Providing for Elder Care

By Sonja Lepkowski, CFP, CPA, Yohalem Gillman & Co. LLP

The growth of the U.S. elderly population has been and will continue to be dramatic. At present, more than 13% of all Americans are over 65, and more than 1.7% are over 85. The last 50 years have seen significant improvement in life expectancy, but as individuals grow older, they become less able to complete the activities of daily living (managing finances, preparing meals, walking, toileting). As a result, there has been a dramatic increase in the elderly living in nursing homes. Studies show that 60% of people over the age of 65 will require long-term care at some point in their lives. Nursing home placement has more than doubled since the introduction of Medicare and Medicaid in 1965.

Most taxpayers presume that Medicare will provide for all their medical needs upon retirement. But Medicare provides for a maximum of 100 days of long-term nursing home care after a hospital stay of at least 3 days, provided that admission is within 30 days of hospital discharge and that the care is skilled (custodial care is not covered). The first 20 days are fully covered; days 21–100 have a co-insurance amount. Home care benefits are also limited to a maximum of 35 hours a week of part-time and intermittent benefits (generally, no more than a few hours a week).

How will the long-term care of our elderly (and disabled) be paid for? There are four primary options:

• Self-insurance
• A long-term care insurance policy
• A state-sponsored policy, such as the NYS Partnership for Long-Term Care insurance policy (Connecticut, Indiana, and California offer similar partnerships)
• The distribution of assets in order to qualify for Medicaid.

Self-Insurance

This option—paying directly for all the costs of long-term care, either at home or in a nursing home—is for the wealthy or for someone with no family or heirs. If the money runs out, Medicaid takes over.

A Long-Term Care Insurance Policy

Individuals are used to insuring major liability risk such as their home, automobile, and health. Why should the risk of needing long-term care be any different? People purchase long-term care insurance to maintain financial independence, preserve their personal dignity, and control treatment. Many insurance companies are licensed to sell long-term care insurance, but policies vary considerably. It is important to compare benefits, costs, and policy restrictions. It is more economical to purchase the policy when younger and healthier.

The following are questions to ask when evaluating a long-term care insurance policy:

• What levels of care are covered (skilled nursing care, intermediate care, custodial care, home health care, adult day programs)?
• How much will be paid for each level of care? What are the costs of care in the local community?
• How long will the policy pay benefits?
• Is there a maximum policy benefit? Is there an inflation rider?
• Is there a waiting period before the benefits are payable?
• Are pre-existing conditions covered, and if so what is the waiting period?
• Does the policy impose any eligibility requirements, such as prior hospitalization?
• Is Alzheimer’s disease specifically covered?
• Does the policy restrict the location of the care? (Better policies do not.)
• Is policy renewal guaranteed? Can the insurer cancel the policy?
• What is the annual premium? Can the premium increase over the life of the policy, and does the policy contain a waiver of premium?
• Does the insurer have a good rating and experience in health insurance claims?
• Is the policy an indemnity policy or a reimbursement policy?

NYS Partnership for Long-Term Care Insurance Policy

This unique program, originally sponsored by the Robert Wood Johnson Foundation, combines private long-term care insurance and Medicaid extended coverage. It was created to help New Yorkers finance long-term care without impoverishing themselves or signing over their life’s savings, with the accompanying loss of dignity.

If an individual purchases a state-approved long-term care policy with coverage for at least 3 years of nursing home care (the average stay), 6 years of home care, or a combination of the two, the program provides for asset protection when applying for Medicaid. The program covers $148 per day for nursing home care (the average nursing home cost for the New York City metropolitan area is $255 per day, or $93,000 annually) and $74 per day for home care and covers 14 days of respite care each year, to give the at-home caregiver some rest. The waiting period for basic coverage is 100 days, but insurers may offer shorter waiting periods for an added premium. Inflation protection is equal to 5% compounded annually (no inflation rider after age 80). Benefits can be increased through a larger premium.

When the policy benefits are exhausted, asset protection is extended to policyholders (and their spouses) eligible for Medicaid. Unfortunately, there is no income protection for the recipient or the spouse (there is no penalty for minimizing income resources prior to applying for Medicaid, except that income such as Social Security and mandatory pension distributions cannot be reassigned). The Medicaid recipient is allowed a monthly income of $50 for personal items. The community spouse is allowed a monthly income of $2,103 (in the year 2000). The community spouse must contribute up to 25% of any income over the current allowance to care of the Medicaid-eligible nursing home spouse. This program does not create any Medicaid liens.

These state-sponsored partnership policies are for married persons who are generally healthy, have a total income of at least $40,000–$50,000, and have assets, not including the home, of at least $140,000; or, single persons who are generally healthy, have a total income of at least $30,000, and have assets, not including the home, of at least $60,000.

The cost of premiums depends upon age and policy options. Whatever the cost, the premiums will not increase due to changes in health. An average annual premium for a 50-year-old is $800; at 55, $980; at 60, $1,250; at 70, $2,400; and at 75, $3,800. The cost of a comparable policy would be more than double that amount.

The NYS Partnership policies can be purchased from a number of insurance companies. While covered by private insurance coverage, participants may use the policy benefits anywhere indicated in the policy. If a participant leaves New York State, however, they must return to receive the Medicaid Extended Coverage portion. This policy may not be for individuals planning to move out of state and not return.

Medicaid

Medicaid is a health insurance program for low-income individuals. One must be a resident of the state in which application for benefits is being made. Many states (such as New York) have income limitations for eligibility and in most states the person applying can have only approximately $2,000 in assets and a burial account. The total of all assets owned by both spouses is to be considered available for the care of the nursing home spouse. When the well spouse has assets in excess of the basic asset allowance, the well spouse may refuse to contribute that excess; however, Medicaid may bring a support suit against the well spouse.

A person can give away all of his assets to any person and be immediately eligible for home care. The health care provider will be chosen by Medicaid, however, and the care will not be around the clock. If a person or his spouse gives away his or her assets (without receiving something of equivalent value) prior to the application for Medicaid benefits, there will usually be a period of Medicaid ineligibility (the penalty period). The maximum lookback period is 36 months, or 60 months if the transfer is to a trust. The penalty period begins from the date of the transfer and is determined by dividing the value of the gifts made during the lookback period by the average cost (at private pay rates) of a nursing home in the community in which the Medicaid applicant resides. The private pay rate is set annually by the Medicaid agency. In 2000, that pay rate was $7,730 in New York City and $7,760 on Long Island. Gifts to a spouse or a blind or disabled child will not result in a denial of Medicaid. Under current Medicaid law, the home remains exempt and is not considered in determining the applicant’s Medicaid eligibility as long as any of the following individuals reside there:

• the applicant or their spouse
• a child who is under 21, blind, or disabled
• a sibling with an equity interest who had resided in the home for one year prior to the applicant’s admission to a long-term care institution
• the applicant’s child, if that individual had lived in the home for two years prior to the institutionalization and cared for the parent, enabling the applicant to remain at home.

The following are alternative ways to become eligible for Medicaid without giving away all of one’s assets:

• Available resources could be transferred into exempt assets (such as a home, a more expensive home, home improvements, furnishings, automobiles, payment of the mortgage).
• A husband and wife could spend down excess resources through expenses such as travel and entertainment, as long as these expenses do not benefit third parties. (It would be better advice to spend such funds on exempt assets instead.)
• Purchase a single-premium annuity, which is a transfer for value and therefore not subject to Medicaid transfer penalties. This method will preserve wealth (now in the form of income) for the well spouse. Annuities must be carefully thought out, however, so that the income generated does not exceed monthly income limits when combined with that of the institutionalized spouse.

Income Tax Issues

If an individual is in a nursing home principally for medical care, the entire cost of maintenance, including meals and lodging, is deductible as a medical expense, subject to limitations. If not, only the cost attributable to medical or nursing care (excluding meals and lodging, and housekeeping if the care is provided at home) is deductible.

Premiums for long-term care insurance contracts are deductible medical expenses. The policy must cover “only qualified long-term care services,” must be guaranteed renewable, must not have a cash surrender value or permit borrowing, and must apply all dividends and premium refunds as a reduction against future premiums or increased benefits. The deductible amount of the premium is limited by the age of the individual at the close of the tax year: In 2000, the maximum was: age 40 or less, $220; age 40–49, $410; age 50–59, $820; age 60–69, $2,200; and age 70 or older, $2,750. These amounts are also subject to 7.5% of adjusted gross income (AGI) limitations.

Self-employed individuals may deduct the inflation-adjusted maximum deductible premiums from gross income up to a maximum percentage (60% for 1999–2001, 70% in 2002, and 100% in 2003 and thereafter). The remainder is deductible as a medical expense, subject to 7.5% of AGI limitations.

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Editors:
Milton Miller, CPA
Consultant

William Bregman, CFR, CPA/PFS

Contributing Editors:
Theodore J. Sarenski, CPA
Dermody Burke & Brown P.C.

David R. Marcus, JD, CPA
Marks, Paneth & Shron LLP

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