be civilly and
criminally liable for doing so. This is why when you enter
into a hospital or doctor’s office they have you sign a HIPAA waiver that authorizes who they can talk to. Because
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of HIPAA, doctors are unwilling or very reluctant to put
in writing that you are incapacitated.
If you have a financial power of attorney that’s effective only when two doctors put in writing that you are
incapacitated, and now, because of HIPAA, doctors are
unwilling to put in writing that you are incapacitated, your
power of attorney is “powerless” at the critical moment
when you need it most. In response to this, we no longer
prepare two doctor standard springing powers of attorney;
instead we now prepare powers of attorney that are immediately effective in order to avoid issues with HIPAA.
A few years ago we had a client who insisted on the
“two-doctor standard springing financial power of attorney.” We recommended that she not use this language, but
she insisted. Since she was a client and was paying the bill,
we complied. She stated that she hadn’t seen a doctor in
fifty (50) years, and was going to manage her affairs as
long as she could.
Tragically and somewhat ironically, a few months after
we signed her documents, she suffered a massive stroke
that left her brain-dead on her deathbed. One of the additional issues we faced was that she was a caregiver for
her husband, who was in late-stage Alzheimer’s. In spite
of her clear incapacity, it took her son almost three weeks
to get two doctors to put in writing that she was incapacitated. During those three weeks, the son had no control
over mom’s accounts to pay bills or otherwise take care
of mom or dad’s financial affairs. The lesson is that you
should have your power of attorney reviewed to make sure
it can speak for you if you can’t speak for yourself. You
need a powerful power of attorney!
MEDICAL POWER OF ATTORNEY
AND LIVING WILL
The next set of documents everyone should have in
place is a medical power of attorney, HIPAA waiver, and
living will directive. In January of 2007, Pennsylvania
combined these documents into one. The HIPAA wavier
allows you to name who the doctors can speak to without
worrying about civil or criminal penalties. The medical
power of attorney section allows you to select someone to
make medical decisions for you if you cannot make them
for yourself. The living will directive is a section of the
document in which you can let your family and medical
professionals know how you feel about end-of-life medical
decisions such as the introduction and continuation of life
support that only prolongs the process of dying.
If you are a Pennsylvania resident and have not updated your medical power of attorney and living will since
January 2007, we strongly recommend that you do so. The
new document is more comprehensive and clarifies many
things that were unclear under the old law. Furthermore,
our firm has added specialized language that makes our
document better to serve your interests. However, if you
have the old form, do not worry because the new law specifically states the old form is still effective and binding
but because the new form is substantially better, we recommend updating the document.
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The most important thing a living will can accomplish is to let your family know what you want as far as
end-of-life decisions. We have had numerous calls from
children of clients thanking us for putting a living will in
place for the parents because when end-of-life decisions
had to be made, they knew what their parents wanted.
This can go a long way to alleviate any guilt and give
direction to the family because they are just carrying out
their parents’ wishes.
So in order to avoid a guardianship proceeding or what
we call living probate, one must have a powerful financial
power of attorney, healthcare power of attorney/living will
and HIPAA authorization and release.
But in addition to these documents, what other documents should a proper estate plan include?
You should have your power
of attorney reviewed to make
sure it can speak for you if
you can’t speak for yourself.
5
WILLS AND PROBATE:
WHAT’S ALL THE FUSS?
Everybody should, at minimum, have a
will. If you do not have a will in place, guess who has an
estate plan waiting for you? You are right. The IRS and
the Commonwealth of Pennsylvania have a plan for you.
If you die with no will, you are considered to have passed
away as intestate. When someone dies intestate, the IRS,
Pennsylvania law, and the County will decide who is in
charge, who will be your beneficiaries and who gets paid
and who doesn’t. Do you really think the IRS and the
Commonwealth of Pennsylvania have the best interest of you and your family at heart? The plan the IRS
and the state have for you and your assets may be completely different than what you want to occur.
Our firm calls this the “I love you but” plan: “I love
you and I hope everything works out, but I am not going
to do anything except let you clean up the mess.” In retrospect this sounds more like the “I hate you” plan: “I don’t
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love you enough to clean up my own mess and will leave it
for you to clean up after I am gone.”
A will, the most common of estate plans, is a legal
written document that names who is in charge, and who
gets what and when after your death. It also names the
guardian(s) for any minor children. At a minimum everyone should have a will, a power of attorney for finance, a
power of attorney for health care/living will and a HIPAA
waiver. For many of the peers of our generation, this simple estate plan may have met their needs. But today, this
simple plan may just not be enough.
A will does not control the distribution of jointly held
assets or assets with beneficiary designations such as an
IRA or a life insurance policy. Even if your will says everything goes to your spouse, if your beneficiary on your
life insurance policy is your mom, the proceeds will go to
your mom, not your wife. If you have not recently double-checked your beneficiary designations on your life insurance policies, IRAs and annuities, now is a very good
time to do so.
There are several drawbacks to a will. First, a will guarantees that your estate will go through probate—it does
not avoid probate. Probate is the court process in which
all your property and assets get distributed pursuant to the
terms of your will. So what is the big deal of a will going
through probate? Probate takes time and costs money.
While some people, mainly probate attorneys, say that
probate is “No Big Deal,” and there is no reason to avoid
it, we and many of our clients strongly disagree. Probate is
a legal process by which a court identifies assets, identifies
who is in charge, recognizes creditors, and identifies beneficiaries. If there is a will, the court will validate the will
and settle any disputes. If there is no will, the court will
determine who is in charge and determine who the beneficiaries are. If a person dies with any assets in his or her
name but with no beneficiaries named, the estate has to go
through probate.
A will does not avoid probate. In fact, a will is a
one-way ticket to the probate process. If you have a will,
probate is the only way to transfer property after you die
if the assets are in your own name only and there are no
beneficiaries designated.
So why does probate exist? In simple terms: dead people cannot sign documents! Let us use this example to
illustrate why probate exists. Assume grandma, a widow,
dies owning a house. None of her children want or need
the home, so they decide to sell it.
The first person to walk into the house offers to buy
the house and offers to pay cash and the closing is scheduled for a few weeks later at an attorney’s office. At the
closing, the deed is on the attorney’s conference room table, but there’s a problem with the deed. Grandma obviously is not going to be there to sign the deed. The main
reason probate exists is because dead people cannot sign
their names. Essentially the purpose of the probate court
is to appoint someone who is authorized to sign a deceased
person’s name.
If you thought grandma was smart and had a powerful financial power of attorney and the person who
held grandma’s financial power of attorney could sign the
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deed, please note the power of attorney stops working at
death. Therefore, after grandma died, the agent named in
her power of attorney no longer has any authority to sign
grandma’s name and therefore cannot sign the deed.
Another reason probate exists is to make sure creditors
are paid. Unless the estate is bankrupt and a court has to
decide who gets paid and who does not, most creditors do
not use the probate process to get paid anyway. Typically,
creditors simply send final bills, the person in charge pays
them, and the affairs of the estate are wrapped up.
I know you must be thinking, “But I do not have unpaid creditors, so why should my estate go through probate?” In Pennsylvania, the probate process is essentially
as follows. Typically the original will and a death certificate are given to an attorney who prepares a petition to
the court for them to appoint executor or executrix of the
estate. The executor is the person in charge of wrapping
up the affairs of the decedent, paying bills, taxes, and
distributing the estate to the beneficiaries. The executor,
usually accompanied by the attorney, takes the original
will, a certified death certificate, and the petition to the
register wills office in the county in which the decedent
passed away and files the petition. A fee is paid at the register of wills office, who then decides whether to admit
the will to probate.
If the will is not self-proving, that is, a will witnessed
by two or more individuals who certify by affidavit that the
will was signed by the decedent or testator, the witnesses
to the will have to be located to sign an affidavit authenticating the decedent’s signature and appear at the register
of will’s office. Or, an affidavit of unavailability has to be
presented to explain why the witness could not appear, i.e.
the witness has died.
If the will and petition are accepted, the register’s representative makes the executor take an oath that they will
carry out the duties of an executor in accordance with the
laws of the Commonwealth of Pennsylvania. A notice of
the opening of the probate has to be given to the decedent’s intestate heirs whether they are beneficiaries or not.
That is why we call this the “shake the nuts out of the tree”
notice. The notice tells the intestate heir that he or she may
or may not be a beneficiary of the estate but if they do not
act right away, the right to contest the estate may be barred.
After the notice is sent to the intestate beneficiaries,
a certification of the sending of that notice is filed with
the court. Next the estate is advertised in the local legal
journal and a paper having general circulation for three
consecutive weeks. An inventory of the probated assets is
then prepared and filed with the court. An inventory is
just what it sounds like: a list of the value of the probated
assets calculating the value of the assets as of the date of
the decedent’s death.
The executor then prepares or has prepared an inheritance tax return. The return is due and the taxes must be
paid within nine (9) months of the date of death of the
decedent. However, for returns filed and taxes paid within
ninety (90) days of the death, a five percent (5%) credit on
the taxes due is granted. The rate of inheritance tax to a
spouse or to charities is 0 percent; the rate for lineal heirs
such as children, stepchildren, grandchildren, parents or
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grandparents is 4.5 percent. The rate to siblings is 12 percent. The rate to all other beneficiaries, including nieces
and nephews, is 15 percent.
With some exceptions such as an active farm, the only
asset that is not subject in Pennsylvania to inheritance
tax is life insurance. All other assets including real estate
and IRAs, after deducting for estate-related expenses
and funeral expenses, are subject to inheritance tax.
Pennsylvania currently takes over six (6) months to
determine whether they accept the return as filed, to make
changes, or to ask questions.
After the state approves the return, one of two things
happens: either the family agrees to an informal accounting and signs a receipt and release/family settlement agreement as to the disposition of the estate or, the executor can
petition the court for a formal accounting. Prior to hearing
on the accounting, the executor must give a sixty (60) days’
notice about the hearing to the beneficiaries and all interested parties.
At the hearing, the attorney appears in front of the
judge, answers any questions or challenges. If there are no
questions or challenges, the judge signs off on the estate.
If no one appeals after thirty (30) days, a specific notice is
filed with the court and the administration of the estate
is complete. As you can see, there’s a lot of “hurry up and
wait” in the probate process.
There are two main reasons to avoid probate: time and
attorney’s fees. The first reason to avoid probate is that
it takes time to administer the estate. We tell clients to
expect about a year to complete probate estate. A Penn-
sylvania probate attorney quoted in the Allegheny County
legal journal stated that a simple estate takes nine to twelve
months to administer while a typical estate takes twelve to
fifteen months. AARP conducted a survey that showed
that the nationwide time for probate is typically about two
years. If your estate is not organized, or if you have no
will in place, or if there are family issues, probate can take
even longer. This can be especially troublesome for the
person you name as executor if he or she lives out of state.
Probate essentially ties your executor to the Pennsylvania
court system for up to fifteen months or longer.
The second reason to avoid probate is attorneys’ fees.
In Pennsylvania, attorneys are permitted to charge a reasonable fee for probating an estate. A reasonable fee is
typically anywhere from 3 to 7 percent of the gross estate
depending on the size of the estate. (The executor is also
allowed to charge a fee and that fee is typically the same
as the attorney’s fee.) One particular case in Pennsylvania
inheritance law is the Johnson Estate case; it is the most
relied upon case to determine what a “reasonable fee” is
for attorneys and estate settlement. The Commonwealth
of Pennsylvania even relies on the case when it determines
whether an executor or attorney’s fee is reasonable. The
case illustrates that a reasonable fee to probate a $200,000
house is $9,750; therefore, it would be reasonable to expect
attorney the charge almost $10,000 to settle your estate if
you own a $200,000 home. The Johnson Estate case also
says that the maximum attorney’s fee for non-probate estate or non-probate assets is 1 percent. Therefore, by avoiding probate on a $200,000 estate, the maximum attorney’s
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fee would be $2,000 i.e. 1 percent of $200,000 rather than
up to $9,750.
Please note that the reasonable attorneys’ fees apply to
the “gross” estate, not the “net” estate. For example, if you
have a $350,000 home with a $300,000 mortgage, the fee
is based on the $350,000 figure. The mortgage owed is
deductible from inheritance tax but is not deducted when
calculating a reasonable attorney’s fee. Proper planning
will allow the attorney to only charge the maximum fee of
one percent (1%).
If someone owns property in more than one state, even
a timeshare, the estate can go through probates in each
state involved. This means involving additional attorneys
in each state. If you have a home up in Pennsylvania and a
condo in Florida, your estate would go through probate in
Pennsylvania and also have an ancillary probate in Florida.
Two probates are not better than one; two probates mean
two sets of attorneys’ fees. Two sets of attorneys’ fees are
not better than one!
We once probated an estate in which the deceased
had a timeshare on Hilton Head Island, South Carolina,
worth about $12,000 at the time. We had a South Carolina
attorney handle the probate of the timeshare and his fees
were approximately $5,000, almost half the value of the
timeshare.
We have not mentioned court costs yet, but they
make up only a small amount of probate expenses. On a
$200,000 estate that goes through probate, the actual court
costs, filing fees and advertising expenses would only be
about $1,000, a small fee compared to the attorneys’ fees
on that estate which would be about $9,750.
These fees and expenses can add up to a substantial
portion of your estate and every dollar paid in attorneys’
fees is a dollar your heirs do not receive. The saddest part
is that your heirs may end up having to sell the assets to pay
the fees and taxes. Many children learn this the hard way
when they settle their parent’s estates.
This is the fee schedule for the Johnson Estate case.
While the case has technically been overturned, the
Commonwealth of Pennsylvania relies on it to calculate a
reasonable fee. Put in the value of your estate and calculate
what would be a reasonable fee for settling your own estate.
COMMISSIONS
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So can probate be avoided? Is there a better way to settle
an estate? Yes! Probate can be avoided through the use of a
properly funded trust. But before we talk about trusts, we
have to talk more about Pennsylvania Inheritance Taxes
and Federal Estate Taxes.
In large part your parents did not concern themselves
with probate because the house they bought for $15,000
was only worth $90,000 when they died and did not result
in a large attorney’s fee. Meanwhile, you may have paid
$80,000 for a home which is now worth $350,000 which
would result in a sizable attorney’s fee.
A will DOES NOT
avoid probate.
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PENNSYLVANIA
INHERITANCE TAX
Pennsylvania is one of the few states that
still have an inheritance tax. By our last count, seven states
still have an inheritance tax. Think about it as a tax on
transferring property at death from one person to another.
The rate of the tax depends on the relationship of the
decedent to the beneficiary. In the past, Pennsylvania even
taxed inheritances between spouses, but they reduced it
to zero percent in the 1990’s. The tax rate to charities and
spouses is zero, but the spouse who receives an inheritance
in certain situations may still have to file Pennsylvania
inheritance showing that no tax is due.
The tax rate to lineal descendents is 4.5 percent. Lineal
descendents includes children, stepchildren, grandchildren,
step-grandchildren, parents and grandparents. Siblings
are taxed at the rate of 12 percent. Anyone else, including
nieces and nephews, are taxed at the rate of 15 percent.
One of the few assets that are not subject to Pennsylvania inheritance tax is life insurance. So if you have a
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niece or nephew you want to name as partial beneficiaries,
consider leaving them the proceeds from a life insurance
policy because those proceeds are not subject to Pennsylvania inheritance tax.
Pennsylvania inheritance tax is due nine (9) months
after the passing of the decedent, but you can receive a
discount of 5 percent discount on the amount of tax due if
you pay the tax within ninety (90) days of the death. This
means that if the family owes $10,000 in inheritance tax, if
the tax is paid within three (3) months, the family would
receive a $500 discount on the tax due and only have to
pay $9,500 in Pennsylvania inheritance tax.
The issue quite frequently seen with inheritance tax
is one of liquidity. Perhaps you own a business or rental
units worth $750,000. Nieces and nephews who inherit it
would have to pay $112,500 in inheritance tax, while children or grandchildren would get a $33,750 tax bill. If siblings inherited it from each other, they would be liable for
$90,000. If proper planning was not in place, they might
have to “fire sale” property or business just to pay the taxes. Worse yet, they might be forced to cash in other assets
such as IRAs to pay taxes.
The problem with cashing in an IRA or 401(k) is that
not only would they have to pay the inheritance tax on
that money but they would also have to pay income tax
on the portion withdrawn. For example, a beneficiary that
inherited a $300,000 IRA and pulled $100,000 out to pay
taxes, not only would pay inheritance tax on the $300,000
but would also have to pay income tax, which could be
approximately 30 percent on that $100,000 withdrawal. So
essentially, we just turned $300,000 into about $250,000 at
the drop of a hat.
The Pennsylvania legislature has recently passed inheritance tax exemptions for farm property that is kept in the
family and used as a farm for seven years after the passing of the decedent as long as the farm generates at least
$2,000 of farm income annually. This is a good example
of the type of change in inheritance tax that can crop up
from time to time.
If the family is aware of the inheritance tax ahead of
time, they can plan and reduce the inheritance tax, and if
we cannot reduce or eliminate the tax, we can restructure
investments and insurance policies to provide the liquidity
necessary to pay the taxes so we do not have to sell the
family homestead, the family house, the family business,
or cash in an IRA just to pay the inheritance taxes.
Pennsylvania
is one of the
few states that
still have an
inheritance tax.
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7
FEDERAL
ESTATE TAX
Federal Estate Tax might be one of the
most difficult aspects of planning just because of the unknown. For 2015, Federal Estate Tax only affects estates
over $5.43 million. With proper planning we can double
that exemption of $5.43 million to protect $10.86 million
from federal estate taxes. I know a lot of you are thinking:
my estate still won’t reach $5.43 million. But there is the
trap for the unprepared.
The issue is that congress can change the exemption
amount at any time. In fact, the exemption amount has
changed 12 times since 1997! Since the current estate tax
rate is 40 percent, this is a tax to keep in mind when preparing an estate plan. I would rather have planning in place
and not need it, than not have it in place and need it just
because the federal tax rates are so high. Since 1997, the
estate tax rate has change 9 times and has varied between
a low of 0% percent to a maximum of 55%.
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SHIELDS & BORIS
The federal estate tax and Pennsylvania’s inheritance
tax can take a big chunk out of your estate. But the hidden
tax that nobody talks about is the potential of your savings
going to pay for long-term nursing care. We may or may
not have to deal with federal estate tax, but a long-term
illness can be catastrophic. This is the true thief that could
steal your entire legacy from your spouse, children, or
grandchildren. While it is important to plan for what happens to your assets when you pass away, it is more important to plan for what happens if you suffer a catastrophic
illness, which can be a fate worse than death.
But the hidden tax
that nobody talks
about is the potential
of your savings going
to pay for long-term
nursing care.
8
IN-LAWS AND
OUTLAWS AND
CAPITAL GAINS
Gifting can be hazardous to your health
and wealth. All of us have heard that a little knowledge
can be dangerous. When people finally realize that they
could lose their homes, their businesses, their farm, and
their life savings to a nursing home, they panic. They start
giving all their assets away to their kids. They put their
children’s names on the bank accounts because they think
that will protect them. Nothing could be further from the
truth. Asset protection is confusing, but many retirees are
tempted just to give their stuff away rather than paying for
proper estate planning advice. This is a huge mistake, and
it is the most common and most dangerous error made by
retirees today.
The most common question we get is, “Should I sign
the house over to the kids for $1.00?” But this is a much
more complex question than it seems on its face. The first
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rule is do not let your kids’ problems bump into your money. Do not ever put a child’s name on an account which
you would not put your in-laws’ names. Maybe you have
the most wonderful in-laws in the world, but too many
times in our offices we have seen wonderful in-laws turn
into outlaws. Statistics tell us that one in two marriages
will end in divorce, and, unfortunately, divorce changes
people; it can turn the sweetest person in the world into
a raging lunatic, and his or her divorce attorney will have
no qualms about coming after your bank account because
your child’s name is on the account.
But what if your children are not married or are already
divorced? Do they drive? What if they are in an accident?
Could they be sued? If it’s their fault and that results in
damages more than their insurance policies cover, if their
names are on any of your accounts, the insurance company will go after your assets. Worse yet, if they have other
creditor or IRS problems, the IRS can freeze any account
with their name on them, including accounts that have
your name on them as well. The bottom line is we do not
want your children’s problems to bump into your money.
Despite what your bank teller or your hairdresser
might tell you, adding your children’s names to your bank
accounts or real estate does not protect those accounts
from a nursing home crisis. Pennsylvania has the rightto-withdraw rule: if you can withdraw the money out of
the account, the money is yours. So by putting your child’s
name on the account does not mean that you cannot have
access to it, and that access means it is an available asset
and has to be spent down on care if you need care.
So setting aside the issue of giving away assets, which
means that you lose complete control over them, we also
have to look at what is called a “look back” period.
Everybody knows that you cannot give away all your
assets today, get down to $2,400, and apply for Medicaid
tomorrow. You have to wait five years, the “look back”
period. That means that any transfer in any month of
over $500 makes you ineligible to qualify for Medicaid
for five years from the date of transfer. In fact, if you
apply for Medicaid too soon, the penalty period could
even be longer.
Under the old law, prior to February 8, 2006, we could
always protect at least half, if not all, of his or her assets if
one spouse or the surviving spouse needs long-term care.
However, under the new law this is simply not the case.
Therefore, you must plan as far in advance as possible. The
goal of proper planning is to stack the deck in our favor
in order to make your money last as long as possible for
yourself and your spouse, and also to have an inheritance
for your children or grandchildren. Typically, the sooner
you do this planning, the more assets you can protect.
Another issue that has to be taken into consideration is
capital gain taxes. If you paid $20,000 for your house and
it is now worth $220,000, if you gift it to your child or sell
it for $1.00 (still considered a gift), the child gets your cost
basis in the property, which is $20,000. If the child never
kicks you out of the house and waits to sell it until after
you die, when the child sells the property, they will have
to pay capital gains on the difference between the cost
basis, $20,000, and what they sell the house for, $220,000.
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SHIELDS & BORIS
Federal capital gains taxes are 15 percent so that means
your child would owe $30,000 when the property is sold.
Capital gains tax is even due if the house is sold during
your lifetime because you no longer own the house so
you cannot use your $250,000 capital gains exemption for
selling a primary residence. Not only do family dynamics,
control issues, in-laws, outlaws and creditors have to be
taken into account when doing estate planning, we also
have to take into account capital gains and other applicable
taxes. Because your parents’ property did not appreciate
many times over, they did not have to worry themselves
about all these issues. Again, this is another example of
why a retiree today has a much more difficult time planning
than their parents.
Do not EVER put
a child’s name
on an account
which you would
not put your
in-laws’ names.
9
THE HIDDEN
RISKS
The risks we’ve talked about so far—not
having proper documents in place, death taxes, nursing
home costs and in-laws who have become “outlaws” –
can be easily seen and understood. However, there are
many risks to your legacy that are unclear. We call these
hidden risks.
We discussed the first hidden risk earlier: estate recovery. While the state cannot force you to sell your house to
pay for long-term care, if you go on Medicaid, the state can
put a lien on your house and take all the equity out after
you pass away. Federal law forces every state to attempt to
recover money previously paid out in the form of Medicaid
benefits, so states are aggressively pursuing the recovery of
Medicaid benefits by attacking retirees’ homes after they
die mainly because the states are broke.
The state can employ attorneys to make filings against
your estate in an attempt to recover money it paid out for
your long-term health care expenses while you were alive.
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Because these lawyers are paid a percentage of what they
recover (Pennsylvania allows attorneys to take 5 percent of
the estate or sometimes uses the Johnson Estate case cited
earlier which allows a reasonable attorneys’ fee of 3 percent to 7 percent of the estate), they have a huge incentive
to collect every penny possible from your estate, and that
money won’t go to your family.
According to estate recovery rules, states are “required” to attempt to recover funds from the Medicaid
recipients’ probate estates. This means assets that pass via
a decedent’s will after he or she dies are subject to estate
recovery. If the spouse of the deceased Medicaid recipient
is still living, no recovery is supposed to take place until
the surviving spouse dies. Likewise, if the child of the deceased recipient is under the age of twenty-one, or is blind
or disabled, estate recovery is not permitted.
The most commonly targeted asset is the real estate
titled to the decedent. This means if you have a house,
estate recovery could go after all these proceeds after you
pass away. But Medicaid also gives each state the option of
seeking recovery against property owned by the Medicaid
recipient that is not part of the recipient’s probate estate,
and this includes jointly held bank accounts, real estate
held jointly with rights of survivorship, assets held in a revocable living trust, and life estate interest in real property.
Because of Medicaid’s strict asset limits, most people
who have qualified for Medicaid benefits won’t have many
assets of value in their probate estates with the exception
of family homesteads. Estate recovery rules turned what
was an exempt asset while you were alive into countable
resources after you die. This gives the states the green
light to come after the family homestead with a vengeance.
That means if the state paid your major nursing home bill
through Medicaid, the state can snatch up your family
homestead from your heirs when you die.
Another hidden risk is market loss. The general rule is
the older we get the more we should have in safety and not
at risk. If you are retired and on a fixed income and supplement yourself with investment income, what happens
if your investments go down 40 percent? Will this affect
your income and your standard of living?
GOAL IS BALANCE
To combat all these risks, what you need is balance.
You need some money invested at risk for the long term
in the market to hedge inflation. You need to protect some
of your assets from long term care. You need some shortterm rainy day money. And you need some money for the
mid term such as for two to ten years. But we cannot talk
about risk management without talking about income.
The most commonly
targeted asset is the
real estate titled to
the decedent.
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10
INCOME AND THE
SOCIAL SECURITY
SHUFFLE
Everyone understands the devastating
emotional effects of losing a loved one, but many are not
prepared for the harsh financial impact they will experience at the passing of the first spouse. In most cases when
one spouse dies, the Social Security shuffle occurs. The
surviving spouse is not permitted to keep both Social Security checks previously enjoyed by the household. If a
husband’s Social Security check is higher than his wife’s
she will lose her smaller Social Security check and gain
his when he dies. Not only has she lost her spouse, she has
also lost a significant source of income.
Many unsuspecting retirees also experience significant
loss of income at the passing of the first spouse due to
“straight” single-life pensions. If a retiree elected to take
a single-life pension, that means it is only paid out during
that person’s lifetime. When a retiree dies, the pension
dies with him or her, and the spouse receives nothing.
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Many steelworkers who were forced out of work early had
straight single-life pensions because they had to maximize
their income to make ends meet. In order to maximize
their pension they left no trail for the surviving spouse.
Their intent was to save enough money or buy life insurance to ensure that their wives were provided for if they
predeceased, but one issue these retirees did not factor in
was the possibility of a long-term illness draining their
savings or forcing them to cash in the life insurance policy.
Let us take a closer look at how one retiree’s single-life
pension and Social Security shuffle can have a devastating consequence on the surviving spouse. Bob is seventy
and Sue is sixty-eight. Of significance is the life expectancy
table set forth in the Healthcare Finance Act, which indicates that females on average live seven years longer than
males. While none of us has a crystal ball to predict how
long we will live, when doing estate and asset protection
planning for Bob and Sue, we must consider that it is quite
possible that Sue, who is two years younger than Bob, may
outlive Bob by nine years.
Bob’s monthly income includes $1,200 from Social Security and $1,800 in pension. Sue’s Social Security is $600
per month. They have about $300,000 in the bank. The
Social Security shuffle means that when Bob dies, Sue will
inherit Bob’s $1,200 per month Social Security payment
but lose her $600.
When Bob retired from the steel mill, he took a single-life pension, which paid $1,800 per month, but Sue will
lose that at Bob’s passing as well. Sue’s total household income, which was $3,600 a month when Bob was alive, will
be down to $1,200 per month, a 67 percent loss. In our office we call that “moving to a new neighborhood” because
it is unlikely that Sue will be able to maintain her standard
of living with her income being reduced by $2,400 per
month. Not many of us could.
But Bob and Sue were not stupid; remember that
they had saved $300,000 to provide for Sue if Bob passed
away first. But the issue is what if Bob went into the nursing home for over three years prior to dying? Sue would
be able to keep only $119,220 as all the balance would
be spent on Bob’s care. At Bob’s death, Sue would have
a third of her prior income and only about a third of
their prior savings. How is she ever going to make ends
meet? Furthermore, their children will get next to nothing as inheritance because mom will have to spend that
$119,220 to make ends meet.
In our office we see this happen all too frequently:
married couples who have worked hard and saved their
entire lives only to have the surviving spouse live in near
poverty. Most husbands want to ensure that their wives
will be provided for when they pass away, so they save diligently and may even purchase life insurance to replace the
income their wives would lose at their deaths. They also
want to make sure something is left for the children. Unfortunately, single-life pensions, the Social Security shuffle, and unexpected illnesses could snatch away all those
plans in a second. The good news is that the proper planning could alleviate all these issues.
Due to a pension stopping at the death of a spouse,
many families purchase a life insurance policy on the life
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of the spouse who had a pension that stopped. While this
is a popular strategy which can work well, what most families are unaware of is that if either spouse needs care, if the
cash value of the policy is above a small amount, Medicaid
will force you to cash in the policy and use the cash value to pay for care. If the policy is gone when the insured
spouse dies and that spouse’s pension stops, the surviving
spouse is again left behind the eight ball.
We now have two strategies we can use to help in this
situation. The first is to plan ahead and make the owner
of the policy a specialized trust so that five (5) years after
placing the policy into the trust the cash value and subsequent death benefit is protected for the surviving spouse.
If we do not have five (5) years before needing use, the
second cutting edge strategy is to sell the policy on the secondary market and receive a stream of income payments
to help pay for care thereby protecting the family’s other
assets and income from going to pay for long-term care. A
portion is even set aside to pay for burial. Better to sell the
policy for more than its cash value than to lose its benefits
completely.
MARKET RISK
I’m sure that if people told you to invest your IRA in
Powerball tickets, you would tell them they were crazy, but
that is similar to what people do every day. The difference
between planning and not planning is the difference between a foolish person who builds a house on sand versus
the wise person who builds on rock. When the tide comes
in, it destroys the house built on sand, but the house built
on rock remains standing.
That is why protecting principal is the most important
concern at any cost. Warren Buffett once said the first rule
of investing is to never lose money. The second rule of
investing is to never forget rule number one. I will use the
following example to illustrate my point.
Let’s assume you invest $100,000 from your savings.
Also assume the market drops by 30 percent so your money goes from $100,000 to $70,000. How much growth do
you need just to get back to even? It’s not 30 percent. You
actually need 42.5 percent growth on your money just to
get back to $100,000. How long will it take to see a 42.5
percent growth rate in this economy? While we know from
recent experience a 30 percent loss can happen a matter of
months or even weeks, what we don’t know is how long it
will take to get your money back.
After the Great Depression, from 1929 through 1932,
the Dow fell 89 percent and took twenty-two years to recover. From 1973 through 1974 the Dow fell by 45 percent, and those losses were not recovered until December
of 1992. That means it took eighteen years to simply break
even.
Most recently in 2008, after the market peaked in October of 2007, stocks slid, and by March 5, 2009 the S&P
was down 56 percent and the Dow was down 53 percent.
Wall Street is fond of saying, “Just hang onto it; it’ll come
back,” but how long will that take? Isn’t it more prudent to
keep what you have in the first place? Isn’t this especially
true when in retirement and on a fixed income?
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SHIELDS & BORIS
The general rule of thumb is that the older we get the
more money we should have in safety and the less exposed
to market risk. We still need some money at market risk
to hedge inflation, but when you retire, you can’t afford to
take the same risks you could when you were working, had
income, had a longer investment time horizon, were not
living off your investments, and were still contributing to
IRAs and 401(k)’s. If all your assets were in the market in
retirement and the market had a 30 percent loss, this could
affect your standard of living.
You also have to look at how gains are calculated.
Let’s say you had that same $100,000 invested and you lost
50 percent of that in a year. The next year it went up to
$100,000, a 100 percent gain. The next year it went down
to $50,000, a loss of 50 percent, and in the next year it
went back up to $100,000, another gain of 100 percent.
Your financial planner could say that on average you had a
25 percent gain over four years even though you still just
had the $100,000 you began with. While rational investors
would say you still had only $100,000, an investment firm
would say on average you had a return of 25 percent per
year. This is just like saying if you had one foot in ice water
and the other foot in boiling water, on average you would
be comfortable. The bottom line is that the most important thing you can do with your assets is to keep them.
As of this writing, the NASDAQ, DOW and S&P
Five Hundred are all at all time highs. The last three
times this happened, the market had a 10 percent to 30
percent “correction.” Is your legacy prepared to handle
a 30 percent “correction” or reduction? Will this affect
your lifestyle? Would you be better to cash in some of
your gains, put the proceeds into a safe money account
and keep what you have?
We also must discuss bonds here. Many consider
bonds as a lesser risk than stocks or mutual funds. While
that can be true if you hold bonds to maturity and get
paid, it could be a problem if you have to sell prior to
maturity to raise money. First of all, many municipalities
are defaulting on the bonds. Secondly, and more importantly, interest rates are still very low. Historically, when
interest rates go up, bond prices go down. If your bond
pays 3 percent and a new bond is paying 4 percent, if you
have to sell your bond before maturity you have to sell it
at a discount. So the issue is if interest rates go up and you
have to sell bonds or bond funds before maturity, you
may have more risk and volatility in your bond portfolio
than you originally expected.
...the older we get the
more money we should
have in safety...
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CARING FOR AN
AGING ADULT –
GIVE YOURSELF A
BREAK
WHEN THE CAREGIVER NEEDS A
BREAK...WHERE CAN THEY TURN?
One out of every four families in the U.S. today are
caring for an aging adult in some way. For some families,
that means 24-hour live-in care. For other families, that
means that mom needs a ride to the doctor or to the grocery store. In the next 10-20 years, it is projected that elder care will replace childcare as the number one issue for
working adults. Employers will likewise be affected.
Caring for an aging parent can be rewarding and overwhelming at the same time. After all, these are one’s parents who raised and cared for us. It is very difficult when
the roles reverse.
Respite (res-pit) care is often the answer. Respite care
is time off for the caregiver. Respite gives the caregiver time
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away to rest and do necessary activities so that they can
continue to provide good care for their loved one. Being a
caregiver is often a job that can be physically and emotionally draining. Without relief, a person’s physical and emotional health can be affected, reducing the quality of care
for their family member. There are several options when it
comes to respite care.
In-home care can be arranged for as little as a few
hours, or up to several days with the proper planning and
financial resources. Be sure to pick an agency with a great
reputation and proven reliability. Make sure that background checks are done on all employees and Elder/Child
Abuse checks are also completed. In-home care for long
periods of time can be costly, so be sure to budget for the
expense. Also many home health agencies require several
days or weeks of advance notice for long assignments. Plan
ahead!
Nursing-Care/Assisted-Living facilities will often
offer respite care for a weekend or a full week or more.
Many facilities have a minimum number of days required.
The cost includes room and board; many other services
will be extra. Some facilities will only require a few day’s
notice, and others will require several weeks’ notice. Check
with the facilities in your area for costs and bed availability. As always, it is important to plan ahead.
Local Area Agencies on Aging or Social Service
Agencies will sometimes sponsor programs that allow for
volunteers to come to the home and provide respite care
for short periods of time. These visits are usually just for
a few hours. The volunteers are not medical professionals
and therefore are not able to care for seriously ill family
members, but they are able to provide some relief. These
programs are usually free or at a very low cost to local residents. Contact your local Area Agency on Aging for more
information.
The Alzheimer’s Association is a great source of
information. It is not necessary to be taking care of an
Alzheimer’s-diagnose family member to take advantage
of their referral database. Your local agency can usually
provide you with a wealth of information, resources and
contacts.
Family and friends are a great resource for the caregiver. Do not be afraid to ask for help; many people are
happy to assist with errand running and caregiving. Have a
family meeting and ask each family member for 1-2 hours
of his or her time per week; this will allow the caregiver to
take a hot bath, read a book, go for a much-needed walk,
or just go shopping. Make a schedule and give each family
member a copy.
Local Churches and Other Organizations are generally willing to send volunteers out to the home for a few
hours. Again, most of these volunteers are non-medical
personnel and will only be able to stay for a couple hours
at a time.
Taking care of yourself is just as important as caring
for your disabled/aging family member. If you become ill,
what will happen to your loved one? Do not hesitate to
ask for help. If you look in the right places, you might find
more help than you need.
So take a much-needed break. You deserve it!
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HOSPICE CARE – AT THE END OF LIFE
Hospice is end-of-life care. Usually, it is estimated
by a physician that a patient has 6 months or less to live.
Hospice focuses on caring for the individual, keeping
them comfortable, and providing support for the family.
Hospice care can be provided in the home, in a designated
hospice facility, or in a long-term care facility. These
services are available to patients of all ages. It is covered
under Medicare, Medicaid, and most private insurance
plans. Long-term care insurance also covers hospice care.
The primary caregiver for a hospice patient is usually a
family member. There is a team of healthcare professionals available to help the primary caregiver; this team often
includes a physician, a registered nurse, home health aides,
clergy or social services, trained volunteers, and physical
or occupational therapists. However, when a family needs
24 hour care provided by a home health aide, or other unlicensed personnel, they end up paying privately for this
service or utilizing their long-term care insurance benefits. Most long-term care insurers provide hospice care as a
standard benefit in their plan and there is no need to meet
the waiting period (elimination period).
PAY YOURSELF OR A LOVED ONE FOR
PROVIDING CARE – THE OPTIONS AND
TAX BENEFITS
Many adult children find it financially impossible to
leave their current employer and give up a much-needed
salary to take care of an aging adult. There are some ways
to offset that financial responsibility, but it does take diligence and investigation on the part of the adult child.
Retirees can pay adult children or other care providers, just like they would a home health agency for services,
by using a caregiver’s contact. This document should be
drafted by an elder law attorney. The child will be responsible for taxes on the payments.
Some retirees have long-term care insurance that allows a family member to be the primary caregiver, and get
reimbursed for providing the care.
If neither of those options apply, here are some other
options:
• If employed, check with your company’s human
resource department or seek the counsel of your
employee assistance program to find out about
family leave options or local programs that assist
with caregiving expenses and options.
• Contact Eldercare Locator, a service of the National Association of Area Agencies on Aging at
www.n4a.org/locator or phone 800-677-1116.
• A state-by-state listing of paid leave programs for
caregivers can be found at www.paidfamilyleave.org
Take a much-needed
break. You deserve it.
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WHAT SHOULD
MY ESTATE PLAN
ACCOMPLISH
TO PROTECT MY
FAMILY’S LEGACY?
Most clients have no idea what their estate plans should accomplish. They are understandably
concerned about how to handle their legacy, their futures,
and their spouses’ and children’s futures. They are worried about everything from their in-laws who have become
outlaws, to long-term care costs, to market risk.
My mom’s best friend shared all the same concerns.
She simply told me to do what I would have done for my
own mother. We had to investigate all the options that
were available and put our entire firm’s knowledge of estate planning to work for her. After some research, we sat
down to talk about her assets and desire for her legacy, and
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came to the following important conclusions about what a
proper plan should accomplish:
• Reduce or avoid federal estate taxation so that
assets will be protected from tax rates of 40
percent or more;
• Offer protection from creditors not only for
long-term care providers, but to prevent any of
their children’s issues bumping into the parents’
money;
• Create a lasting legacy for the family;
• Be cognizant of income tax and inheritance tax
consequences; and
• Be simple to understand and maintain.
With these goals in mind, our firm put together a plan
to protect her family legacy. We now look at all estate plans
through the lens of what would we put in place for our
own parents. The plans for our parents are much more
complicated and difficult than the relatively straightforward plans that were needed by our grandparents.
Be simple to
understand
and maintain.
13
THE OLD SOLUTION:
GIVING IT ALL AWAY,
MEDICAID AND LONGTERM CARE INSURANCE
If your parents were concerned about
planning ahead, reducing taxes and protecting assets from
long-term care, they typically would do one of two things.
The first and most common choice was to simply give it all
away. They would sign the house over to the children for
$1.00 or just gift all their bank accounts to their children.
This could reduce or eliminate federal estate tax, Pennsylvania inheritance tax and even protect assets from longterm care. If they ever needed long-term care, they simply
would qualify for public benefits such as Medicaid, called
Medical Assistance in Pennsylvania, because they had no
money if they gifted the assets three years ahead of time.
Even if they did not plan, under the law prior to the
Deficit Reduction Act of 2005, if one spouse got sick and
went to a nursing home, the healthy spouse (community
spouse) got to keep the house, one car, their own income,
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their own IRA and, after a Hurley appeal calculation, most
of the other countable assets. Even if a surviving spouse, a
widow or widower, went into a long-term care facility, we
were still able to protect over half of their assets from longterm care costs. With the passing of the Deficit Reduction
Act and other Pennsylvania legislation, these strategies either do not work or are impractical for today’s retiree.
The first issue with giving it all away is the obvious: if
you give it all away, you may not be able to get it back if you
need it. Never put anything in your child’s name that you
wouldn’t put in your son-in law or daughter in-law’s name.
If your child dies, gets sued, gets divorced, or goes bankrupt, your house or other assets you gave your child are at
risk. You could be living in a house that is now owned by a
son-in law or daughter in-law! Even if you simply got into
a fight with your child, they could legally kick you out of
your own home. Your children are much more likely to get
sued, divorced, or go bankrupt than you ever were.
The second issue is one of capital gains. Even if your
child never kicks you out of your house and waits to sell
the house after you die, they could be hit by capital gains
when the property is sold, even if the property is sold
during your lifetime. Federal capital gains taxes are typically 15 percent on the increase in the value of the property. For your father, capital gains may not have been that big
of a deal. They purchased a house for $15,000 to $20,000
and when they died, the house was sold for $90,000 to
$100,000. This would result in capital gains of $11,250
to $12,000. While not small, the taxes are not that much.
You purchased a house for $60,000 to $80,000. Today, that
house sells for $260,000 to $380,000. Federal capital gains
taxes alone would be $30,000 to $45,000 when a child sold
your house. Disregarding the risks of a child being sued,
divorced, going bankrupt, or getting mad at you, capital
gains taxes alone do not make sense economically to sign
the home over to the kids.
Finally, your parents had little if any IRAs or 401(k)’s.
Typically they spent their life working to secure a traditional pension for retirement. Since most of their assets
were in the bank invested in CDs and savings accounts,
there were little tax consequences to signing over the CD
or savings account to their children. Conversely, most of
you have sizable IRAs and 401(k)’s. What happens if you
want to sign your traditional IRA over to children while
you are alive? If you had a $450,000 IRA and transferred it
to your child, you would have $450,000 of taxable income
to the IRS. This means you just transformed $450,000 into
about $300,000 after tax money in the blink of an eye.
Your father did not have to worry about the tax consequences of signing his regular CD or savings account over
to you, but your situation is much more complex from a
capital gains and income tax standpoint, due to real estate
appreciation and your sizeable IRAs and 401(k)’s.
The other old answer to long-term care risk was to purchase traditional long-term care insurance. The idea was
that if you ever needed long-term care, the policy would
pay for it. But there are many issues with long-term care
policies. First of all, hardly anyone purchased the policy.
Less than 10 percent of people 65 or older own a traditional long-term care insurance policy. Second, only the very
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healthy could even qualify for them. Third, most people
did not like the idea of paying for a policy forever and never receiving any benefits. Fourth, the policies typically paid
inadequately when needed. For example, a policy may pay
$50 of care per day. Well when daily care was $80 per day,
this helped, but with skilled care now costing $293 per day,
the coverage is simply inadequate.
Finally, and worst of all, the cost of the policy is not
fixed and the companies can petition the insurance commission to increase the cost of the policy to the consumer.
Because the companies underestimated how many people
who owned the policies would make claims on them, the
insurance companies had to either increase the cost of the
policies or reduce the coverage of a policy. For someone
who is retired and living off of a fixed income, when the
companies increase the cost, the insured either had to reduce the amount of coverage or cancel the policy.
Due to the above reasons, we do not recommend that
you give all your assets to your children. We do not want
your assets to run into your children’s problems, especially
while you are still alive. Secondly, we also do not recommend purchasing a traditional long-term care insurance
policy. They are too expensive and could become even
more expensive in the future. Please note that if you currently have a long-term care policy in place, do not cancel
the policy unless or until you have a qualified professional
review it and/or the policy becomes far too expensive for
your budget.
As for now, we can still protect some assets in an emergency where someone has to go into a nursing home for
the rest of their life. The issue is how long these strategies
will be available. The Federal Government and the Commonwealth of Pennsylvania have attempted to reduce or
eliminate these strategies numerous times with some limited success.
HOW TO USE MEDICAID TO PAY FOR
LONG-TERM CARE
While Medicaid should be used as a last resort to pay
for long-term care, there are two cases where this may be
the only option for a family to protect assets. The first
example is a married couple. In the case of a married couple, the federal law will allow for a division of assets to
occur at the time that either spouse enters a nursing home.
Simply put, the couple is able to divide their assets by two
and the healthy spouse, usually considered the community
spouse, is able to keep half of the assets up to $119,220. Put
another way, let’s assume we have a couple, Mary, age 78,
and her husband, Bill, age 82, with countable assets totaling $380,000. Even though when you divide the assets by
two, you would expect that each spouse would be entitled
to $190,000, the healthy spouse, i.e. community spouse, is
only able to keep $119,220 in this example. The balance
of $260,780 could need to be spent down to $2,400 before Medicaid will begin paying. However, if the family is
aware of the OBRA 93 (the Omnibus Reconciliation Act
of 1993), they would learn that, actually, the healthy spouse
can retain the $260,780 by converting this amount into
the OBRA 93 Medicaid compliant annuity. While many
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individuals have annuities, this particular annuity is something that you would only come in contact with if you are
in a long-term care crisis and are attempting to do Medicaid or Veterans planning. In order for an annuity to be
Medicaid compliant it must be irrevocable, nonassignable,
noncommutable, nontransferable and actuarially sound.
When properly done, this planning will allow the healthy
spouse to maintain 100% of the assets by using the OBRA
93 Medicaid compliant annuity and turning the money
that otherwise would have to be spent down on care or
other exempt assets into income for the healthy spouse.
The healthy spouse’s income does not go to pay for the ill
spouse’s care thereby the healthy spouse essentially keeps
all the assets but some in the form of a monthly income.
The case of a single individual using Medicaid as a
long-term care planning strategy is a little more challenging. However, it may make sense to consider whether or
not the family is concerned about making sure that there
are adequate funds to pay for their parent’s funeral expenses and other expenses that are not covered by Medicaid.
Using a strategy commonly referred to as the “Half Loaf”
strategy, an individual would transfer approximately 50%
of the assets to their children or possibly into an irrevocable trust. The other 50% would be deposited into the
OBRA 93 Medicaid compliant annuity. The income generated from the annuity, along with Social Security and
pension income, would pay for the cost of care during
the penalty period that was created by making a transfer
of the other 50%. Put another way, let’s use Edith, age
80, who recently entered a nursing home where they have
Medicaid beds available. Since Edith has an IRA worth
$150,000, and an additional $150,000 in her money market
and checking accounts, she would be unable to qualify for
Medicaid. However, if we transferred her $150,000 to a
properly drafted irrevocable trust and the remaining balance of $150,000 IRA into an OBRA 93 Medicaid compliant annuity, the income from this IRA annuity, along
with her Social Security and pension, would allow her to
privately pay during the penalty that was created by transferring the other $150,000 into the trust. As a result, Edith
would be eligible to receive Medicaid benefits after the
penalty of only 17 months. The end result is that Edith has
now protected half of her assets, or $150,000 for her future
needs and the future of her children. This strategy is successful in Western Pennsylvania but has been challenged
by the Pennsylvania Department of Public Welfare.
The good news is that, unlike for your father, we have
powerful new legal answers and asset based solutions to
these issues that are both cost effective and tax efficient
that we will discuss in the upcoming chapters.
We do not want
your assets to run
into your children’s
problems...
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THE NEW
SOLUTIONS:
ASSET BASED
PROTECTION COMBINED
WITH POWERFUL LEGAL
DOCUMENTS
Your father’s generation rarely talked about
money to anyone. Many times after they passed away, the
child comes to our office with a “big box of stuff” for us
to sort out because mom and dad never told the children
what assets they had or where they were. Today’s retiree
had to clean up after their parents so they are much more
open to planning ahead to not leave a mess for their own
children to clean up. By being open to planning ahead,
this gives you the opportunity to not only avoid leaving a
mess for your children to clean up, but more importantly,
to protect your family’s legacy so you do not become a
burden to your spouse or your family.
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SETTING THE LEGAL FOUNDATION
Why do we need legal documents in place? We need
legal documents in place because we do not know what
the future holds. We would rather have documents in place
and not need them, than need them and not have them in
place. Because we do not know what the future holds, at
a minimum, everyone should have: a powerful financial
power of attorney that is HIPAA compliant; a healthcare
power of attorney which in Pennsylvania is combined with
a HIPAA waiver and a living will directive to address end
of life issues; and a will which names beneficiaries and
names the executor of your estate. If these documents are
not in place, the Commonwealth of Pennsylvania and the
IRS have a plan in place for your assets. They would decide
who is in charge, who your beneficiaries are and how your
estate is taxed. Do you really want Pennsylvania and the
IRS to design your estate plan?
In addition, if you want your estate to avoid probate,
which in Pennsylvania takes time and costs money, you
may want to consider adding a revocable living trust to
your estate plan. This is especially true if you have property in more than one state so that you would not have
an attorney and a probate in each of the states involved.
Finally, if you not only want to avoid probate but to protect assets from Pennsylvania Inheritance Tax and from
future long term care costs, you may want to also consider
adding various types of irrevocable trusts to your estate
plan. Depending on the type of trust utilized, you may be
able to protect assets from Pennsylvania Inheritance Tax
if the proper trust is funded one (1) year before you pass
away. Additionally, if the assets are in the appropriate trust
five (5) years before you need long term care, the assets in
your irrevocable trust would be protected from long term
care. Since the assets have to be titled in the appropriate
irrevocable trust for one (1) to five (5) years before something happens, the key is to plan ahead. So what do you
need to know about these documents before you get them
in place?
FINANCIAL AND HEALTHCARE POWERS
OF ATTORNEY
Becoming incapacitated is a fate many people consider to be worse than death. Without proper planning,
becoming incapacitated can have dire legal and financial
consequences. This is why the possibility of running out
of money keeps many retirees up at night. Financial power
of attorney law changed on January 1, 2015 so it is a good
time to have your financial power of attorney reviewed.
By definition, an IRA is an individual retirement account. If you have an asset such as an IRA and you become incapacitated, no one can manage or withdraw the
money from the IRA because the account is only in your
individual name. This means that even if you need money
to pay bills or if the market is collapsing and your account
needs reallocated, no one can reallocate or access your account. The only way someone can control the IRA is if the
incapacitated person has a proper and powerful financial
power of attorney in place.
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Now I realize that some of you are thinking, “I am
married, so my spouse can manage my affairs.” While that
might be true for certain joint accounts such as bank accounts, it is not true for any individual account such as an
IRA, 401(k), 403b, Roth IRA, individual bank accounts,
individual annuities, individual stocks, or individual investment accounts.
Please note that even though either owner of a joint
account can close an investment account such as a 401(k),
the check that liquidates the account would be issued in
the joint name. To deposit the check would require the
endorsement of both parties. However, if one spouse is
incapacitated, how can the incapacitated spouse endorse
the check?
The problem can be even worse. Not only may a spouse
not be able to obtain control of retirement accounts, they
also will not be able to sell or transfer any real property
that was owned jointly.
Pennsylvania most recently changed financial power of attorney requirements starting in January of 2015,
which required certain notices and disclosures. Pennsylvania power of attorneys can also become old or stale. This
means that if your power of attorney is 10 years old the
bank or financial institution may not accept it. Therefore,
if your power of attorney was signed more than 10 years
ago and you still have capacity, you can avoid problems by
signing a new power of attorney.
There are other concerns about financial power of attorney as well. Not only can powers of attorney not work
because they become old and stale but the actual words
of the power of attorney can render it ineffective. For example, a power of attorney may allow your agent only to
make limited gifts. This means gifts of $14,000 or less.
In fact, Pennsylvania’s laws suggest that unless the power
of attorney specifically gives the power to make unlimited
gifts, any gifting powers are considered to be limited to
the $14,000 amount. So you need to check the language of
your power of attorney. Unless it is specifically says “unlimited gifts”, you may have what we call a “powerless”
power of attorney which will not be able to protect assets
in the future if you or your spouse ever need long-term
skilled care.
MEDICAL POWER OF ATTORNEY AND
LIVING WILL
The next document everyone should have in place is
a medical power of attorney, HIPAA waiver and living
will directive. In January of 2007 Pennsylvania combined
these documents into one document. The HIPAA waiver
allows you to name who the doctors can talk to without
worrying about civil or criminal penalties. The medical
power of attorney section allows you to select someone to
make medical decisions for you if you cannot make them
for yourself. The living will directive is a section where
you can let your doctor and family know how you feel
about end-of-life medical decisions such as the introduction or continuation of life support procedures that only
prolong the process of dying.
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If you are a Pennsylvania resident and have not updated
your medical power of attorney and living will since January 2007, we strongly recommend that you do so. The new
document updated and clarified many things that were not
clear under the old law. Furthermore, our firm has added
specialized language, which helps the new document better serve your interests. However, if you have the old form,
do not worry. The new law specifically states the old form
is still effective and binding, but since the new one is more
comprehensive, we recommend you update the document.
The most important thing a living will can accomplish is to let your family know what you want as far as
end of life decisions are concerned. I have had numerous
calls from children of clients to thank us for putting a
living will in place for their parents because, when end of
life decisions had to be made, they knew what their parents wanted. This can go a long way to alleviate any guilt
for the family because they are just carrying out their parents’ wishes.
So the bottom line is that the most important documents to have in place to avoid guardianship, or what
we call living probate, are a proper powerful financial
power of attorney and a healthcare power of attorney,
which in Pennsylvania is combined with a living will
and HIPPA waiver.
WILLS AND PROBATE
A will is the most common estate-planning document. It is a legal written document that names who is in
charge, names your beneficiaries and who inherits what
and when. It also names the Guardian for any minor children. While some people, mainly probate attorneys, say
that probate is no big deal and there is no reason to avoid
it, we and many of our clients strongly disagree. Probate
is a legal process by which a court identifies assets, identifies who is in charge, recognizes creditors, and identifies
beneficiaries. If there is a will, the court will validate the
will and settle any disputes. If there is no will, the court
will determine who is in charge and determine who the
beneficiaries are. If a person dies with any assets in his
or her name but with no beneficiaries named, the estate
must go through probate.
A will does not avoid probate. In fact, a will is a oneway ticket to the probate process. If you have a will, probate is the only way to transfer property after you die if
the asset is only in your name and has no beneficiaries
named. Probate exists because dead people cannot sign
legal documents.
There are two main reasons to avoid probate, time
and attorneys fees. The first reason to avoid probate is
that it takes time to administer the estate. We tell clients
to expect about a year to complete the probate process.
AARP conducted a survey that showed that the average
national time to settle an estate through probate is typically two years. If your estate is not organized, you have
no will or trust planning in place and there are family
issues, probate may take even longer. This can be especially troublesome if the person you name as executor
lives out of state. Essentially probate ties the executor of
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the estate in the Pennsylvania court system for anywhere
between 9 and 15 months on average.
The second reason to avoid probate is the cost of attorney’s fees. In Pennsylvania, attorneys are entitled to a
“reasonable fee” for probating an estate. A reasonable fee
is typically anywhere from 3 to 7% of the gross estate depending on the size of the estate. The Johnson Estate case
illustrates a reasonable fee to probate a $200,000 house is
$9,750. Meaning that it would be reasonable to expect an
attorney to charge almost $10,000 in attorney’s fees to settle your estate if you own a $200,000 home.
For those who own property in more than one state,
even timeshares, the estate can go through multiple probates in each state that is involved. This means additional
attorneys will need to be involved in each state. If you have
a home in Pennsylvania and a condo in Florida, your estate
would not only go through probate here in Pennsylvania,
but you would also have an ancillary probate in Florida.
Two probates are not better than one. Two probates means
two sets of attorney’s fees. Two sets of attorney’s fees are
not better than one!
REVOCABLE LIVING TRUSTS
A revocable living trust is the most popular way to
avoid probate. A trust is simply a contract in which you
name someone to make financial decisions if you become
incapacitated and also name who is in charge of your estate
when you die. The trust includes instructions to pay any of
your final bills, expenses, and taxes and to distribute what
is left over to your designated beneficiaries. During your
lifetime, you maintain complete control of the assets in a
revocable living trust. The IRS says that since you are in
charge of your own assets, the trust is therefore a “grantor” trust and is still identified by your social security number. This means that if you have a revocable living trust
you still file the same federal income tax returns. Since
the revocable living trust is a contract which designates
who is in charge when you die, the court does not have
to appoint someone through the probate process to be in
control. Since the trust appoints someone to be in charge,
this avoids the very costly and time consuming process of
having the court appoint someone via probate. By avoiding
probate, you can reduce legal fees for settling your estate to
one percent (1%) or less of your estate in Pennsylvania.
While a revocable living trust is a great tool to avoid
probate, a revocable living trust will not protect assets
from long term care costs and will not protect assets
from Pennsylvania Inheritance Tax. So if you want to
protect assets from long-term care and/or Pennsylvania
Inheritance Tax, how can you accomplish that goal?
IRREVOCABLE TRUSTS
Irrevocable trusts are tools that cannot only avoid probate but, if set up properly and ahead of time, can even
protect assets from long term care costs, Pennsylvania
Inheritance Tax, Federal Estate Tax and creditors. Pennsylvania is one of a handful of states that still has an Inheritance Tax. It is a tax on the net estate of a deceased
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Pennsylvania resident (or for a non-resident a tax on real
estate in the Commonwealth of Pennsylvania), which, with
a few exceptions, taxes all net assets except life insurance
proceeds. If structured properly, after one (1) year of assets being in an irrevocable trust, the assets will be exempt
from Pennsylvania Inheritance Tax.
Another benefit of a properly structured irrevocable
trust is that assets that have been in an irrevocable trust for
five (5) years are exempt from paying for any of your long
term care costs. An irrevocable trust can be used as a tool
to protect a portion of your assets from long term care and
Pennsylvania Inheritance Tax but you have to get these
tools in place ahead of time. Take advantage of your good
health now to protect assets in the future. The old saying
is that the best time to plant a tree was 30 years ago. The
next best time to plant a tree is today. Plant your tree today
so that your assets are protected in the future.
PROTECTOR TRUST
A protector trust is a type of grantor irrevocable trust
that is designed to avoid probate, shelter assets from creditors and most importantly to protect assets from the nursing
home spend down as long as the trust has been properly
funded. The trust is set up or created by the client who is
the “grantor” and also controlled by the client who is the
“trustee”. By setting the trust up in this manner it gives the
client the ability to control the assets funded into the trust
as they see fit. As long as an asset has been transferred into
the trust and been in the trust for five (5) years, that asset
will be protected from the nursing home and Medicaid Recovery. However, there is a catch to the trust; even though
you control where the assets in the trust are invested you are
only entitled to the interest and/or income and do not have
direct access to the principle. In order to access the principle
we have created a position in the trust which is called a protector trustee. The client will appoint someone, preferably
two people, to serve in this position. The trust protector(s)
will have access to the principle with permission from the
trustees and be able to withdrawal assets as needed for the
grantors. Some good news for the grantor/trustee is that
the trust protector(s) can be replaced in the event any issues
arise and can even be removed as beneficiaries of the trust
if the client wishes. This still gives the client leverage over
their estate plan and how it is administered.
Again, the protector trust is a great option when trying
to shelter assets from the cost of long term care while still
maintaining some control over the client’s assets.
THE BOTTOM LINE
As grandma always said, “Clean up your own mess”.
The bottom line is that by putting powerful documents
in place ahead of time, you can choose a person to make
decisions for you if you are unable to do so. You can also
make sure that your assets are protected for you and your
spouse in the future, and, at your passing, transfer your
estate in the most efficient way to your beneficiaries.
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TRUSTS TO PROTECT FROM IN-LAWS
AND OUTLAWS AND CREDITORS
An irrevocable trust will be the owner of your assets
for Medicaid qualification purposes, but the assets will not
be your children’s until after you die. This prevents your
assets from running into your children’s problems while
you are alive. You can also structure the distribution so
that any share for a child could be protected from in-laws,
outlaws, creditors, and predators. So using trusts solves
a current retiree’s issue of qualifying for public benefits
such as Medicaid and protecting assets from children’s
creditors. However, trust planning to protect assets also
has some flaws.
An irrevocable trust cannot protect IRAs because putting an IRA into a trust is a taxable event. When you use
trusts to protect assets, you give up control over those assets. Finally, there is the risk that these public benefits as
they exist today will not be in place in the future.
Today’s retiree does not want to rely on public benefits
and wants to live independently for as long as possible. As
long as you have money left, you have options. So we want
to make your money last as long as possible. To do that,
we cannot use trusts alone, but can use new alternative
insurance and financial techniques to protect assets and
make your money last longer. When the proper insurance
and financial products is paired with the appropriate trust,
they both become even more powerful.
So what new insurance and financial products are
available to make your money last longer and protect your
family’s legacy?
ANNUITY BASED LONG-TERM
CARE SOLUTIONS
On August 17, 2006, the President signed into law The
Pension Protection Act of 2006 (the “Act”). Individuals
owning annuity contracts can now transfer these old policies for new annuities with long-term care riders with special tax advantages. The Act allows the cash value of annuity contracts to be used to pay premiums on new annuities
with long-term care payment provisions. In addition, the
Act allows annuity contracts without long-term care riders
to be exchanged for contracts with such a rider in a taxfree transfer under Section 1035 of the Internal Revenue
Code of 1986, as amended (“IRC”). This provision may
prove beneficial to individuals who own annuities with a
large cost basis and those who are not in the best of health.
When the new DRA compliant annuity is used to pay for
care, the money paid out of the annuity is tax-free. What a
great way to leverage an old annuity that has a low tax basis
and a lot of tax-deferred income, which you never intend
to touch anyway.
Here is an example of how an annuity-based long-term
care plan could help someone. For this example, we will
call our client Bob, age 70, and recently widowed. His children live out of town and are very concerned about what
would happen if dad needed some additional care in the fu-
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ture. Since Bob had some health concerns and was recently diagnosed with diabetes, along with a history of heart
disease, he was not a good candidate for traditional longterm care insurance. However, by taking advantage of the
Pension Protection Act, Bob could likely be insured. By
taking his $140,000 fixed annuity with a cost basis of only
$40,000 (i.e. the amount he actually deposited) and using
the IRS 1035 tax-free exchange from his existing fixed annuity to a new annuity that complied with the rules laid out
in the Pension Protection Act, Bob’s $140,000 fixed annuity could continue to earn interest. However, if he needed long-term care to pay for home care, assisted living,
or skilled care, the new annuity may double or triple the
amount of money available to pay for care from $140,000
to $280,000 or $420,000. And remember, since the income
from the annuity is used to pay for long-term care, it would
be tax-free.4
LIFE INSURANCE BASED LONG TERM
CARE SOLUTION
Until recently, the thought of using a life insurance
policy to pay for long-term care expenses was unthinkable. However, with the first baby boomers reaching the
milestone age of 65 on January 1, 2011, the insurance companies have begun offering long-term care coverage as a
rider on term life policies as well as whole life and univer4 Not all annuities are available in all states. You need to qualify
for the annuity. This example is for illustrative purposes only.
WHEN SOMEDAY ARRIVES 101
sal life policies. This was also the result of the Pension
Protection Act.
The basic concept is that the insurance company will
allow the insured to accelerate the death benefit of the policy if the insured is unable to perform two of the six activities of daily living (eating, dressing, bathing, transferring,
toileting or continence) or if the insured is cognitively impaired. The most attractive feature of this type of plan is
the ability of the insured to use the money to pay for home
healthcare, assisted-living, or skilled care. The policy will
even allow you to pick who your caregiver is—including
family members.
ASSET BASED LONG-TERM
CARE SOLUTION
“Legacy assets” are those assets in a retiree’s portfolio
that do not support their lifestyle, but are available in case
of some serious emergency (rainy day money!). These assets, if (hopefully) never needed, will probably pass to the
clients’ children, church, or charity after they die. The one
most significant risk to those assets is the need to pay for
long-term care.
Many people in this situation resist the idea of conventional long-term care insurance, not wanting to admit that
they might need it, and taking the position that they can
pay for any care out of pocket. They are choosing to “self
insure.” For these individuals, the ideal planning approach
would be to “invest” some of their legacy assets in such a
way that the assets can be worth as much as possible when-
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ever they may be needed to pay for care either in the home,
assisted-living facility, or nursing home. If not needed, the
money would then pass to the intended heirs, with no “use
it, or lose it” issues as there is with conventional long-term
care insurance.
To employ this strategy, money is transferred from its
current location (bank account, fixed annuity, etc.) into
a specially designed life insurance policy with riders that
prepay the death benefit, and additionally to reimburse
the insured for the incurred costs of long-term care. Depending on age, sex and health status, the money paid
into one of these policies may be worth twice as much if
the insured dies without ever needing to use it. In addition, it is Pennsylvania inheritance tax free. Also, if needed for convalescent care, the insured can receive up to
five times the amount of money deposited into the contract. Any money not used for that purpose would then
pass to the heirs at death.
While invested in the insurance policy, the client’s
money is safe and available for any other reason at any
time. There is usually a money-back guarantee that assures that the policyholder will always have access to the
funds. Rather than a typical “purchase” of insurance, the
transaction is more like “moving money from one account to another” ...a cash value account that provides
the same “savings” features as the bank, bond, or annuity
from which it came.
Because the actual cost of long-term care is so great
(potentially $106,999.80 per year or more in Pennsylvania)
and the average need exceeds 2 years, these policies are
usually purchased with a rider that extends the long-term
care benefits after the death benefit has been exhausted.
These riders effectively double or triple the benefit so that,
for example, a $75,000 premium deposit can provide as
much as $375,000 in total long-term care benefits, providing nearly 3 years worth of protection.
This approach is ideal for those individuals who reject the idea of purchasing conventional, annual-premium
long-term care insurance policies and take the position
that if they ever need long-term convalescent care, they
will pay for it using their own assets.
For individuals who do not, for whatever reason, want
to own any life insurance, there is an alternative. Since the
objective is to leverage up the individual’s assets if longterm care is needed, some insurance companies are now
offering fixed index annuities with guaranteed income riders that double or triple should the individual enter a nursing home.
Finally, of all the contingencies faced in retirement,
long-term care is probably the most difficult. It is also
perhaps the most costly, both financially and emotionally. These asset-based long-term care strategies allow wise
consumers to manage their money, and to provide significantly for such a possibility without committing large
annual insurance premiums to something they sincerely
hope will never be needed. Since the money to do this
must reside somewhere, these asset-based long-term care
products provide a safe and financially rewarding option.
104 SHIELDS & BORIS
IRA BASED LONG-TERM
CARE SOLUTIONS
While most people use their IRA to supplement retirement, many times waiting until age 70 1/2 (at which
point the mandatory required minimum distribution
rules apply), some people have chosen to take a portion
of their IRA and fund an IRA-based, long-term care
policy. As an example, we will use Tim, age 60, recently
widowed, and retired. While he feels very secure about
his retirement income, his main concern is long-term
care. By taking advantage of a tax-free, trustee-to-trustee transfer, Tim is able to reposition $157,000 of his
$500,000 IRA account into an IRA-based long-term care
policy. By doing so, he will create a tax-free death benefit in the amount of $167,000 that will be paid to his
children upon his death. More important than the death
benefit is that, should Tim ever need long-term care, this
policy will provide a monthly benefit of $6,976 that can
be used to pay for home healthcare, assisted living, adult
day care or even skilled nursing-home care.
Our next example shows the impact of using an IRAbased long-term care plan for a married couple. Both Beth,
60, and her husband Bob, age 65, are concerned about
long-term care but up to this point have been scared away
from purchasing traditional long-term care insurance due
to the requirement of paying annual premiums. While
they do not need additional income from Bob’s IRA, they
would like to help their children avoid paying taxes on the
IRA account when both Bob and Beth have passed away.
In the case of a married couple, this is when the taxes on
an IRA are due.
By taking advantage of a tax-free, trustee-to-trustee
transfer, Bob decides to transfer $240,000 from his IRA
into an IRA based long-term care policy. As a result, upon
the death of both Bob and Beth, their children will receive
a tax-free death benefit in the amount of $436,000. More
importantly, by making this transfer they have secured
$8,716 of monthly long-term care benefit for both of them,
to be used to pay for home healthcare, assisted living, adult
day care, or even skilled nursing care. In addition to the
above benefits, should they ever need to withdraw their
$240,000, the policy offers a full refund of premium.
By planning ahead both legally and financially, you can
make sure your legacy is protected for you, your spouse
and your heirs.
The only way someone
can control the IRA is
if the incapacitated
person has a proper and
powerful financial power
of attorney in place.
15
CONCLUSION:
TAKE ACTION AND
TAKE CHARGE
Your retirement will look much different
from that of your parents’. They had the benefit of traditional pensions and the curse of a shorter life expectancy.
You can expect to spend 20 to 30 years in retirement. The
decisions you make today will affect your lifestyle and your
legacy for decades to come.
You have always taken action and taken charge of the
situation. You are your best advice giver; not your brother-in-law, your hairdresser, your children, not even your
financial advisor. While all of them may have your best
interest at heart, they all have different agendas which may
or may not coincide with what you believe is best for you
and your legacy. As they say, “Momma knows best.” You
know ultimately what is in the best interest for you and
your legacy, but a failure to plan is planning to fail.
Today’s retiree typically wants three things from their
estate plan:
107
108 SHIELDS & BORIS
1) Control – to maintain your ability to manage your
assets and make your own decisions;
2) Simplicity – so you understand the components of
your plan and how they work together; and
3) Protection – protection from unnecessary taxes,
costs, and illness.
Remember, the biggest enemy of proper planning is procrastination, so begin today. Ask the tough questions like,
“How long will my money last? What happens if I die?
What happens if I live? How will I pay for long-term care?
What happens if the market goes down 30 percent? Can
we maintain our standard of living in retirement? How
can I not repeat the mistakes that my parents made in retirement?”
When you have the answers in place to the above questions, you can relax and enjoy your retirement; a retirement nothing like that of your parents!
...the biggest enemy of
proper planning is procrastination...
APPENDIX A
ESTATE
ORGANIZER
SCHEDULES OF
ASSETS AND OTHER
INFORMATION
PREPARED BY:
109 VIP Drive
Suite 102
Wexford, Pennsylvania 15090
(724) 934-5044
109
110 SHIELDS & BORIS
GENERAL INFORMATION TO OUR FAMILY
1) MISCELLANEOUS:
a) Our safe deposit box is located at:
_________________________________________
b) The keys to the safe deposit box are located at:
_________________________________________
c) Someone else’s property is in our safe deposit box.
___________________’s property is identifiable as:
_________________________________________
d) We have someone else’s property in our possession.
___________________’s property is identifiable as:
_________________________________________
e) Our personal safe is located at:
_________________________________________
f) Our tax records are located at:
_________________________________________
g) Other:
_________________________________________
2) ADVISORS:
We suggest that you complete this section in pencil so that changes can
be made as necessary.
Name
*Personal
Representative(s)
*Trustee(s)
Attorney
Doctor
Religious Advisor
Guardian
CPA
Insurance Agent
Stockbroker
*Other than Husband or Wife
Address
Phone
112 SHIELDS & BORIS
GENERAL INFORMATION TO MY FAMILY
FROM WIFE
1) DIRECTIONS FOR MEMORIAL SERVICES:
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
2) BURIAL:
My body should be buried in_____________________
cemetery located in___________________________.
My body should be cremated and the ashes ____________
_________________________________________
My body should be donated to ____________________
_________________________________________
Other, specify _______________________________
_________________________________________
3) SPECIFIC COMMENTS, WISHES, THOUGHTS:
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
114 SHIELDS & BORIS
GENERAL INFORMATION TO MY FAMILY
FROM HUSBAND
1) DIRECTIONS FOR MEMORIAL SERVICES:
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
2) BURIAL:
My body should be buried in_____________________
cemetery located in___________________________.
My body should be cremated and the ashes ____________
_________________________________________
My body should be donated to ____________________
_________________________________________
Other, specify _______________________________
_________________________________________
3) SPECIFIC COMMENTS, WISHES, THOUGHTS:
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
116 SHIELDS & BORIS
SPECIFIC LIST OF ASSETS
[It would be very helpful to your family if this list is kept up-to-date.]
Keep a copy of Certificates of Deposit with this page.
Location of originals:_____________________________
BANK ACCOUNTS
Include checking, savings, certificates of deposit, etc.
Name and Address
of Institution
Type of Account
Account Number
Keep a copy of stock certificates with this page.
STOCK
Name of
Corporation
Name & Address of
Broker/Transfer Agent
Account or Certificate
Number
118 SHIELDS & BORIS
Keep a copy of bonds with this page.
BONDS
Type of Bond
Name & Address of Agent
to Contact
Bond or Account
Number
Keep a copy of all notes, land contracts in which you are a creditor, etc. with this page.
ACCOUNTS RECEIVABLE
Name and Address
of Debtor
Due Date of Payment
Security for Debt
120 SHIELDS & BORIS
Keep copies of evidence of any business assets and business
agreements with this page (e.g., partnership agreements,
buy-sell agreements, close corporation stock certificates, and
miscellaneous business agreements).
BUSINESS ASSETS
Type of Asset
Location of Asset
Account or
ID Number
Keep a copy of all deeds with this page.
REAL ESTATE
Address
Type of Property
122 SHIELDS & BORIS
Keep a copies of all titles with this page.
TITLED PROPERTY
(INCLUDE CARS, TRUCKS, CAMPERS, BOATS, MOTORCYCKLES, MOBILE HOMES, ETC.)
Year
Make
Model
State where
Titled
[Please list any information which may be of importance regarding
any other assets.]
OTHER ASSETS
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
_________________________________________
124 SHIELDS & BORIS
SCHEDULE OF LIFE INSURANCE/
TAX-DEFERRED ANNUITIES
Include copies of the face page of insurance policies.
Company
Person Insured
Beneficiary
Primary
Life Insurance (Include accidental death policies)
Annuities
Designations
Contingent
SCHEDULE OF OTHER TYPES
OF INSURANCE
Include copies of the face page of insurance policies.
Type
Disability
Medical
Auto
Homeowners
Other Liability
Other
Company
Amount and Type of
Benefits
126 SHIELDS & BORIS
SCHEDULE OF TAX-DEFERRED
INVESTMENTS
Include copies of the face page of policies, agreements, etc..
Company
Pension
Profit Sharing
I.R.A.’s
Keoghs
Tax-Deferred
Annuities
Other
Beneficiary
Primary
Designations
Contingent
APPENDIX B
HOW DO I FIND A COMPETENT ESTATE
PLANNING OR ELDER LAW ATTORNEY?
Do you know any attorney to ask for a referral? If not,
although it is something we don’t often talk about, do you
know anyone who used an estate planning attorney? Spend
some time on the Internet. Do a search for a trust attorney
(city and state) or Elder Law attorney or Medicaid planning attorney, etc.
Attend a seminar. This is a great way to have an informal “interview” with an attorney to see if he or she seems
competent and appears to be a person you can work with.
You may be able to attend a lunch or dinner seminar, and
at worst, you may get a free meal.
Once you have found a potential attorney, ask the
right questions at your meeting. Remember the best and
most experienced attorneys usually have a line of people begging to hire them. (So if you call an attorney on
Monday and he or she can see you on Tuesday, beware.)
A competent attorney will not be insulted or put off by
these questions. Rather, he or she will welcome them because it shows you are taking steps to educate yourself.
We’d rather represent people who educate themselves
than someone who gets wacky advice from a neighbor or
other uninformed person.
127
128 SHIELDS & BORIS
The following questions might help you to interview
attorneys and find someone who can help you:
• How many years have you been in practice?
The longer the better; however, our firm is old
enough to have experience but young enough to
help you, your spouse, or your family if you pass
away or become incapacitated.
• How many years have you been practicing in
the area of estate planning and elder law? The
longer the better.
• Have you ever recommended Trusts? If the
attorney never has, leave. Some situations almost
require the recommendation of a Revocable Living Trust.
• Do you always recommend Trusts? If yes,
leave. A Trust isn’t always appropriate.
• What is a Revocable Living Trust? The attorney better be able to explain it to you in a way you
understand.
• What are an IDGT and ILIT? These are highly
sophisticated Trusts designed to help shelter
assets either from probate, nursing homes, taxes
and creditors and the attorney should be able to
explain in detail.
• How many Trusts have you prepared? The
more the better but make sure they also settle
Trusts. We prepared 253 estate plans last year
alone.
• What is probate? Again, the attorney should be
able to explain the process simply.
• What do you charge to probate an estate? If he
or she cannot state a reasonable fee or scale, leave.
• How many estate plans have you set up? We
do hundreds each year.
• What do you include with a Will package?
A proper Will package should include power of
attorney for finance, power of attorney for health
care, living will, and perhaps a HIPAA waiver.
(We also include an estate organizer to help you
organize your assets.)
• What do you include with a Trust package? A
Trust package should include a bill of sale, pour
over will, power of attorney for finance, power
of attorney for health care, living will, HIPAA
waiver, assistance with funding of the Trust and
the filing of at least one deed.
• What do you include in a Pre-Crisis package?
Normally everything in a Trust package with an
additional highly complex Protector Trust.
• How many trusts have you settled? The more
the better.
• How many wills have you settled? The more
the better.
• Do you prepare special needs trusts, and if so,
how many? The more the better.
• Are unlimited giving powers in a power of
attorney good or bad? Can ease loss of control but
130 SHIELDS & BORIS
can be needed for Medicaid planning. Understand
your options.
• Have you ever been disciplined by the state
bar? The obvious answer is no and should be no!!!
• What is the process for setting up an estate
plan? The attorney should be able to discuss freely.
• Do you prepare Pennsylvania Inheritance Tax
Returns? If yes, how many? The more the better.
• Do you regularly attending continuing
education courses in estate planning? The
answer should be yes. Attorneys are required to
complete 12 credits of course work per year.
• Do you handle estate planning for oil and gas
leases? The answer should be yes. For our firm,
Attorney Boris’ parents own a farm in Washington
County and he created their estate plan for their oil
and gas planning needs.
• What percentage of your practice is made up
of estate planning and elder law? The higher
the better.
• Have you ever represented a client in preparing
a Medicaid application? If yes, the attorney has
elder law experience and will keep nursing home
care in mind when planning.
• Have you ever published any articles, guides,
or books for consumers or other attorneys? The
more the better.
• What is the difference between a springing
and immediate power of attorney? A springing
power of attorney is effective only when two
•
•
•
•
•
doctors sign in writing that you are incapacitated.
An immediate power of attorney is effective as
long as there is space.
What is HIPAA and how does it affect my
estate plan?
Have you ever helped a client prepare a
Veteran’s Benefit application?
How can I pay for long-term care?
What would happen to my assets if I (or my
spouse) needed skilled or long-term care
today?
What is the DRA and how does it affect me
(and my spouse)?
ABOUT THE ELDER
LAW OFFICES OF
SHIELDS & BORIS
serves all of Western Pennsylvania in the areas of Estate
Planning and Elder Law. Together, Attorneys James P.
Shields and Thomas J. Boris have over 32 years of legal
experience and have helped thousands of families, couples and individuals with estate planning, Wills, Trusts,
Powers of Attorney, Living Wills, probate, special needs
planning, Medicaid planning and asset protection from
nursing homes.
Attorney Shields and Attorney Boris are members of
the National Academy of Elder Law Attorneys, the
Pennsylvania Bar Association, Allegheny County Bar
Association, NESA, and many other national professional
organizations.
133
134 SHIELDS & BORIS
ABOUT JAMES P. SHIELDS:
Attorney Shields graduated cum
laude from Saint Francis College in
1990 and from the University of Notre Dame Law School in 1993. He
is admitted to the Pennsylvania Bar
and Ohio Bar. Jim received an award
as one of the Pittsburgh Five Star
Wealth Managers in 2011, 2013, 2014
and 2015. Jim and his wife Denise have resided in Western
Pennsylvania their entire lives and have five children.
ABOUT THOMAS J. BORIS:
Attorney Boris is a graduate of
Washington & Jefferson College
(1994) and Duquesne University
School of Law (2001). He is
admitted to the Pennsylvania Bar
and the U.S. District Court for the
Western District of Pennsylvania.
Tom and his wife Stephanie have
resided in Western Pennsylvania their entire lives and have
two children.
109 VIP DRIVE, SUIT E 1 0 2
W EXFORD, PA 1 5 0 9 0
72 4 -93 4 -5 0 4 4
7 2 4 -93 4 -3 0 8 0 FAX
1-80 0 -87 9 -09 8 4 T OLL FR EE
“Protecting Your Family’s Legacy”
WHEN SOMEDAY
ARRIVES
How to protect your loved one from ending up in
a nursing home and what to do if you can’t
“As eldercare replaces childcare as the number one issue
facing today’s retirees, When Someday Arrives is one book
you need to take back control of your life and provide
excellent long-term care for your aging loved ones without
them going broke in the process.”
Don Quante
Don Quante has worked in the insurance and financial
planning industry for nearly 30 years. He is also a
nationally acclaimed speaker and trainer on the topic of
long-term care.
724-934-5044
fax: 724-934-3080
toll free: 1-800-879-0984
L aw/$16.95
WORD ASSOCIATION
PUBLISHERS
www.wordassociation.com
1.800.827.7903

WHEN SOMEDAY ARRIVES - The Elder Law Offices of Shields

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