Ken Himmler.com » Family Protection Strategies

Coordination of Long-Term Care with Government Benefits

Ken Himmler — Tue, 20 Jul 2010 19:24:45 +0000

What does "coordination with government benefits" mean?

In the context of long-term nursing home care, a number of governmental (and governmentally regulated) programs and tools exist to help you pay for this care. Medicare, Medicaid, Medigap, and long-term care insurance (LTCI) (combined with Medicare) can each assist you to pay for your long-term nursing-home care, assuming you meet their respective qualifications.

What is long-term care?

Long-term care refers to a broad range of medical and personal services designed to assist individuals who have lost their ability to function independently. The need for this care often arises when physical or mental impairments prevent you from performing certain basic activities, such as feeding, bathing, dressing, transferring, and toileting.

Long-term care may be divided into three levels:

· Skilled care–continuous "around-the-clock" care designed to treat a medical condition. This care is ordered by a physician and performed by skilled medical personnel, such as registered nurses or professional therapists. A treatment plan is established, and it is usually contemplated that the patient will recover at some point.

· Intermediate care–intermittent nursing and rehabilitative care provided by registered nurses, licensed practical nurses, and nurse’s aides under the supervision of a physician.

· Custodial care–care designed to assist one perform the activities of daily living (such as bathing, eating, and dressing). It can be provided by someone without professional medical skills but is supervised by a physician.

What is Medicare and to what extent does it subsidize long-term care?

Medicare is a federal health insurance program for people age 65 and older, certain disabled individuals under age 65, and people of any age with permanent kidney failure. Medicare is divided into two parts: Part A is a hospital insurance program, and Part B is a medical insurance program:

· Part A covers: (1) inpatient hospital care, (2) inpatient care in a skilled nursing facility (SNF), (3) home health care, and (4) hospice care

· Part B covers: (1) doctors’ services, (2) home health care services (for persons not covered by Part A), and (3) certain other outpatient medical services and supplies not covered by Part A

Medicare was not designed to address custodial and intermediate long-term care needs at institutional facilities. Although Medicare will subsidize skilled medical care in nursing facilities, it will pay for only a certain number of days per year and requires a co-payment after a period of time. In addition, numerous rules exist governing when a beneficiary will qualify for benefits. To qualify for Part A’s SNF care benefit, the patient must have been hospitalized for at least three days before entering a Medicare-approved SNF. (The patient has 30 days from his or her hospital discharge date to enter the SNF.) Furthermore, a doctor must certify that the patient needed and received skilled nursing care or skilled rehabilitation on a daily basis at the SNF. Assuming these conditions have been met, Medicare will pay for skilled care in the following manner:

· Medicare will pay the full cost of SNF care for the first 20 days in each benefit period (year).

· The patient must pay a daily co-payment for days 21-100. This co-payment figure increases each year and amounts to $133.50 per day in 2009 ($128 in 2008).

· After the 100th day of SNF care, the patient must pay all costs.

What is Medigap insurance and to what extent does it subsidize long-term care?

Medigap is supplemental insurance sold by private insurance companies to fill in some of Medicare’s gaps in coverage. Medigap is an individual health plan that provides benefits for all or part of the deductible and coinsurance amounts not covered by Medicare. Certain benefits not covered by Medicare, such as payment for prescription drugs, may also be covered under particular Medigap plans.

With respect to long-term care, some (but not all) Medigap plans will subsidize the $133.50-per-day co-payment for days 21-100 of skilled nursing home care under Medicare Part A. Thus, your first 100 days in a given year of skilled care provided in an SNF will be free of charge. However, you will still have to pay the full cost out-of-pocket for the rest of the year. And bear in mind that Medigap will not pay for intermediate and custodial care in nursing homes.

What is Medicaid and to what extent does it subsidize long-term care?

Medicaid is a joint federal-state program providing medical assistance to low-income individuals who are aged, disabled, or blind (and to needy, dependent children and their parents), and who cannot otherwise afford the necessary care. Medicaid pays for a number of medical costs, including hospital bills, physician services, and long-term nursing care.

To qualify for Medicaid’s long-term care benefits, you must be financially and medically eligible. Financial eligibility is based on the amount of your income and assets, and although many people are not financially eligible for Medicaid when they first enter a nursing home, many states allow elders to "spend down" their assets to become eligible.

Typically, Medicaid beneficiaries must require some skilled medical care (e.g., intravenous feeding, treatment of dressings), but a medical condition requiring assistance with activities of daily living can also be part of the eligibility requirements. Thus, intermediate care in an institution will be subsidized in most states, as will home health care and personal care services at home.

Medicaid is the largest single payor of nursing-home bills in America and is the last resort for people who have no other way to finance their long-term care. Unfortunately, however, because Medicaid mandates income and asset thresholds, many people are forced to exhaust their lifetime savings to become eligible for Medicaid. For information about Medicaid planning, see Planning Goals and Strategies.

What is long-term care insurance (LTCI), and to what extent does it subsidize long-term care?

Long-term care insurance (LTCI) pays a selected dollar amount per day for a set period for skilled, intermediate, or custodial care in nursing homes and other long-term care settings. Because Medicare and other forms of health insurance do not pay for intermediate care in a nursing facility and custodial care in general, many nursing home residents have only three alternatives for paying their nursing home bills: cash, Medicaid, and LTCI.

Most policies will let you select the amount of coverage you want, typically running anywhere from $40 to $150 or more per day. A very comprehensive LTCI policy will cover skilled care, intermediate care, home care, adult day care, hospice care, and assisted living care.

Most policies provide that benefits will be "triggered" by certain physical and/or mental impairments. The most common method for determining when benefits are payable is based upon your inability to perform activities of daily living (ADLs). The most common ADLs are eating, bathing, dressing, continence, toileting, and transferring. Typically, benefits are payable when you’re unable to perform a certain number of the ADLs, such as two out of the six or three out of the six.

Coordination of Long-Term Care with Government Benefits

Insurance Companies Go For The Gold

Ken Himmler — Thu, 16 Apr 2009 00:25:03 +0000

The government’s bailout money is not up for grabs. Large insurance companies that qualify for the government’s bailout money have made applications. So far Hartford life, Prudential and Metropolitan are some of the ones that have made the application. They may be eligible for billions that may help bolster their corporate bond positions. Most insurance companies make money on the spreads that they get from buying corporate bonds and government bonds. Just like a bank makes a spread on the money they payout on Cds and savings accounts versus the amount they charge on loans. Insurance companies make money the same way – on their portfolios.

The problem was when the recession – depression hit many companies either stopped their interest payments on their bonds or outright defaulted. This has put a crunch on some insurance companies that may have been leveraged to highly. This new seed of investment help from the government should help these companies buy up more corporate and government bonds. While it still makes sense to have insurance companies as a part of an overall investment plan it also makes sense to diversify between different companies and different insurance products. You also want to check your state to find out what the actual coverage is in case an insurance company does go into receivership. As an example in Florida the amount each person is covered for is $100,000 for an annuity contract.

Insurance Companies Go For The Gold

How does a Cash Value in a Life Insurance Policy Really Work?

Ken Himmler — Sun, 07 Sep 2008 04:32:58 +0000

What is cash value?

Term insurance charges an increasing premium (annually or in bands) to reflect the fact that the insured is aging and, each year, more likely to die. Cash value life insurance has a level premium that is larger than necessary in the early years of the policy to offset the increased costs of insuring the individual in the later years. This excess premium is invested and kept in an account known as the cash value account. In the event that you surrender the policy before death, this excess premium and its earnings are returned to you.

Cash value, by any other name . . .

Since cash value life insurance, also known as permanent life insurance, comes in many product varieties, people often get confused. Whole life, variable life, universal life, and variable universal life are among the most common cash value life insurance products found in today’s marketplace. All of these policies operate in much the same fashion. (For the purposes of this discussion, where they differ is in how the cash value is invested.)

For more information on other life insurance such as life insurance to pay estate taxes, you can go to http://kenhimmler.com.

How cash value grows

We’ve already said that a portion of every premium payment goes toward your policy’s cash value. So, it’s easy to understand that the cash value of a policy will grow as additional premiums are made. The cash value of a policy may also grow because of earnings.

Whole life policies offer “guaranteed” cash value accounts that increase based on a formula determined by the insurance company. (Guarantees are subject to the claims-paying ability of the insurer.) Universal life policies offer cash value accounts that track current interest rates. Variable life policies allow their owners to invest in accounts that operate like mutual funds, meaning that their cash value accounts can be invested in bond, stock, and other funds, known as subaccounts. The cash value will grow or decline based on the performance of the underlying subaccounts.

The amount of your premium that goes toward cash value decreases over time

Over time, the amount that you contribute from each premium toward cash value decreases, because the cost of insuring you increases every year. The pattern is similar to what happens with a mortgage. In the early years of a home loan, you pay mostly interest; in the later years, you pay mostly principal.

Let’s take a very simplified example and assume you’re paying a $25-per-month premium for cash value insurance. In the early years of the policy, it costs relatively little to insure you–say $5 a month–because your odds of dying prematurely are low. In the later years of the policy, the cost to insure you is much greater–say $20 a month–because the insurance company knows that the odds are much greater that you will die as you grow older.

The cash value part of your premium behaves just the opposite of the insurance component. In the early years of the policy, your cash value can grow quickly since more of your premium is available for cash value. In the later years, the cost of insurance consumes more of your premium, so less is left over for cash value.

The role of cash value

You probably understand that, as you grow older, the cost of insuring your life gets more expensive. That’s why a term insurance policy will generally cost you a great deal more at age 50 than at age 30. With cash value insurance, the insurance company looks ahead and factors in the increasing costs of insuring you as you grow older. The insurance company calculates a premium amount that will cover the anticipated increase in insuring your life. Cash value plays a central role in this calculation.

As the cash value of your policy grows, the amount that the insurance company needs to pay out as a pure death benefit decreases. That’s because part of the policy payout upon your death comes from the cash value of the policy. The larger the cash value, the greater the percentage of the policy that can come from the cash value. In effect, to avoid increasing premiums as you get older, you’re setting aside funds now to make up the difference.

An example

Although grossly oversimplified, cash value works something like this:

Assume that a policy will pay $1 million upon your death. You make monthly premium payments, and each month a portion of your premium is applied to the cash value of the policy. After 30 years, the cash value of the policy is equal to $500,000. Since the policy will pay $1 million upon your death, and the policy already has a cash value of $500,000, the insurance cost needs to cover only the remaining $500,000.

Ten years later, the cash value is equal to $750,000. Because you’re 40 years older than you were when you bought the policy, the pure insurance cost of insuring your life is significantly higher now. However, because of the cash value, your policy is really insuring only $250,000. The rest of your policy’s payout will come from cash value.

How does a Cash Value in a Life Insurance Policy Really Work?

Revocable Living Trust

Ken Himmler — Tue, 19 Aug 2008 14:30:10 +0000

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Summary:
A revocable living trust can be a useful and practical estate planning tool for certain individuals, but not for everyone. This type of trust is most commonly used to avoid probate because, unlike property that passes by will, trust assets are distributed directly to heirs. This type of trust is also used as a way to maintain management of one’s financial affairs during a period of incapacity because someone else can immediately take charge when needed. A revocable living trust does not minimize income, gift, or estate taxes, nor does it shelter trust assets from creditors in most cases.

What is a revocable living trust?

A revocable living trust (also known as an inter vivos trust) is a separate legal entity created to own property, such as a home or investments.

The trust is called a living trust because it’s meant to function while the grantor is alive. The trust can continue after the grantor’s death, but the trust becomes irrevocable the moment the grantor dies.

Revocable living trusts are used to accomplish various purposes:

To ensure that property continues to be properly managed in the event the grantor becomes incapacitated
To reduce costs and time delays by avoiding probate
To lessen potential challenges to or elections against a will
To maintain privacy
To avoid ancillary administration of out-of-state assets

How does a revocable living trust work?

Establishing the trust

Typically, an individual creates and funds the trust, and names himself or herself as both the trustee and sole beneficiary for his or her lifetime (if married, both spouses are typically named beneficiaries). The grantor also names a successor trustee or co-trustee, as well as the beneficiaries who will receive any assets that remain in the trust at the grantor’s death. Often, a spouse or child is named as the successor or co-trustee and is also named as an ultimate beneficiary.

Caution: In some states, a co-trustee is required.

The grantor continues to manage trust assets during his or her life. Any income earned or expenses incurred by the trust flow through to the grantor on the grantor’s individual income tax return. A separate return for the trust is not necessary.

In the event the grantor becomes incapacitated (e.g., from illness or injury), the successor trustee or co-trustee can immediately step in to take over the management of the trust on the grantor’s behalf, avoiding the need for the grantor’s spouse or other family members to petition the court to appoint a guardian.

Tip: If special knowledge or skill is required to manage property in the trust, the successor or co-trustee should be qualified.

At the grantor’s death, assets remaining in the trust pass directly to the beneficiaries, bypassing the probate process. This can save time and money, and can minimize some of the burden of settling the grantor’s estate.

Funding the trust

To ensure that the trust fulfills its objectives, the trust must be funded after it is created. Funding the trust means transferring legal title from the grantor into the name of the trust. This may entail recording a new deed for real estate; re-titling cars and trucks; renaming checking, savings, and investment portfolio accounts; transferring life insurance policies, stocks, and bonds; executing new beneficiary designation forms; or executing assignments.

Although a revocable living trust can be funded with virtually any kind of property, including personal property, special consideration should be made before transferring certain types of property, including:

Incentive stock options
Section 1244 stock
Professional corporations

Tip: Transfers to the trust are not considered gifts, so the grantor doesn’t need to file a gift tax return.

Caution: Some states will reassess the value of a home for property tax purposes when it is transferred to a trust. Some states will disallow income tax deductions related to the home if it is owned by a trust.

Caution: Some banks will impose a penalty when certificates of deposits (CDs) are transferred to a trust because they consider such transfers to be early withdrawals.

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For more information on revocable living trusts or living trusts you can go to http://kenhimmler.com.

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Suitable clients

A revocable living trust can be appropriate for individuals:

Owning real estate in more than one state (to avoid ancillary probate)
With concerns about their health or future ability to manage their own financial affairs
Who want to keep transfers at death private (to avoid family conflicts, for example)
Who want someone else to manage and invest assets (e.g., persons with special needs, persons who often travel overseas)
Who want someone with special knowledge or skill to manage and invest assets (e.g., persons who inherit or win large sums of money)
Who are single or who care for themselves
Who are unmarried domestic partners
Who are elderly or ill
Who are not concerned about transfer taxes

Example

Harry and Wilma just celebrated their golden wedding anniversary. They have a 49-year-old daughter, Cindy, who is a professor at the community college, and a 47-year-old son, Carl, who is an engineer. Harry’s health is beginning to fail, and lately, he’s had a little trouble remembering things. Harry has always taken care of the family finances, and he’s worried that Wilma might not be able to manage them on her own if something should happen to him. Harry and Wilma own the following assets jointly:

Home	$600,000
Checking and savings accounts	2,000
Certificates of deposit (CDs)	20,000
Bonds	7,000
Mutual funds	5,500
Life insurance	$2 million

Total	$2,634,500

Harry and Wilma aren’t worried about federal transfer taxes because their estates ($1,317,250 each) will be sheltered by their exemptions ($2 million in 2008).

So, Harry and Wilma transfer all of the couple’s assets to a revocable living trust. Harry is named as trustee and his daughter, Cindy, is named as successor trustee. The trust also names Carl as successor trustee if Cindy cannot serve for some reason. The sole beneficiaries of the trust during their lives will be Harry and Wilma, and, upon the death of the last spouse to die, any assets remaining in the trust will pass to Cindy and Carl equally.

Now, Harry can still manage the couple’s property himself, but knows that if he should become incapacitated or die before Wilma, Cindy (and if not Cindy, Carl) will immediately take charge, paying the bills and providing Wilma with income until she dies. Harry also knows that when Wilma dies, Cindy and Carl will receive their inheritances without the delay and costs of probate.

Advantages

Avoids guardianship

Typically, the grantor names himself or herself as the trustee, and someone the grantor trusts or a professional trustee is named as co-trustee or successor trustee. So, if the grantor should become unable to manage the trust assets for whatever reason, the co-trustee or successor trustee can immediately take over control and continue managing the assets with little or no lapse in between. This can be very important with certain types of assets that require frequent attention to maintain their value, such as rental property or a securities portfolio.

Avoids probate

The grantor and the grantor’s spouse are typically named as the sole beneficiaries of the trust during their lives, and at their deaths, any assets remaining in the trust pass to the grantor’s named beneficiaries, usually children and grandchildren. If the grantor can and does transfer all of his or her assets in this way, having a will becomes unnecessary. Since assets passing by trust are not subject to probate as assets that pass by will are, distributions to beneficiaries can be made more quickly (and they are often needed quickly). Further, bypassing probate will save the grantor’s estate any costs that would have otherwise been incurred, such as filing fees and attorney’s fees. And, finally, the grantor’s family will be spared any burden that would be associated with the probate process, such as petitioning the court and organizing documents for filing.

Caution: Bypassing probate may not be an appropriate goal for some individuals. For example, smaller estates may qualify for an expedited probate process or be exempt from probate altogether. In some cases, the costs associated with a living trust may be greater than the costs associated with probate. And, under certain circumstances, the court’s oversight of the estate settlement during the probate process may be welcome (for example, when family conflict is involved).

Disadvantages

Does not save taxes

Though a living trust is a separate legal entity, it is not a separate taxpayer during the grantor’s lifetime. The grantor is considered the owner of the trust assets for tax purposes. All income and expenses generated by trust property flow through to the grantor and must be reported on the grantor’s personal income tax return. However, upon the grantor’s death, the trust becomes a separate taxpayer and different income tax rules apply. Further, assets in the trust will be included in the grantor’s gross estate, generally at their date of death value, for estate tax purposes. Therefore, a revocable living trust cannot be used as a way to minimize taxes.

Does not shelter assets from creditors

Generally, assets in a revocable trust are deemed to be owned by the grantor and are therefore reachable by creditors (although, in some states, the assets may not be reachable by Medicaid recovery after the look-back period expires).

Revocable Living Trust

Qualified Terminable Interest Property (QTIP) Trust

Ken Himmler — Tue, 19 Aug 2008 01:21:50 +0000

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Summary:

In general, transfers of property between spouses can be made federal gift and estate tax free under the unlimited marital deduction. However, transfers of terminable interests to spouses are disqualified from the marital deduction. A terminable interest is one that terminates or fails at a certain time or upon an occurrence or lack of occurrence of a certain event or contingency. A QTIP trust is an exception to this rule.

A QTIP trust is used when a spouse or both spouses want property of the first spouse to die to qualify for the marital deduction and provide lifetime income to the surviving spouse, but also want that property to be preserved and ultimately passed on to other beneficiaries.

What is a QTIP trust?

A QTIP trust (also called a marital deduction trust) is an irrevocable marital trust used to ensure that a decedent’s property will provide lifetime income to his or her surviving spouse and then pass to other beneficiaries. A QTIP trust qualifies for the unlimited marital deduction, allowing the surviving spouse to use his or her federal gift and estate tax exemption (also called the applicable exclusion amount–$2 million in 2008) and/or federal generation-skipping tax exemption (same amount as the applicable exclusion amount).

A QTIP trust is designed to transfer property free of transfer taxes under the marital deduction just as an outright transfer would. The result, as in an outright transfer, is that the property will then be subject to taxes in the surviving spouse’s estate, but can be offset to the extent of the surviving spouse’s available exemption(s). Another advantage of a QTIP trust is that the property does not pass outright to the surviving spouse–it passes to an independent trustee who controls and manages the property on behalf of the surviving spouse for his or her life, and then passes to beneficiaries (typically children and grandchildren) named by the first spouse to die.

How does a QTIP trust work?

QTIP trust requirements

To qualify QTIP trust property for the marital deduction, the following four requirements must be met:

The trust must direct that all income earned by the trust assets be distributed to the surviving spouse at least annuallyCaution: The trust document should not contain a provision that terminates the non-grantor spouse’s income interest in the event of divorce.

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The trust must direct that no person, including the surviving spouse, can appoint any part of the trust property to anyone other than the surviving spouse during the surviving spouse’s lifetimeCaution: The trust document should not grant a power of appointment to the grantor spouse, even if the power would only be exercisable after the death of the non-grantor spouse.

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Assets remaining in the trust at the surviving spouse’s death must be included in the surviving spouse’s gross estate for estate tax purposes
A QTIP election for all or a portion of the property funding the trust must be timely made on the grantor spouse’s gift or estate tax return, whichever is the case.Caution: Once made, the QTIP election is irrevocable.��

The surviving spouse can be given access to principal, but that is not required. At the surviving spouse’s death, the remaining assets in the trust pass to the beneficiaries who were named by the first spouse to die.

Funding a QTIP trust

Typically, a QTIP trust is created and funded at death by the decedent’s will or living trust, though it can be funded during life. If the QTIP trust is funded during life, a provision can be included in the trust document directing that in the event the non-grantor spouse dies first, the annual income will be payable to the grantor spouse.

Since the surviving spouse must receive the income interest from the QTIP trust to qualify for the marital deduction, the trust must be funded with some income-producing property that is “consistent with the property’s value.”

Caution: Careful consideration should be made before funding a QTIP with qualified retirement plan or IRA proceeds. This can result in distributions starting sooner, larger distributions during the surviving spouse’s lifetime, potentially higher income taxes on the benefits paid, and the possible loss of a life expectancy payout.

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Naming a trustee

The grantor spouse should not be a trustee of a QTIP trust because doing so may be deemed a retained interest sufficient to nullify the trust. The non-grantor spouse may be named as well as the ultimate beneficiaries, but if family harmony is an issue, a neutral trustee should be considered.

If the management of the trust assets is an issue, a qualified professional trustee should be considered.

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A/B and A/B/C trust arrangements

A QTIP trust is often used in conjunction with a credit shelter trust (also called a bypass trust). This is referred to as an A/B trust arrangement. Typically, the credit shelter trust is funded with property equal to the decedent’s available exemption amount, and the QTIP trust is funded with the remainder. In cases where it is not desirable for the entire remainder estate to fund the QTIP trust, a third trust can be created and funded with the difference. This is called an A/B/C trust arrangement (which is why a QTIP trust is sometimes called a C trust).

Qualified Terminable Interest Property (QTIP) Trust

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Suitable clients

A QTIP trust can be appropriate for married couples:

Who want to defer transfer taxes until the death of the second spouse to die
Who have children from a previous marriage, or outside the marriage, and want to ensure that those children will receive their inheritance
Who anticipate that the spouse who survives will remarry and want to prevent the new spouse from receiving any rights to family property
Where one spouse will need help managing the property, or has a high exposure to creditors or lawsuits

Example

John and Mary married two years ago. It’s the second marriage for John–he’s 70 years old and has two children from his first marriage. It’s Mary’s second marriage too–she’s 50 and has one child, Ann, from her first marriage. Since her divorce 25 years ago, Mary has struggled financially, raising Ann alone and helping her with college expenses. John was very successful and owned several businesses over the years–he retired recently with considerable wealth. John’s children, John, Jr. and Sally, are not happy about their father’s marriage and their relationship with Mary is tense, to say the least. John is devoted to Mary and wants her to live the rest of her life in comfort, but also understands his children’s position. The long and hard hours John spent building his wealth were made a little easier knowing his children would benefit from his legacy.

Assuming there is no prenuptial agreement or other legal arrangement, if John were to die today, Mary would be entitled to a statutory share of John’s wealth. John doesn’t mind that Mary would receive his wealth, but he believes this would result in a bitter dispute between Mary and his children, as well as the potential loss of some of his wealth to court costs and legal fees.

John executes a will that transfers property directly to his children in an amount that equals his available exemption, and pours over the remainder of his estate to a QTIP trust. John names Mary as the income beneficiary and he also gives her access to principal at the trustee’s discretion, though he could have given Mary more or less access to principal or no access at all. John designates a neutral professional to act as trustee. John also leaves clear instructions for his executor to make the QTIP election on his estate tax return.

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Advantages

Allows assets to pass transfer tax free under marital deduction even though assets ultimately pass to non spousal beneficiaries

QTIP trusts defer taxation until the death of the second spouse to die. At that point, assets remaining in the trust can be totally or partially offset by the surviving spouse’s available exemption(s).

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Provides income and financial security for the surviving spouse while preserving assets for descendants

The surviving spouse does not have to be given any access to principal or any powers of appointment.

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Protects assets from future creditors or lawsuits, new spouses or ex-spouses

Because a QTIP trust is irrevocable, future creditors or lawsuits, and new spouses or ex-spouses of beneficiaries will be unable to reach the assets while they are in the trust.

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Provides tax planning flexibility

The executor can elect to qualify all or only a portion of the QTIP trust assets for the marital deduction. This flexibility can be beneficial in some cases. For instance, if making a full election results in putting the surviving spouse’s estate into a higher transfer tax bracket, the executor might make a partial election instead to reduce overall taxes on the spouses’ combined estates.

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Promotes family harmony

Children from a previous marriage can feel more comfortable with a new spouse if they know their inheritance is secure.

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Disadvantages

Surviving spouse’s access to the trust assets is limited

Although the surviving spouse must receive all income from the trust, and can be given limited access to the principal, the surviving spouse cannot be given total access to the principal or a general power of appointment.

Tip: The surviving spouse can be given the power to demand the trustee convert unproductive property to productive property.

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Ultimate beneficiaries must wait until surviving spouse’s death

One of the requirements of a QTIP trust is that the surviving spouse must be the sole beneficiary during his or her lifetime. Heirs must wait until the death of the surviving spouse before they can enjoy any benefits from trust property.

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For more information on QTIP or other trusts such as living trusts or revocable living trusts you can go to http://kenhimmler.com.

Qualified Terminable Interest Property (QTIP) Trust

Life Insurance: Estate Planning

Ken Himmler — Fri, 15 Aug 2008 02:09:17 +0000

What is life insurance?

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A contract

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Technically, life insurance is a contract between the policy owner (which can be you, “the insured,” or a separate party) and an insurer. The policy owner agrees to make premium payments, and the insurer agrees to provide a specified sum to a designated third party (the beneficiary) upon your death.

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Tip:�� Contracts, including life insurance contracts, are governed by state law.

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And a will substitute

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Because proceeds are paid directly to the beneficiary, life insurance can bypass the probate process, saving both expense and delay.

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Purchased for four primary reasons

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Life insurance is one of the biggest players in the estate planning game. For some, it is the only way to ensure that family members will be able to support themselves after the death of the primary wage earner. For those with larger estates, life insurance can provide the funds needed to pay estate taxes (and other costs) without liquidating estate assets. For those with a business interest, life insurance can be used as a vehicle for business succession. Finally, for those with a generous spirit, life insurance can permit you to make charitable gifts.

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Advance planning needed to avoid taxes

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Although life insurance proceeds are generally received by the beneficiaries income-tax free, they may be subject to estate taxes if you do not plan in advance.

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For more information on estate planning or life insurance to pay estate taxes you can go to http://kenhimmler.com.

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Is it life insurance?

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The following are considered life insurance proceeds under the Internal Revenue Code:

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�� Death benefits paid under regular life insurance contracts

�� Death benefits paid under a workmen’s compensation insurance contract

�� Death benefits paid under an endowment policy where death occurs before the contract matures

�� Death benefits paid under a group life policy

�� Death benefits paid under a National Service or U.S. Government Life Insurance policy

�� Death benefits paid under a double-indemnity provision

�� Death benefits paid under an accident (or accident and health) policy

�� Death benefits attributable to paid-up additions and term additions purchased with dividends paid on a policy

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Why buy life insurance?

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Provides an income for your family

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Life insurance can provide your family with immediate cash to cover their day-to-day living expenses after your death. This may be desirable if your estate is small so there would be little left for your family to fall back on after payment of debts and expenses. This may also be desirable if: (1) your property has a high value but is not income-producing, (2) you have heavily invested in speculative securities, (3) you have parents, young or disabled children, or other family members who are dependent on you, or (4) your property is weighted heavily on the variable side.

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Provides for the special needs of your family

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Life insurance can provide funds for your children’s (or grandchildren’s) education, or it can be used to satisfy the special needs of individual family members (e.g., financial demands of a physically or mentally handicapped or learning disabled child, aging parents, or other dependents with physical or mental limitations).

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Provides for children of a previous marriage

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In today’s world, a family is often a mixture of “yours, mine, and ours.” If this is the case in your family, you may need to plan ahead to ensure that your assets are sufficient to provide for your new family as well as your children from a previous marriage. Life insurance may be one option that is right for you. For more information on this topic, see Providing for Children of a Previous Marriage.

�

Provides cash for payment of estate expenses and debts

�

Life insurance can provide funds for payment of federal and state death taxes and other estate settlement costs. For more information on this topic, see� Liquidity.

�

Can be used to fill business needs

�

If you are a business owner, life insurance proceeds can be used to:

�

�� Fund a buy-sell agreement

�� Finance nonqualified deferred compensation arrangements

�� Finance death benefit only (DBO) plans

�

Can be used to fund a charitable gift

�

Life insurance proceeds can be used to fund or supplement charitable donations. This can be accomplished in two ways: by having the proceeds paid directly to the charity or by using the proceeds to replace other assets given to charity. For more information, see Life Insurance and Charitable Giving.

�

What are the advantages?

�

Provides large amounts of cash at a relatively low cost

�

Life insurance can provide your family with a large amount of cash immediately upon your death. Usually, the proceeds exceed the amount you paid in policy premiums.

�

Is relatively risk-free

�

Investment in life insurance is fairly safe (i.e., life insurance companies rarely fail or become insolvent) as compared to other investment vehicles, and generally offers a higher return than traditional savings accounts.

�

Avoids income tax

�

In most cases, life insurance proceeds are not taxed as income to the beneficiary.

�

Caution:�� There are a few exceptions, such as the transfer-for-value rule.

�

Avoids estate tax

�

In many cases, life insurance proceeds are not subject to federal estate tax (with some exceptions).

�

Exempt from some state death taxes

�

Some states completely exempt life insurance proceeds from death taxes.

�

Avoids probate

�

Where the beneficiary is someone other than the insured’s estate, life insurance proceeds are not included in the insured’s probate estate, thereby avoiding the cost and delay of probate.

�

Ensures privacy

�

Because life insurance proceeds generally are not subject to probate, there is no public record of who receives the death benefit or how much each beneficiary receives.

�

May be protected from creditors

�

In some states, life insurance policies or proceeds are not subject to claims of creditors of the owners or beneficiaries of the policies.

�

What are the tradeoffs?

�

May not be available to everyone

�

Life insurance may be difficult or impossible to obtain if you are in very poor health.

�

Shopping isn’t easy

�

Life insurance is a complex product, to say the least. Gathering information about various life insurance products and understanding it is a difficult task. To make the right choices, you must do some comparison shopping. Seeking a professional’s help is advisable.

�

Premium payments deplete your current funds

�

Of course, life insurance isn’t free. You will have to make premium payments in one form or another. The money you spend on premiums is money not spent on something else. Money spent on premiums is, in most cases, money not included in the insured’s estate (i.e., is not used to purchase assets which are included in the insured’s estate) and may therefore lower the overall impact of estate taxes for some persons.

Life Insurance: Estate Planning

Life Insurance: Protection Planning

Ken Himmler — Tue, 12 Aug 2008 21:59:16 +0000

What is life insurance?

�

Life insurance is a legal contract between an insurance company and a policyowner and is governed by state law. Under the terms of the policy contract, the policyowner pays premiums in exchange for the promise of payment of a specified amount of money to a named beneficiary when the insured dies. The policy itself contains provisions specifying the rights and obligations of the parties under the contract.

�

The specific purpose of life insurance is to replace the economic loss resulting from a person’s death using money from a pool of funds to which many people contributed a relatively small amount.

�

How does it work?

�

The application

�

The first step to obtaining life insurance is completing the written application. Insurance companies typically inquire about a proposed insured’s age, place of birth, home and business addresses, Social Security number, occupation, salary, tobacco, drugs and alcohol usage, bankruptcy, driving record, dangerous hobbies, travel outside the United States, other life insurance owned, and personal and immediate family medical history.

�

Today, insurers pool life insurance application and claims information in a database maintained by the Medical Information Bureau (MIB), a nonprofit membership organization of life insurance companies that operates an information clearinghouse on behalf of its members. When an application is submitted to a member life insurance company, the information on the application is compared to the MIB records from other companies’ applications and claims information that the MIB has on the proposed insured. Insurance companies use this information to verify the information provided on the life insurance application as a means of preventing fraud.

�

Omitting a pre-existing medical condition or making any type of material misstatement may be grounds for denial of coverage. If the omission is discovered after the policy is issued, the insurer may be able to revoke the policy or increase the policyholder’s premiums, depending on the amount of time that has passed since the issue of the policy and the discovery of the misstatement.

�

The medical exam

�

Depending on the proposed insured’s age, the amount of insurance the insured is buying, or other factors, a medical exam may be required after the application has been completed. The exam may include a physical exam, blood work, and EKG. Typically, the exam is performed by a licensed health professional that works for the insurance company. The insurance company usually pays for the exam and any lab work. The results are sent directly to the underwriter for review along with the proposed insured’s application, although the proposed insured may request a copy.

�

The underwriting process

�

The job of an underwriter is to analyze the information provided by a proposed insured and the records and reports obtained regarding the proposed insured, decide whether the company should assume the risk of insuring that person, and if so, at what price. If an applicant is deemed a favorable risk, the application will be approved, the premiums will be set, and the policy will be issued.

�

The premium pool

�

When an insurance company collects premiums from its policyholders, fees, expenses, mortality costs, and taxes are deducted and the balance of the money is pooled and invested in an account based on the policy type (e.g., whole life, universal life), and the terms stated in the individual policies.

�

When an insured person dies, a claim is filed with the insurance company that issued the policy. The insurance company pays the death benefit to the policy’s beneficiary (there can be more than one), using money from the cash reserve of paid premiums and investment earnings.�

�

When can it be used?

�

Personal Uses–At Death

�

Provide for final expenses

�

Life insurance can provide cash for final expenses such as your funeral and burial costs (which normally averages between $5,000 and $10,000). As the following table shows, there are several ways to pay final expenses.

�

Ways to Pay for Final Expenses
Executor may borrow cash	Could end up costing more as the money borrowed plus interest may have to be repaid
Cash on hand	A great way to pay unless there’s not enough cash to also pay other expenses and/or bequests
Sale of stock/investments	As assets receive a stepped-up basis under current tax law (except in 2010), this could be advantageous but only if the investments are easily traded and not illiquid
Liquidation of tangible assets	May be difficult if there isn’t a ready market for the assets. Further, a sale under pressure could result in having to sell the assets at less than fair market value.
Life insurance proceeds	Excellent way to pay because proceeds are generally paid promptly, received free of income tax, and if the required criteria are met, may be free of estate taxes

�

Provide financial support for dependents

�

A major reason for having life insurance is to provide financial protection for dependents that are left behind. When an individual dies, the financial support he or she provided to the family ends. However, the family’s need for income continues. Most families will have an ongoing need for housing, transportation, medical care, food, clothing, and possibly education and day care.

�

Pay off debt

�

The proceeds from life insurance can be used to pay off a home mortgage, automobile loan, credit cards, or any other debt that may have accumulated, relieving family members of the financial burden. Even persons who are single with no dependents should consider whether they could be leaving behind college loans or other debts for which co-signers may be held liable. Unfortunately, death does not relieve an estate of the deceased’s contractual debt obligations. Insurance can provide the means to pay debts that are left behind.

�

Pay estate taxes

�

Many people think that only wealthy people have estate tax concerns (e.g., those with sprawling mansions or vast corporate empires). The truth is, under current law, if you have assets of a couple of hundred thousand dollars or more, you may owe state death taxes, and an estate valued at million dollars or more will subject you to federal estate taxes. The following list contains some of the items that may make up your estate:

�

Home(s)	Automobile(s)
Cash	Investments
Jewelry	Personal property
Assets owned with spouse, either as joint or community property	Antiques, collectibles, etc.
Business	�

�

Estate taxes can quickly erode the value of a sizeable estate (by as much as 50 percent or more). However, using life insurance in an estate plan can allow family members to avoid liquidating assets to pay these taxes.

�

Create an estate

�

Life insurance can be used to create an estate when time or other circumstances have kept you from accumulating sufficient assets in excess of what is needed to provide day-to-day financial support for your family after your death. The premiums you pay for life insurance may be significantly less than the proceeds paid to your beneficiaries at death. The death benefit can be used to provide your beneficiaries with a larger legacy than might otherwise be possible.

�

Personal Uses–During Lifetime

�

Create retirement or college fund

�

When you buy cash value life insurance, you can receive certain lifetime benefits. Cash value life insurance policies include a potential accumulation of funds that can be accessed during your lifetime (e.g., for retirement savings or education savings) through loans or withdrawals. In addition, the cash value grows tax deferred, meaning you don’t pay taxes on the increased value until you actually access the cash value, and even then the distributions may be subject to favorable income tax treatment.

�

Business Uses

�

Employee benefit program

�

Life insurance can be part of an employee benefit program, with coverage provided under a group plan. Many employers offer life insurance group coverage to employees at low or no cost to the employee. Often, the death benefit provided is a multiple of salary, such as two or three times annual gross salary.

�

Caution:�� Employer-provided coverage over $50,000 has certain tax consequences to the covered employee.��

�

Key person coverage

�

Some companies take out life insurance policies on certain key employees, such as officers or managers. The purpose of the policy is to protect the company from the loss of talent, goodwill, and profit that can occur at the death of certain high-level employees. In addition to the loss of the employee, the company may face recruiting and training costs arising from filling the vacancy caused by the employee’s death.

�

Fund a buy-sell agreement

�

Life insurance can be used to fund a buy-sell agreement. Under a buy-sell agreement, life insurance can be used to provide cash for the purchase of a deceased owner’s interest in the business, providing liquidity for the family of the deceased. If a cash value insurance policy is used, cash values may be accessed to help fund a buy out for a retiring partner’s interest thereby creating a market for the retiring partner’s interest.

�

How do you know what to buy?

�

Needs analysis

�

The first step in determining what type or amount of insurance to buy is a “needs analysis.” A financial professional can conduct a needs analysis to assess the financial impact on the family or business if the breadwinner or a key person in the business should die. The analysis will look at income-generating capability, current assets, debts, and ongoing expenses. Another consideration is your overall financial picture. This may include your goals for retirement, estate and tax planning, and education funding for any dependents, as well as your overall feelings about investments and risk. The results will indicate whether you have a need for insurance and how much insurance is appropriate. This picture will also direct you toward a specific life insurance policy type.

�

Affordability

�

As important as it is to know how much insurance you need, consideration must be given to what you can afford. If you are in a situation where you have a high insurance need but low cash flow, there may still be a policy type available for you (e.g., term insurance), and you may have more options than you think.

�

What are the potential life insurance mistakes?

�

No insurance

�

As difficult as it is to face your own mortality, don’t put off buying the life insurance protection your family needs. The proceeds from a life insurance policy can help your loved ones continue to manage financially during the difficult weeks, months, and years after your death.

�

Not enough insurance

�

The second serious mistake is to not have enough life insurance. There are lots of ways this can occur, but there is an easy way to prevent the problem altogether. Periodically review your insurance coverage (e.g., every three years and at the occurrence of major lifetime events) to avoid (or correct) the situation of being underinsured.

�

Too much insurance

�

It is possible to have too much insurance. This could happen if you purchased a large policy during one point in your life and then didn’t adjust your coverage when your insurance need was reduced. This is another good reason to periodically review your coverage with your financial planning professional.

�

The wrong type of insurance

�

There are two basic types of policies–term and cash value. Term insurance offers pure financial protection without a cash value component–the insurance company will only pay money if you die.� On the other hand, cash value policies can provide both a death benefit and, after a set time period, the accumulated cash value if the policy is terminated.� All other types of polices are some variation of these two basic types.� Which type is the right type for you will depend on many factors including how long you need coverage and how much you can afford. Though it can be frustrating, you should take the time to understand the policy types and choose the one that will fulfill your particular needs.

�

Tax considerations applicable to all types of life insurance

�

Tax code sets definition of life insurance

�

In order to be considered life insurance and receive favorable treatment under the tax code, life insurance policies must fulfill certain criteria established by Congress. There are specific tests that must be met in order for a policy to be considered life insurance for tax purposes.

�

Tests of life insurance
Cash value accumulation test	Cash surrender value must not at any time exceed the value of the net single premium that would have to be paid to fund future benefits under the contract
Guideline premium test	The sum of premiums paid must not at any time exceed certain guideline levels
Death benefit corridor test	Contract death benefit must exceed a specified percentage of the cash surrender value at all times. The percentage varies according to the attained age of the insured.

�

�� Life insurance premium payments are generally not tax-deductible expenses for individuals or businesses

�� Policy proceeds are generally received income tax free

�� Transfer of a policy for value (as opposed to gifting the policy) can subject proceeds (excluding purchase price and subsequent premiums) to income tax

�

Gift and Estate Tax

�

Policy proceeds not considered gift to beneficiary

�

When the proceeds of your life insurance policy are paid to a beneficiary, they are not treated as a gift for gift tax purposes. However, the insurance proceeds are generally included in your gross estate and may be subject to federal estate taxes and state death taxes.

�

Policy premium payments generally not subject to gift tax

�

When you are the owner of a policy on your own life, with another party as the beneficiary, premium payments made by you are not considered a gift to the beneficiary for gift tax purposes. If, however, someone else pays the premiums on a policy you own, or you pay the premiums on a policy that is owned by someone other than you (e.g., a trust), the premium payments are considered gifts and may be subject to gift tax. Policy premiums that are considered gifts generally qualify for the annual gift tax exclusion.

�

Policy proceeds included in estate value in most cases

�

The proceeds of a life insurance policy on your own life are included in the value of your estate if you held any incidents of ownership at any time during the three years before your death, or if the proceeds are payable to your estate. Incidents of ownership include (but are not limited to) the rights to change the beneficiary, take out policy loans, or surrender the policy for cash.

�

Does it matter from which insurance company you buy your policy?

�

There are thousands of insurance companies in the marketplace and some are better than others in terms of financial strength and claims-paying ability. Premiums for similar amounts of coverage can also vary widely among companies. Your safest bet is to do some research before you pay money for a policy. Don’t be afraid to ask questions. It’s your money and your policy.

�

Check the ratings

�

Many individuals will maintain life insurance for quite some time before there is a benefit payout. Therefore, it is necessary to thoroughly research several life insurance companies before deciding. Look for a company with a strong financial position and track record. The claims-paying ability rating is an indicator of the company’s financial strength and how well prepared it is to pay on policy claims. The best insurance companies are those that have strong financial reserves (to pay claims) and have a history of paying claims promptly.

�

There are five major ratings services that monitor insurance companies: A. M. Best, Standard & Poor’s, Fitch (formerly Duff & Phelps), Moody’s, and Weiss. Each company has a different rating system. Rating information is available in most public libraries (check the business reference section) as well as through various published sources, some of which may be found on the Internet.

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For more information on protection planning or other life insurance such as health savings accounts or long term care, you can go to http://kenhimmler.com.

�

Tip:�� Try to choose a company that has among the highest ratings from at least two or three of the major service companies.

�

Look at service reputation

�

Service is an important factor in determining customer satisfaction–even if no action is necessary. Find out how long the company takes to process and pay claims. Check with the consumer division of the department of insurance in your state to find out about complaints (and how they were resolved) or about disciplinary action against a particular agent, broker, or insurance company. And finally, ask friends and family members who they use and how they found out about the company

Life Insurance: Protection Planning

Drugs for Retirees Double – How to Survive in Retirement

Ken Himmler — Mon, 11 Aug 2008 21:37:02 +0000

Here we are in another day of la-la land with the U.S. and their drug policies. As I was doing research on the portfolios today I noticed some rather odd gyrations within the pharmaceuticals. When I looked further I noticed that just overnight six very popular drugs have doubled in price. As an example Ambien went up 160% in price. Do I have an answer for this, no. I will say that it is primarily a problem with the U.S. Last June (2007) I traveled to Germany to get back surgery done because the cost of this in the U.S. would have been five times as high as it was in Germany. The greatest part of it was it was a single price of 34k. This included everything from the surgery, the post-op and the drugs. If you have ever had any medical work done in the U.S. be prepared to pay $40.00 for a roll of surgical tape. That is another story where a local hospital did in fact try to charge my insurance company $40.00 for surgical tape – until I complained that I could get a roll of hockey tape for $2.00.

Here is the problem:

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1) When you are retired or you are going to retire plan on needed a nest egg of about $225,000 per person for medical expenses. (Assuming you retire at age 60 – if you retire earlier it will be more)

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2) Plan on an average annual increase of 15% on all medical expenses.� (This sounded good until the 100% increase overnight on drugs)

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3) Plan on a 7 out of 10 chance that you will in fact need long term care before you die.

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I dont know about you but getting older is really expensive. If you have had an experience with medical expenses�ruining someone retirement leave a comment.

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Comments are monitored and you must be approved to be a commenter. If you would like to comment you can create a user name by going to

http://www.kenhimmler.com/wp-login.php� and create a free commenting account.

Also check out the other post/article I wrote on Medical Expenses in retirement at

http://www.kenhimmler.com/2008/08/06/healthcare-in-retirement

Drugs for Retirees Double – How to Survive in Retirement

How does a Cash Value in a Life Insurance Policy Really Work?

Ken Himmler — Fri, 08 Aug 2008 01:11:24 +0000

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What is cash value?

�

Cash value, by any other name . . .

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For more information on other life insurance such as life insurance to pay estate taxes, you can go to http://kenhimmler.com.

�

How cash value grows

�

The amount of your premium that goes toward cash value decreases over time

�

The role of cash value

�

An example

�

Although grossly oversimplified, cash value works something like this:

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How does a Cash Value in a Life Insurance Policy Really Work?

Healthcare in Retirement

Ken Himmler — Wed, 06 Aug 2008 22:24:25 +0000

What health care benefits are available in retirement?

�

Medicare

�

In general

�

Medicare

is a federal health insurance program created in 1965. Medicare primarily assists those who are 65 or older, but if you are disabled or have kidney disease, you may be eligible for Medicare coverage no matter what your age. Medicare currently consists of

Part A

(hospital insurance),

Part B

(medical insurance),

Part C

(which allows private insurance companies to offer Medicare benefits), and

Part D

(which covers the costs of prescription drugs), with each part having its own eligibility requirements. You may qualify for one or more parts, or you may choose to accept or decline coverage if you are eligible. Many health policies limit coverage for Medicare-eligible individuals regardless of whether they have accepted Medicare coverage.

�

Medicare benefits for disabled individuals

�

Under certain conditions, the disabled are eligible to enroll in Medicare before age 65. If you have been receiving (or have been entitled to receive) Social Security disability benefits for at least 24 months (not necessarily consecutively), you may be eligible to enroll in Medicare. To enroll, you must be entitled to benefits in one of the following categories:

�

�� A disabled individual of any age receiving worker’s disability benefits

�� A disabled widow or widower age 50 or older

�� A disabled beneficiary who is older than age 18 and receives benefits based on a disability that occurred before age 22

�

In addition, Medicare may be available at any age if you are disabled as a result of chronic kidney failure requiring dialysis or a kidney transplant. For more information, see

Medicare Benefits for Disabled Individuals.

�

Qualified Medicare Beneficiary program

�

If you have limited means, you may be eligible for the Qualified Medicare Beneficiary (QMB) program. Here, your state’s Medicaid program may pay for your Medicare Part B premium, Part A and Part B deductibles, and coinsurance requirements. Eligibility rules may vary from state to state, but in general, you must meet the following three criteria:

�

�� You must be entitled to Medicare Part A

�� Your income must be at or below the national poverty level

�� The value of your assets must be below a certain level

�

There are also other related programs that have somewhat less restrictive eligibility requirements. For more information, see

Qualified Medicare Beneficiary Program.

�

Medigap

�

In general

�

Medigap

is supplemental insurance specifically designed to cover some of the gaps in Medicare coverage. Although the name might lead you to believe otherwise, Medigap is provided by private health insurance companies, not the government. However, Medigap is strictly regulated by the federal government.

�

Every Medigap policy offers certain basic core benefits, and various additional benefits may be included as well. The basic benefits and the optional benefits can only be combined in certain ways, creating 12 standard Medigap policy types. Basic Medigap will cover most of your Medicare co-payments, while optional benefits may cover your Medicare deductibles, prescription drugs, skilled nursing facility care, preventative care, and charges that result when a provider bills more than the Medicare-approved amount for a service.

�

Caution:�� No new Medigap policies with drug coverage (plans H, I, and J) are currently being sold, although two new types of Medigap benefits packages are available (plans K and L).

�

Medicaid

�

In general

�

Medicaid provides medical assistance to aged, disabled, or blind individuals, or to needy, dependent children who could not otherwise afford the necessary medical care. Medicaid pays for a number of medical costs, including hospital bills, physician services, home health care, and long-term nursing home care. Each state administers its own Medicaid programs based on broad federal guidelines and regulations. Within these guidelines, each state performs the following: (1) determines its own eligibility requirements; (2) prescribes the amount, duration, and types of services; (3) chooses the rate of reimbursement for services; and (4) oversees its own program.

�

Applying for benefits

�

To apply for Medicaid, you must use a written application on a form prescribed by your state and signed under penalties of perjury. Give the application to your state Medicaid office. Typically, you will need to provide proof of age, marital status, residence, and citizenship, along with your Social Security number, verification of receipt of government benefits, and verification of your income and assets. A responsible individual can complete the application on behalf of an incompetent or incapacitated individual.

�

For more information, see Applying for Benefits.

�

Eligibility

�

To qualify for Medicaid, you must meet two basic eligibility requirements. First, you must be considered categorically needy because of blindness, disability, old age, or by virtue of being the parent of a minor child. Next, you must be financially needy, which is determined by income and asset limitation tests. States have much discretion in determining which groups their Medicaid programs will cover, but as participants in Medicaid, they must provide coverage for all residents who are considered categorically needy.

�

Caution:�� State and federal rules regarding Medicaid eligibility change frequently. For further information, see Eligibility for Medicaid.

�

Transfer of assets

�

Because Medicaid eligibility is based on your income and other resources, state Medicaid authorities are interested in knowing whether you have tried to transfer assets out of your name in order to qualify for Medicaid. When you apply for Medicaid, the state has the right to examine your finances and those of your spouse as far back as 60 months before the date you applied for Medicaid. Only certain transfers are prohibited. Fair market transactions will typically be considered legitimate, but if you transfer assets for less than fair market value around the time you apply for Medicaid, the state will presume that the transfer was made solely to help you qualify for Medicaid.

�

For further information, see Transfer of Assets.

�

Planning goals and strategies

�

As mentioned earlier, the state has the right to look into your financial transactions to determine whether you have transferred assets solely to qualify for Medicaid. However, the state may count only the income and assets that are legally available to you for paying your bills. Consequently, several methods have been developed to help you shelter your assets from the state and facilitate Medicaid qualification. Proper planning can help you to qualify for Medicaid, shelter “countable” assets, preserve assets (including the family home) for loved ones, and protect the healthy spouse (if any).

�

For more information, see Planning Goals and Strategies.

�

Medicaid qualifying trusts

�

To qualify for Medicaid, both your income and the value of your other assets must fall below certain limits (which vary from state to state). A trust helps you to qualify for Medicaid because it can shelter your income and assets, making them unavailable to you. The state Medicaid authorities cannot consider assets that are truly inaccessible to the Medicaid applicant. Therefore, anything that stays in an irrevocable trust will lie outside of your financial picture for Medicaid eligibility purposes. If you are looking for a strategy to shelter your resources, one of the following may be appropriate: (1) an irrevocable income-only trust, (2) an irrevocable trust in which the creator of the trust is not a beneficiary, (3) a Miller trust, or (4) a special needs trust. For further information, see Medicaid Qualifying Trusts.

�

Protection of principal residence

�

In certain cases, the state may be entitled to seek reimbursement for Medicaid payments by forcing the sale of your principal residence if you are a Medicaid recipient. Medicaid planning tools have been devised to protect your home, but their effectiveness varies. Therefore, it is important to weigh the costs and benefits of each device carefully. If you are looking for a strategy to preserve your home for loved ones, one of the following four methods may be appropriate: (1) an outright transfer or gift of the home, (2) a transfer subject to life estate, (3) a transfer subject to special power of appointment, or (4) a transfer in trust.

�

For more information, see Protection of Principal Residence.

�

Medicaid and long-term care insurance

�

Long-term care (LTC) insurance can be useful as part of your Medicaid planning strategy. Your LTC policy can subsidize your nursing home bills during the Medicaid ineligibility period caused by your transfer of assets to third parties. Thus, it may be possible for you to give your assets away to loved ones, have the security of paid nursing home bills during the ineligibility period, and qualify for Medicaid when the LTC policy runs out.

�

For further information, see Medicaid and Long-Term Care Insurance.

�

Medicaid liens and estate recoveries

�

Federal law requires states to seek reimbursement from Medicaid recipients for Medicaid payments made on their behalf. Cost-recovery actions against the assets of Medicaid recipients may come in two forms: (1) real or personal property liens and (2) recovery from decedents’ estates. A Medicaid lien makes it impossible for you to sell or refinance your house without the state’s knowledge and ability to collect what it is owed. As for recovery from decedents’ estates, states also can seek reimbursement from your probate estate after you die. States have the option to expand the definition of estate to include all non-probate assets as well.

�

For more information, see Medicaid Liens and Estate Recoveries.

�

Divorce and Medicaid

�

From a purely financial perspective, divorce can be a practical move and may actually be used as a Medicaid planning tool. When a spouse enters a nursing home and applies for Medicaid, the couple’s assets must be pooled together and totaled to determine what portion the healthy spouse may keep. After this Spousal Resource Allowance has been determined, the Medicaid applicant must transfer assets representing the amount of the allowance to the healthy spouse. The remaining assets must be spent on the institutionalized partner’s medical care. A divorce court order can supersede the normal Spousal Resource Allowance rules prescribed under state Medicaid regulations. You should consult your legal advisor for further information.

�

For more information on healthcare in retirement or planning for retirement, you can go to http://kenhimmler.com.

�

Military benefits

�

Disability benefits, health-care benefits, and long-term care benefits are available through various military programs sponsored by the Department of Defense and the Department of Veterans Affairs (VA), formerly known as the Veterans Administration. Health care for veterans is typically available at VA hospitals and health-care facilities. In general, active service members, retirees, and veterans other than those who were dishonorably discharged are eligible for military benefits. Survivors of service members and veterans are also generally eligible for some of the same benefits. However, the rules surrounding these benefits can be complex and may change frequently. It is best to check with your military personnel office or local VA office if you have questions about any of these benefits.

�

For further information on military health care benefits and eligibility requirements, see

Military Benefits.

�

Choosing a continuing care retirement community

�

Continuing care retirement communities (CCRCs) are retirement facilities that offer housing, meals, activities, and health care to their residents. These communities appeal to people who are currently in good health but who worry that they may need nursing care later on. The CCRC and the resident sign a contract guaranteeing that the CCRC will provide housing and nursing home care throughout the resident’s life and that, in return, the resident pays an entrance fee and a monthly fee. In choosing a CCRC, you should consider factors such as the entrance fee and monthly fees, insurance requirements, the financial stability of the CCRC, its facilities and activities, and the quality of medical care provided to residents.

�

For more information, see Choosing a Continuing Care Retirement Community.

�

Choosing a nursing home

�

A nursing home is a licensed facility that provides skilled nursing care, intermediate care, and custodial care. Although you may prefer in-home care, you may have to enter a nursing home if you need round-the-clock care, especially if you can’t get help from family or an in-home caregiver. When choosing a nursing home, you should consider factors such as the cost of the home, the quality of medical care provided, the appearance and the safety of the facilities, the ratio of staff to residents, and recreational opportunities.

�

For further information, see Choosing a Nursing Home.

�

Paying for nursing home care

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Nursing home care can be extremely expensive, and paying for this care is a problem that weighs heavily on the minds of older Americans and their families. There are several resources you can use in planning for this expense, including self-insurance, long-term care insurance, Medicare (limited benefits), Medicaid, and military benefits.

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For more information, see Paying for Nursing Home Care.

Healthcare in Retirement