How to Avoid the “Double Whammy”
* By: Anthony J. Enea, Esq.
You are probably wondering what the “double whammy” is. It is not a legal term or a financial term. It is a phrase I have coined to describe what happens when one’s assets are losing value and at the same time one is dealing with health issues requiring long-term care. Presently, the value of one’s stocks, IRA’s, 401Ks, etc. are decreasing and are volatile for a variety of reasons, including, predominantly, the decision by the Federal Reserve to aggressively increase interest rates to tame inflation. Even if one doesn’t own stocks, the value of one’s cash savings is feeling the effects of inflation at 8%, thus reducing one’s buying power. Additionally, higher interest rates are impacting the value of one’s real property and the ability to sell said property as mortgage rates continue to increase.
The combination of the above loss in asset values when combined with the need to utilize and deplete your life savings for the cost of long-term care (either nursing home or home care) is the “double whammy.”
Unfortunately, when it comes to your stock and real property investments, I suggest you regularly consult with your financial advisors and have a strong stomach. As to your potential long-term care planning needs and expenses, the following are options you should consider depending on your age, health and finances, which may help minimize the financial impact:
(A)Purchase Long-Term Care Insurance (LTCI)
If you are in good health, relatively young (50 or younger in my opinion), and can afford the annual premium for LTCI, you should consider purchasing insurance that covers both the cost of nursing home care and any home care you may need. There are differing types of coverage available, such as coverage that provides a daily benefit for a number of years or for your life, or policies that provide a lump sum (pool of funds) available for the use of the insured. In New York, one can also purchase a “hybrid” policy that provides both long-term care insurance and a life insurance benefit. Thus, if you do not use the long-term care coverage during your lifetime, there would still be a death benefit available. Generally, a more expensive product with built in flexibility.
In New York, a State Certified Long Term Care Insurance policy is also available. This LTCI policy allows one to purchase LTCI, and once all the benefits under the policy have been exhausted, one will be eligible for Medicaid benefits irrespective of one’s savings. However, one’s income is still counted and deemed available to Medicaid. Obviously, as with other forms of insurance, unless one makes a large lump sum payment, one will need to be able to afford the annual premium. One’s age and pre-existing conditions will significantly impact the premiums charged.
Disposable income will be an important issue in purchasing LTCI especially if one’s nest egg is shrinking because of loss of asset values.
(B)Engage in Proactive Long-Term Care Planning
Because Medicaid is a “means tested” entitlement program, your non-IRA assets either impact your eligibility for Medicaid or are vulnerable to Medicaid liens or claims for services provided by Medicaid. Thus, taking proactive steps to protect assets at a time when you do not need care is advisable. One’s income, with the exception of holocaust reparations and crime victim compensation board income, is countable and available for Medicaid eligibility purposes, subject to certain limits. With respect to the Medicaid home care program, presently one can protect virtually all of one’s income and be able to utilize it to pay one’s living expenses by enrolling in a Pooled Community Trust.
The most common step taken by seniors and those who have a family history of medical conditions to shelter their assets from the cost of long-term care is to transfer title of assets (non-IRA/non-retirement assets) out of their name. Doing so reduces the amount of one’s assets available to pay for the cost of their care, thus increasing the likelihood of Medicaid eligibility. Doing so creates the five (5) year lookback (disqualification) period for nursing home Medicaid, and as of March 31, 2024 will create a thirty (30) month lookback period for Medicaid home care. Once the lookback periods have expired the assets are no longer counted or available for Medicaid eligibility purposes.
Because of the risks, gift tax and capital gains tax issues involved in making “outright” gifts/transfers to one’s children, other loved ones and friends, the most common and effective way to transfer and create the lookback period and shelter assets is to use an Irrevocable Medicaid Asset Protection Trust (MAPT).
For example, one’s home (single or multi-family primary residence, vacation home, condo and if the Co-op Board permits, a cooperative apartment) and non-IRA liquid assets can be transferred to a MAPT. When doing so the owners of the home retain the right to the use and possession of the home (transferred to the MAPT) during their lifetime, The Trustee(s) (presumably their children or other loved ones) cannot sell or rent the home without their permission. The creators of the MAPT can receive any income and/or dividends the trust assets create but not the principal of the trust. The trust creators can also retain the power to remove and replace the Trustee(s) and to change their mind as to whom will receive the trust assets upon their demise. The transfer of the property to the MAPT will create a five (5) year lookback (ineligibility period) for Medicaid nursing home and as of March 31, 2024 it will create a thirty (30) month lookback for Medicaid homecare in New York.
If properly drafted, the MAPT can be structured so the creators of the MAPT are deemed the owners of the home and trust assets for income tax purposes. Thus, retaining the ability to utilize the personal residence exclusion for capital gains taxes ($250,000 if single, $500,000 if married), in the event the house is sold by the MAPT during the life of the MAPT creator(s). Additionally, the creator(s) retains any STAR, Senior Citizens, Veterans and other tax exemption they may be entitled to.
If the house is sold after it is transferred to the MAPT and before the creator(s) passes away, the proceeds of sale can be used to purchase another home in the name of the MAPT. Thus, once the lookback period has expired the newly purchased home and any remaining proceeds of sale will be protected and not impact eligibility for Medicaid.
In conclusion, while there is little within one’s control when stock and real property values are tanking (other than selling), avoiding the “double whammy” is available by being proactive and utilizing a MAPT and/or purchasing Long-Term Care Insurance products.
* Anthony J. Enea is a member of Enea, Scanlan and Sirignano, LLP of White Plains, New York. He focuses his practice on Wills, Trusts and Estates and Elder Law. Anthony is the Past Chair of the Elder Law and Special Needs Section of the New York State Bar Association (NYSBA), and is the past Chair of the 50+ Section of the NYSBA. He is a Past President and Founding member of the New York Chapter of the National Academy of Elder Law Attorneys (NAELA). Anthony is also the Immediate Past President of the Westchester County Bar Foundation and a Past President of the Westchester County Bar Association. He can be reached at (914) 948-1500 or at www.esslawfirm.com