Dem bones and Medicaid trusts
Dem Bones or Dry Bones is a well-known spiritual song composed by James Weldon Johnson. The lyrics were inspired by Ezekiel 37:1- 14. I remember listening to the melody as a kid in the 1950s. It goes like this, “The toe bone connected to the foot bone, foot bone connected to the leg bone, leg bone connected to the knee bone,” and it travels all the way to the head!
Well, financial planning, or to be more contemporary, wealth management is like that song -everything is connected.
Recently I met with a client who wanted to review the notice she had gotten from her long-term care insurance policy issuer.
Most long-term care insurers have been increasing premiums in their new and existing policies over the past several years, and many have stopped issuing them altogether. They’ve had to do this because they underpriced these policies when they began issuing them in the 1980s. Couple that with tumbling interest rates over the last 30 years, spiraling costs, more claims than expected and a very low lapse rate, and you have an industry in hard times.
Insurance companies have been made into boogie men by politicians and the media. Obviously, the critics don’t know what’s going on. This can be illustrated by the question, “If insurance companies are so lecherous and greedy, how come their bottom lines aren’t spectacular?” If you look at the Fortune 500 top 50 companies you will find three insurers: United Health Group, Prudential and MetLife. Not exactly a case for grand larceny.
She made me a cup of coffee and we sat down at her kitchen table to review the letter she’d received. If she kept the policy as is, she would see her premiums rise by 60 percent over three years. If she made modifications to the length of coverage, the daily benefit or the inflation rider she could save some money.
I started looking for ways to save her money. Buying insurance is about risk and cost. Having a fire in your house is costly, but the risk is slight, at only .03 percent per year. Yet, most people have fire insurance. Ditto for automobiles.
What are the chances that you’ll need long-term care? According to the American Association for Long-Term Care Insurance, if you are between the ages of 60 to 80, there is a 50 percent chance that you will need some care.
Okay, the risk is great, but what about the cost? I have a client who is in a nursing home at an annual cost of $144,000. Although this is on the high side, due to the amount of medication she takes, it is a benchmark.
So, we have a high risk that costs a lot of money. What can you do about it? You can buy an insurance policy even though it’s becoming more costly, or you can set up a Medicaid trust.
Medicaid trusts are common these days. Here’s how they work. You put all of your assets into the trust. After five-years, you will have passed the Medicaid look back rule. If you have less than $2,000 in net worth, Medicaid, a federal program for the poor, will pay for your nursing home.
I asked to see her estate documents, so she showed me her deceased husband’s will, which had created a credit shelter trust at his death. She also had documents showing she had contributed her half of the home to the trust shortly after his death.
I thought I might be onto something, so I called her lawyer. He explained that it was a “tax” trust, not a “Medicaid” trust. I told her that the trust was created to save estate taxes on the house at her death.
I further explained that a Medicaid trust is different. And, if she wished to use this strategy, she would have to set up a Medicaid trust now, put all of her assets into it and wait five years for the strategy to work. Since she is in her 70s, a Medicaid trust is iffy. Why?
A, because she would have to wait five years for the look back rule to expire and B, if the trustee she appoints to manage the trust spends the money, she will be broke!
So what did we do? Her policy has a lifetime benefit. Considering that the average stay in a facility is less than three years, and the chance of staying five years or more is 12 percent, we decided that she could save some money by reducing the benefit from lifetime to five years.
Long Term Care as with any potential insurance benefits are based on the claims paying ability of the insurance company.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual.
The content was featured in Randy's column in The Ridgewood News on August 9, 2013. Click here: Neumann: Dem bones and Medicaid trusts