The NCPC publishes periodic articles under the title "Planning for Eldercare". Each article is written to help families recognize the need for long term care planning and to help implement that planning. All elderly people, regardless of current health, should have a long term care plan. Learn More...
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Older Americans control a great deal of the wealth in this country. They are also very interested in protecting what assets they have from loss. In addition seniors want their assets to stretch out as long as possible in order to avoid running out of money well before they die.
The chart below shows the average value of U.S. wealth per household according to the Census Bureau. The average is shown for various age groups. This information was taken from the statistical abstract of the United States.
|Under 35 years old||$106,000|
|35 to 44 years old||$325,600|
|45 to 54 years old||$661,200|
|55 to 64 years old||$935,800|
|65 to 74 years old||$1,152,000|
|75 years old and over||$638,200|
The second chart shows the median value of wealth per US households. This means that half of the households in the age group were above that level of wealth and half of the households were below that level of wealth.
|Under 35 years old||$11,800|
|35 to 44 years old||$86,600|
|45 to 54 years old||$182,500|
|55 to 64 years old||$253,700|
|65 to 74 years old||$239,400|
|75 years old and over||$213,500|
Data from both charts substantiate the fact that Americans in the age group of 55 to 74 years old have a higher proportion of wealth per household than the rest of the people in this country.
It is also important to understand that a great deal of the wealth held by elderly Americans is in the form of home equity. Estate preservation strategies strive not only to preserve the wealth of elderly Americans but also to attempt to convert home equity into cash to be used in the final years of life.
We discuss below a few of the reasons why households in their final years of life have a desire to preserve the estate.
Provide Assets and Income for a Surviving Spouse
When one spouse in a couple dies, the income usually reduces with the death. For example, if both spouses are receiving Social Security, only the larger of the two Social Securities will be retained by the surviving spouse. If John is earning $1,500 a month in Social Security and his wife Mary is earning $900 a month, at John's death Mary will receive $1,500 a month. This may curtail her standard of living since the combined income prior to John's death was $2,400 a month. Sometimes company retirement pension incomes are not shared with the spouse as well and the death of the person receiving the pension results in a termination of that income. Also, a number of pension income plans do not continue at the full amount with the death of a spouse. The most a spouse may receive under one of these plans might be 50% or less of the pre-death amount.
The goal for most couples is to have enough cash equivalent assets to make up for the loss in income. Estate preservation strategies will attempt to protect any remaining cash assets for the surviving spouse from the drain of medical care costs or long term care costs.
Protect Assets and Income from Deterioration or Loss of Property
Unexpected property losses may result in a drain on available cash assets. This might be damage to a vehicle or to the home. Lack of maintenance for both vehicles and the home might also result in expensive repairs. Estate preservation strategies strive to recognize these losses and to provide potential solutions to avoid them or to cover them with adequate insurance coverage. In addition, help can be sought for grants, tax credits and other programs that provide maintenance or savings on utility bills. All of this should be identified as part of an overall strategy.
Maintain Assets to Pay for Medical Care and End-Of-Life
Many older individuals pay out-of-pocket to keep in force Medicare Supplements that provide close to 100% coverage for all costs not covered by traditional Medicare. Often, these policies can be very expensive and will amount to $5,000 or more a year per person. For those not paying for expensive supplement policies, medical co-pays and the cost of prescription drugs not covered by insurance can reduce available assets. In addition, costs associated with dying can drain the estate as well. Strategies are designed to identify these costs and to deal with them while assets are still in place to provide protection.
Maintain Assets to Pay for Long Term Care
The need for long term care often occurs at the end of life. Unfortunately, this is the time when assets are already being stretched thin. As outlined in other articles in this series, the cost of home care or assisted living or nursing home care can be very demanding. Assets that have taken a lifetime to accumulate can be wiped out in a matter of months. Strategies are designed to take advantage of government programs to cut down on the burn rate of personal assets when the need for care occurs.
Compensate Children or Grandchildren for Their Sacrifice
It is very common for children or grandchildren to put their own lives on hold and to sacrifice their time and their income to care for loved ones in their final years of life. It is only fitting that any assets remaining should go towards helping family members get back on their feet after the sacrifice of months or years providing care. The government rarely recognizes this sacrifice and any government help does not allow for money to be given to family members for their services. Strategies are designed to have the government pick up a greater share of care in order to provide some assets for family members.
Provide an Inheritance for Children or Grandchildren
Many seniors have worked hard their whole lives to accumulate cash savings, investments and a fully owned personal residence. It does not sit well with these people to have to put out money at the end of their lives for such things as health care, long term care or maintenance. They prefer to have their children have the money. Many of these older people will actually forego medical care or long term care or maintenance on their property in order to leave more money to their children.
It is particularly galling to have to spend down cash savings for long term care at home or in an assisted living or in a nursing home. In many cases, there is no other alternative. Part of our planning strategy is to help those elders who want to leave some money for their children receive necessary services in their final years of life without spending all of their remaining assets.
At least two government programs prevent participation for seniors who have too much in assets. These two programs are the veterans aid and attendance benefit and Medicaid long term care for the elderly. In order to qualify, eligible participants can have only a certain amount of money in cash equivalent assets. Legal strategies are available to transfer the assets out of the name and control of persons eligible for these two programs and thus allow participation in the programs.
Many argue that it is unethical to divest oneself of assets to qualify for these programs. Of course, everyone has his or her own interpretation of what is ethical and what is not. Ethics do not necessarily have to do with what is legal but what is the "right" choice based on the interactions of people in a given society. A behavior can be unethical but still be legal. The objective of proper ethical behavior is to avoid hurting other people either emotionally or financially through our actions.
Those who are against diverting assets would argue that taxpayers are being hurt when someone gives away property to qualify for a government-funded benefit. Therefore, this behavior is unethical. Unfortunately, there are many government programs or planning opportunities that condone and even support strategies to receive government-funded benefits regardless of assets. It seems, that the only two government programs that consider assets as a prerequisite to providing support are Medicaid and the VA aid attendance program. Both programs are ostensibly designed for people who are poor and cannot provide for themselves without help.
There are a number of government programs that help rich and poor alike without consideration of assets. For example, Medicare can pay out millions of dollars to help a person stay alive whether that person has assets or not. Is this fair and ethical? It could be argued that Medicare is funded through premiums by participants and is therefore not a burden on taxpayers. This is not entirely true. A great deal of Medicare's budget is funded directly through the Federal general fund from taxpayer dollars and not by premiums paid. Therefore, extraordinarily large outlays for Medicare health care for certain wealthy individuals could be considered unethical because it places an additional burden on other taxpayers.
The question could be asked, why doesn't the government have an asset test for people who place an undue burden on Medicare? In other words, those with a lot of money should be expected to pay for their own extraordinary medical care costs while those with no money would be subsidized for their medical care costs. This is the manner in which recipients of Medicaid long term care or the VA aid and attendance are treated. Currently, except for a non-burdensome, high income premium surcharge for part B, all Medicare recipients are treated the same regardless of assets.
Another government program is disaster aid. If someone is deprived of property or the ability to earn an income by a natural disaster, the government does not use an asset test to help those people become whole by providing interest-free loans or outright grants. As an example, the government put out billions of dollars to help those affected by Hurricane Katrina without an asset test. This was indeed a significant burden on taxpayers. Yet, there is no discriminatory asset test with disaster relief as there is with Medicaid or VA aid and attendance.
Another area where there is no discrimination between those having assets and those without assets is tax planning. Anyone can use legal strategies to avoid paying taxes. Is this ethical? The avoidance of paying taxes definitely puts a greater burden on other taxpayers. Why is tax planning considered ethical and diversion of assets to qualify for Medicaid or the VA benefit considered questionable? The undesirable outcome of placing a greater burden on other taxpayers is exactly the same.
Finally, let's consider the following example. Sam and Joe are elderly seniors who live next door to each other. Sam and Joe both need long term care services that cost a great deal of money. Sam and Joe had similar employment histories their whole lives and both retired at age 65 with their homes fully paid for and with adequate income from Social Security and work pensions to meet their needs.
There is, however, a difference between the two. Sam was frugal and did not waste money on what he considered frivolous things throughout his lifetime, and he was able to put together an estate of $400,000 in savings and investments. Joe, on the other hand, was not frugal and spent his money on things he considered important to him such as new cars, expensive trips, snowmobile outings, regularly eating out and so on. Joe has less than $2,000 in savings and investment.
Joe and Sam both need nursing home care which will cost each of them $7,000 a month. Neither of them have enough income coming in to cover this extraordinary cost. Joe, is considered poor for Medicaid purposes and Medicaid will pick up the entire cost of $7,000 a month for him less his current income and other minor adjustments. Sam, is considered by Medicaid, to have adequate resources and is not considered poor and he must fend for himself until he becomes "impoverished." Sam must spend $398,000 and a few more pennies of his $400,000 until he has less than $2,000 remaining and then Medicaid will cover him the same way it covers Joe.
Is it ethical for the government to punish someone who is prudent and who saved for his future and on the other hand reward someone who is not prudent? Remember that ethics is an issue of harming someone because of an action. The government is certainly unethical in its discrimination against Sam and is punishing him and hurting him financially by forcing him to impoverish himself. And what if Sam in this instance had a spouse at home? Medicaid rules are going to punish Sam's spouse as well even though his money may need to be set aside to provide for his wife if he were to die before she does. Is this ethical behavior on behalf of the government?
Or let's ask another question. Is it ethical for Sam to use divestment opportunities to avoid Medicaid's punishment for his prudent behavior?
We believe that the government is not applying fair treatment to people who need Medicaid or the aid and attendance benefit.