Elder Law Survival Kit – Part 2

Here is the current information regarding the scope and cost of long term care:

  1. According to the Department of Human Services (HHS), eight out of every ten people in this country will require some type of long term care.
  2. The average cost of an assisted living facility is over $42,600 per year.
  3. The average cost of a room in a nursing home is $90,500 annually.
  4. The average length of stay in a nursing home is approximately two and one-half years. Women stay an average of four years and men about one and one-half years.
  5. Based on these figures, the cost to a family would be over $200,000 for the nursing home stage alone! And this doesn’t consider pre-institutional care (home care, adult day care, assisted living etc.)

Last issue we addressed the importance of a good Power of Attorney to help a loved one navigate the long-term care system.  Assets must be collected, valued and managed. Medical Assistance (Medicaid coverage for Long Term Care) comes into play for many people when they run out of money. Without a Power of Attorney it is impossible to locate, value and manage a loved one’s assets. In most cases, by the time people get to assisted living or nursing, they have had a period of decline and may not have been taking good care of their money.

The second part of our toolkit involves how you should structure your assets to enable your family to assist you quickly.  When we see families for the first time, we usually find numerous checking accounts, savings accounts, CDs, insurance policies, brokerage accounts, savings bonds and annuities. Since our elderly parents and grandparents love their interest, they are being convinced to trade in their CDs for annuities with the promise of higher income.  This is all well and good unless they get sick.  The problem with these products is that they are being sold to people in their eighties with a variety of ailments including Alzheimer’s and dementia.   When these individuals need nursing care, the assets are not liquid and their higher interest rate ends up costing them tens of thousands of dollars in extra nursing home costs because they are not able to access, value and administer these assets. And that doesn’t even take into account penalty fees!

When we work with younger clients – in their seventies! – we encourage them to simplify their assets and to start paring down accounts that are hard to manage, value and access.  The most difficult assets to manage are those subject to penalties or surrender charges.  These are generally annuities or life insurance products.  If I can get to people early enough, I try to impress upon them the importance of staying liquid and fast on your feet (financially) as you get older.  If it were up to me, I would have no insurance or annuities for anyone over the age of 80.   I don’t care if they offer 10% guaranteed interest.  The insurance companies are well-aware of the statistics on long term care and that their clients cash in their annuities well before they pay out any meaningful money.  And that vaunted “death benefit” that returns your money if the value goes down – that goes away when you cash the annuity.  The only thing “guaranteed” about an annuity is the commission for the salesman.

As for insurance, most people keep it for burial and funeral.  If you are going to do that, then get rid of the policy and prepay the funeral.   Besides being a bad investment, it takes forever for an agent under Power of Attorney to get a life insurance policy cashed.  A burial reserve account or prepaid funeral is an exempt asset for medical assistance and easy to manage!

The next most difficult asset is the sacred IRA.  I can’t tell you how many spouses come to me with their husband or wife in a nursing home and all that they have is a large IRA. We get to tell them that their spouse CANNOT own an IRA and qualify for assistance and we get to tell them that their choice is either to cash it and pay an enormous tax or to tap it each month for nursing home bills.  Again, a majority of IRA owners will need long term care. If you are reaching 80 and have only an IRA, then think about what happens if you really need the money.  We believe that by age 85 (and married) if your total assets are less than $400,000 then only one-half of that should be in an IRA.  The healthy spouse can keep his or her IRA, but in many cases it is hard to predict who will land in a home. And even if your IRA is exempt, that is only while you are married.  And only at the time your spouse applies for assistance.  After that, it is also up for grabs.

I know it is heresy to criticize IRAs but I see the effects of bad assets every day.  For those eight out of ten people that go into long term care, these complicated and restricted assets cost money because the harder it is to get to the money the larger the nursing home bill.

Our second piece of the toolkit is a simple asset mix as you reach your eighties:

  1.  Two checking accounts – both in joint names with Social Security and pensions for each spouse going into each account – DON’T MIX YOUR INCOME as you will have to “unmix” it you apply for Medical Assistance.
  2. One brokerage account (we will also talk about why you should carefully choose an advisor) that holds everything else.  If you want safety of principal, buy institutional CDs.  If you need the money you can get it without penalty.
  3. No Life Insurance, no annuities, no savings bonds.  Stop chasing income, it just might cost principal later on.
  4. IRAs are fine but keep in mind that all your eggs should not be in this basket.

It is never too early to start getting your affairs in order.  There are important tasks that will save you and your family not only money but emotional distress.  Come see us for a full review of whether your family is ready for the “golden years.”

mm About Leonard L. Shober

Leonard L. Shober has focused a quarter century on representing clients in their estates and tax matters. He began his legal career in an estate planning practice. However, his interest in taxes and estate planning led him to pursue a Master of Laws (LLM) from Temple which he completed in 1994. Len continued his estate and tax practice which ultimately led to a focus on the needs of the elderly and disabled. At Shober & Rock, Len focuses on elder law, tax and estate planning and estate and trust administration.

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