Paul O. Dillon, Attorney at Law

Should You Consider a Reverse Mortgage?

A loan of last resort for many years has gotten an upgrade. Stories of borrowers who faced foreclosure and surviving spouses evicted from their own homes are decreasing, as the new reverse mortgage often does what they were originally intended to do: provide financial help for retired homeowners who want to stay in their homes.

Home equity conversion mortgages (HECMs) are insured by the Federal Housing Administration and overseen by the Department of Housing and Urban development, explains a recent article from The Wall Street Journal titled “The New Math of Reverse Mortgages for Retirees.” There are limits on how much borrowers can take, so seniors don’t have the option to take wildly inappropriate large lump sums. There are protections from defaults if the house value sinks to less than the loan amount and provisions to protect a surviving spouse’s right to stay in the home after the death of the borrower.

HECMs are a tiny part of the financing options available to seniors who need to take equity from their homes in later years. Some downsides to the reverse mortgage remain, particularly the high upfront fees. However, the reverse mortgage burden is mainly on heirs, who will not inherit the equity or the home, unless they want to pay back the loan.

For seniors who are concerned about outliving their savings and want to stay at home until the very end of life, a reverse mortgage may be a worthwhile strategy. The cash can be a way to pay for long-term care and other unexpected expenses.

Another benefit: disbursed funds aren’t taxed, since they are considered a loan advance. Distributions from traditional IRAs and 401(k)s are taxed as ordinary income.

According to a trade association, HECMs make up 95% of the reverse mortgage market. There are about 580,000 totaling about $113.5 billion. However, a 2019 study from the Brookings Institute found less than 2% of homeowners age 62 and older hold a reverse mortgage of any kind.

A simplified version of how it works: to qualify for an HECM, borrowers must be age 62 and older, owners and occupants of the home and have the financial ability to maintain the home, including paying property taxes, insurance, and if relevant, homeowner association fees.

HECMs must be obtained through an approved FHA-approved lender and borrowers must buy FHA mortgage insurance and attend an information session with an HUD-counselor. The amount to borrow is determined by the appraised property value, how much is owed on the primary mortgage, the borrower’s age and current interest rates.

The borrower has an option of a payment plan with an adjustable interest rate or a fixed rate. If they choose the fixed rate, they must take the lump-sum disbursement option. This decision may have an impact on eligibility for government benefits, so it needs to be discussed with an elder law attorney.

For the adjustable interest rate, disbursements are made at will and the untouched amount can continue to grow at the variable interest rate. The loan is received as a line of credit, letting the borrower take distributions as needed or as “tenure,” monthly payments for the life of the loan. Other options include monthly payments for another specified term or a combination of these options. Depending on the loan, the recipient can change their payment plan to other options at any time, as long as funds are available.

The risk to the lump-sum payment is simple. In the past, seniors took out lump-sum payments, spent the money quickly and then were without funds to pay household expenses, like insurance and property tax.

Today’s HECM attempts to reduce this risk by limiting the amount to be borrowed. The FHA also performs assessments of loan applicants. Ultimately, the homeowner must use the funds well and wisely to serve their intended purpose.

Reference: The Wall Street Journal (June 3, 2022) “The New Math of Reverse Mortgages for Retirees”

What Is Best Way to Spend ABLE Account Money?

An ABLE Account (Achieving a Better Life Experience Account) is a tax-advantaged savings account available to individuals diagnosed with disabilities. It lets them save without putting their public benefits at risk. Contributions to the ABLE account may be made by the account owner, family members, friends, trusts or any other person, as explained in the article “What Qualifies as Eligible Expenses for an ABLE Account?” from Investopedia. The money can be maintained in the account tax-free or spent on certain expenses, which are called “eligible expenses” or “Qualified Disability Expenses” (QDEs) and cover a broad range of goods and services. In some cases, figuring out if an expense meets the criteria is easy. However, in others, it is not so clear.

Typical QDEs include education, employment training, food, shelter, transportation, assistive technology, health, prevention and wellness, financial management of the ABLE account, including oversight and monitoring, legal fees, funeral and burial expenses. In all cases, keep detailed records of how ABLE funds are spent, just in case there is a dispute about whether an expense qualifies.

The law governing ABLE accounts does not spell out every single QDE. Sometimes the IRS or Social Security Administration will issue guidance to clarify whether an item is a QDE. The law says the term should be “broadly constructed to permit the inclusion of basic living expenses and should not be limited to items for which there is a medical necessity, or which provides no benefits to others in addition to the benefit to the eligible individual.”

Note that ABLE account funds may be used for a vacation, if it helps maintain or improve the health, independence, or quality of life for the disabled individual. The food category includes more than groceries: food delivery and restaurant meals are included.

A few tips:

• If in doubt, use non-ABLE money and save the ABLE funds for eligible purchases.
• Use public funds when possible. For instance, Medicaid may pay for transportation to a health care provider or educational programs.
• Keep extensive records, especially for items you are not sure about.

It is great for the disabled individual to have this much flexibility. However, it can also be confusing. An elder law estate planning attorney will be familiar with the guidelines and help ensure that the funds are used properly.

Reference: Investopedia (Feb. 25, 2022) “What Qualifies as Eligible Expenses for an ABLE Account?”

How Do Special Needs Trusts Work?

A trust of any kind is a document that expresses your wishes while you are alive and after you have passed. The need for a dedicated trust for loved ones differs with the situations or issues of the family. Getting this wrong can lead to financial devastation, explains the article “Take special care with Special Needs trusts” from the Herald Bulletin.

A Special Needs Trust or supplemental trust provides protection and management for assets for specific beneficiaries. The trustee is in charge of the assets in the trust during the grantor’s life or at his death and distributes to the beneficiary as directed by the trust.

The purpose of a Special Needs or supplemental trust is to help people who receive government benefits because they are physically or mentally challenged or are chronically ill. Most of these benefits are means-tested. The rules about outside income are very strict. An inheritance would disqualify a Special Needs person from receiving these benefits, possibly putting them in dire circumstances.

The value of assets placed in a Special Needs trust does not count against the benefits. However, this area of the law is complex, and requires the help of an experienced elder law estate planning attorney. Mistakes could have lifelong consequences.

The trustee manages assets and disperses funds when needed, or at the direction of the trust. Selecting a trustee is extremely important, since the duties of a Special Needs trust could span decades. The person in charge must be familiar with the government programs and benefits and stay up to date with any changes that might impact the decisions of when to release funds.

These are just a few of the considerations for a trustee:

• How should disbursements be made, balancing current needs and future longevity?
• Does the request align with the rules of the trust and the assistance program requirements?
• Will anyone else benefit from the expenditure, family members or the trustee? The trustee has a fiduciary responsibility to protect the beneficiary, first and foremost.

Parents who leave life insurance, stocks, bonds, or cash to all children equally may be putting their Special Needs child in jeopardy. Well-meaning family members who wish to take care of their relative must be made aware of the risk of leaving assets to a Special Needs individual. These conversations should take place, no matter how awkward.

An experienced elder law estate planning attorney will be able to create a Special Needs trust that will work for the individual and for the family.

Reference: Herald Bulletin (March 13, 2021) “Take special care with Special Needs trusts”

What Happens If Power of Attorney Documents are Rejected?

It is frustrating when a bank or other financial institution declines a Power of Attorney. It might be that the form is too old, the bank wants their own form to be used, or there seems to be a question about the validity of the form. A recent article titled “What to know if your bank refuses your power of attorney” from The Mercury discusses the best way to prevent this situation, and if it occurs, how to fix it.

The most important thing to know is just downloading a form from the internet and hoping it works is always a bad idea. There are detailed rules and requirements about notices and acknowledgments and other requirements. Specific language is required. It is different from state to state. It’s not a big deal if the person who is giving the power of attorney is alive, well and mentally competent to get another POA created, but if they are physically or legally unable to sign a document, this becomes a problem.

There have been many laws and court cases that defined the specific language that must be used, how the document must be witnessed before it can be executed, etc. In one case in Pennsylvania, a state employee was given a power of attorney to sign by her husband. She was incapacitated at the time after a car accident and a stroke. He used the POA to change her retirement options and then filed for divorce.

At issue was whether she could present evidence that the POA was void when she signed it, invalidating her estranged husband’s option and his filing for her benefits.

The Pennsylvania Supreme Court found that a third party (the bank) could not rely on a void power of attorney submitted by an agent, even when the institution did not know that it was void at the time it was accepted. For banks, this was a clear sign that any POAs had to be vetted very carefully to avoid liability. There was a subsequent fix to the law that provided immunity to a bank or anyone who accepts a POA in good faith and without actual knowledge that it may be invalid. However, it includes the ability for a bank or other institution or person to request an agent’s certification or get an affidavit to ensure that the agent is acting with proper authority.

It may be better to have both a POA from a person and one that uses the bank or financial institution’s own form. It’s not required by law, but the person from the bank may be far more comfortable accepting both forms, because they know one has been through their legal department and won’t create a problem for the bank or for them as an employee.

There are occasions when it is necessary to fight the bank or financial institution’s decision. This is especially the case, if the person is incapacitated and your POA is valid.

If there is any doubt about whether the POA would be accepted by the bank, now is the time to check and review the language and formatting with your estate planning or elder law attorney to be sure that the form is valid and will be acceptable.

Reference: The Mercury (July 7, 2020) “What to know if your bank refuses your power of attorney”

Possible Pitfalls for Special Needs Planning for Parents

Public benefits for disabled individuals include health care, supplemental income, and resources, like day programs and other vital services. Some benefits are based on the individual’s disability status, but others are “needs tested,” where eligibility is determined based on financial resources, as explained in the article “Planning for loved ones with special needs” from NWTimes.com.

“Needs testing” is something that parents must address as part of special needs planning, in concert with their own estate planning. This ensures that the individual’s government benefits will continue, while their family has the comfort of knowing that after the parents die, their child may have access to resources to cover additional costs and maintain a quality of life they may not otherwise have.

Families must be very careful to make informed planning decisions, otherwise their loved ones may lose the benefits they rely upon.

A variety of special planning tools may be used, and the importance of skilled help from an elder law estate planning attorney cannot be overstated.

One family received a “re-determination” letter from the Social Security Administration. This is the process whereby the SSA scrutinizes a person’s eligibility for benefits, based on their possible access to other non-governmental resources. Once the process begins, the potential exists for a disabled person to lose benefits or be required to pay back benefits if they were deemed to have wrongfully received them.

In this case, a woman who lived in California, engaged in a periodic phone call with California Medicaid. California is known for aggressively pursuing on-going benefits eligibility. The woman mentioned a trust that had been created as a result of estate planning done by her late father. The brief mention was enough to spark an in-depth review of planning. The SSA requested no less than 15 different items, including estate documents, account history and a review of all disbursements for the last two years.

The process has created a tremendous amount of stress for the woman and for her family. The re-determination will also create expenses, as the attorney who drafted the original trust in Indiana, where the father lived, will need to work with a special needs attorney in California, who is knowledgeable about the process in the state.

Similar to estate planning, the special needs process required by Medicaid and the SSA is a constantly evolving process, and not a “one-and-done” transaction. Special needs and estate planning documents created as recently as three or four years ago should be reviewed.

Reference: NWTimes.com (June 21, 2020) “Planning for loved ones with special needs”

Quirk in Medicare System’s Observation Status

There’s a troubling quirk in the Medicare system that occurs when older patients are hospitalized and instead of being officially admitted, they are placed on “observation status” reports the article “Caught Paying for Rehab Due to Observation Status? Medicare May Owe You” from The National Law Journal.

Observation status originally was meant to serve as a temporary status for people who were receiving medical care and tests in a hospital setting until they were either sent home or a diagnosis was made, and they were officially admitted.

However, in the past 10 years or so, the number of patients in hospitals deemed to be in observation status has increased enormously, even when patients have received a diagnosis and their doctors have admitted them to the hospital. This is a direct result of the Medicare claims review process, where hospitals risk not being paid because of inpatient services being billed without documents of certain diagnoses and levels of care.

The hospital seeks to protect itself, by designating a patient as observation status. There’s no downside to the hospital, since this is covered by Medicare, just under Part B, rather than Part A.

However, for the patient, it’s not that simple. First, the denial of Part A inpatient coverage means that the patient has to pay for each and every deductible and copay for each service. Prescription drugs received while the patient is in the hospital are billed separately and aren’t included under the Part A inpatient payment.

 It gets worse. Medicare coverage for post-hospital care is denied or extremely limited for observation status patients. Medicare only covers rehab costs in a facility, if the patient was admitted to the hospital for at least three days.

Observation status days do not count towards those qualifying days. It doesn’t matter if the treating physician had the patient admitted to the hospital, because hospitals can change the status of the patient retroactively.

Until recently, there was no recourse for patients. However, a recent class action suit in Connecticut may see that begin to change. A federal judge held that Medicare beneficiaries whose hospital stays were changed to observation status may appeal to Medicare for reimbursement of their payments to rehabilitation facilities. As a result of Alexander v. Azar, patients have the right to recover payments for their nursing home rehabilitation stays.

Patients whose doctors placed them on observation status still are not permitted to appeal.

Speak with your elder law estate planning attorney, if this scenario applies to you or family member.

Reference: The National Law Review (May 26, 2020) “Caught Paying for Rehab Due to Observation Status? Medicare May Owe You”

How Does Planning for a Special Needs Child Work?

Funding a Special Needs Trust is just the start of the planning process for families with a family member who has special needs. Strategically planning how to fund the trust, so the parents and child’s needs are met, is as important as the creation of the SNT, says the article “Funding Strategies for Special Needs Trusts” from Advisor Perspectives. Parents need to be mindful of the stability and security of their own financial planning, which is usually challenging.

Parents should keep careful records of their expenses for their child now and project those expenses into the future. Consider what expenses may not be covered by government programs. You should also evaluate the child’s overall health, medical conditions that may require special treatment and the possibility that government resources may not be available. This will provide a clear picture of the child’s needs and how much money will be needed for the SNT.

Ultimately, how much money can be put into the SNT, depends upon the parent’s ability to fund it.

In some cases, it may not be realistic to count on a remaining portion of the parent’s estate to fund the SNT. The parents may need the funds for their own retirement or long-term care. It is possible to fund the trust during the parent’s lifetime, but many SNTs are funded after the parents pass away. Most families care for their child with special needs while they are living. The trust is for when they are gone.

The asset mix to fund the SNT for most families is a combination of retirement assets, non-retirement assets and the family home. The parents need to understand the tax implications of the assets at the time of distribution. An estate planning attorney with experience in SNTs can help with this. The SECURE Act tax law changes no longer allow inherited IRAs to be stretched based on the child’s life expectancy, but a person with a disability may be able to stretch an inherited retirement asset.

Whole or permanent life insurance that insures the parents, allows the creation of an asset on a leveraged basis that provides tax-free death proceeds.

Since the person with a disability will typically have their assets in an SNT, a trust with the correct language—“see-through”—will be able to stretch the assets, which may be more tax efficient, depending on the individual’s income needs.

Revocable SNTs become irrevocable upon the death of both parents. Irrevocable trusts are tax-paying entities and are taxed at a higher rate. Investing assets must be managed very carefully in an irrevocable trust to achieve the maximum tax efficiency.

It takes a village to plan for the secure future of a person with a disability. An experienced elder law attorney will work closely with the parents, their financial advisor and their accountant.

Reference: Advisor Perspectives (April 29, 2020) “Funding Strategies for Special Needs Trusts”

Is It a Call from Social Security or a Scam?

If you get a call allegedly from the Social Security Administration, the chances are good that it’s a scam. Prior to disclosing any information or money, there are some steps you want to take.

CNBC’s recent article entitled “Social Security scams have caused millions of dollars in losses in 2019 alone. How you can avoid becoming a victim” explains that it’s common for an unknown caller to say that your Social Security number has been suspended or canceled.

This is the latest version of a robocall scam that the IRS warned people about in early 2019.

Other criminals attempt to convince people to pay up with cash or gift cards, in order to avoid getting arrested.

In the first six months of 2019, people filed 73,000 reports about Social Security fraud, according to the Federal Trade Commission. The losses from these calls was more than $17 million.

However, Congress is trying to stop these practices.

The House of Representatives passed a bill in early December to restrict robocalls by requiring carriers to block the numbers, without charging consumers extra money. The Senate passed a similar bill earlier this year.

Several lawmakers also asked the Social Security Administration to review scam calls purporting to come from the agency.

“While SSA has taken steps in recent months to prevent and raise public awareness about these imposter calls, we are alarmed that the scams continue to be widespread and severe,” the congressmen wrote in a letter to Andrew Saul, commissioner of the Social Security Administration.

The Social Security Administration also won’t send you an email with a “click here” link.

It is important to limit when you give out your Social Security number. You should think twice before revealing that information on healthcare forms, for example, where that information is usually unnecessary.

Reference: CNBC (Dec. 16, 2019) “Social Security scams have caused millions of dollars in losses in 2019 alone. How you can avoid becoming a victim”

What’s the Senior Freeze?

Many states and counties have what is known as a “Senior Freeze” program. This program reimburses eligible senior citizens and disabled persons for property tax or mobile home park site fee increases on their principal residence. To qualify, a senior must meet all the eligibility requirements for each year from the base year through the application year.

As far as property with a life estate, nj.com’s recent article, “Will I get the Senior Freeze if I have a life estate for my home?” explains that it’s important to determine who remains the owner of the property. The article says that the Senior Freeze program is a bit of a misnomer, because the benefit doesn’t actually “freeze” property taxes. The program actually reimburses eligible individuals for any property tax increases incurred, once an individual qualifies for the benefit.

An eligible person gets the difference between the property tax amount in the first year of eligibility—the “base year”—and the current year’s property tax amount, presuming it is higher. For example, in New Jersey, a person has to have two consecutive years of eligibility before applying and satisfy the following requirements:

• The applicant or his/her spouse are at least 65 or receiving Social Security disability benefits;
• The applicant lived in the state continuously since Dec. 31, 2007, or earlier, as a homeowner or renter;
• The applicant owned and lived in his/her home since Dec. 14, 2014 or earlier (and still owns and lives in the home);
• He or she has paid the full amount of the property taxes due; and
• The applicant meets the income limit (currently $89,013 in NJ).

The program typically doesn’t apply to vacation homes, second homes, rental properties, or properties that have more than four units.

It’s not uncommon for seniors to transfer a home to a trust for a variety of purposes including government benefit planning but conveying your home entirely may disqualify you from the Senior Freeze program. An applicant is considered the owner of the property, if she retains a life estate in the property, which must be evidenced in the deed or other legal document showing the applicant’s right to occupy the property.

The retention of a life estate will let an applicant qualify for the program if the other eligibility qualifications are met, but it could create collateral issues that risk qualification for government benefits if the property is sold. Therefore, it’s critical that you talk to a certified elder law attorney before transferring real estate or making substantial gifts.

Reference: nj.com (December 11, 2019) “Will I get the Senior Freeze if I have a life estate for my home?”

How Do I Tell If Dad Needs Caregiving Support?

When you're visiting older family members, you have a chance to judge how they're doing in terms of health, safety, and quality of life. AARP’s recent article, “5 Signs Your Loved One May Need Caregiving Support,” advises us that any of the following five red flags may indicate that your parent needs help.

1. Falls and safety. Look for things like unsafe indoor or outdoor stairs, especially without railings or poor lighting, along with loose rugs, clutter, or a laundry room that makes your mom or dad carry laundry baskets up and down stairs. You should evaluate fall hazards with a certified aging in place specialist (CAPS), an aging life care specialist, or a physical or occupational therapist. They can help evaluate your parent's needs, abilities and the home environment. Consider installing safety measures, such as ramps, handrails on both sides of stairs, grab bars in the bathroom, or a walk-in shower.
2. Unfinished business. If you see a lot of unopened mail and unpaid bills, or key financial, home or legal documents that haven't been addressed, your mom may be cognitively, physically, or emotionally unable to handle them. You may want to help your parent simplify her affairs or engage a financial manager. You can also volunteer to assist with the more complicated matters, while she continues handling day-to-day household and personal finances. You should also be sure your parent has advanced directives and other legal documents in place, so you are able to help manage her affairs in an emergency.
3. Auto accidents and moving violations. When you see multiple accidents—even minor fender benders—or several warnings or citations, scrapes, or dents on the car, it's time to discuss driving. You can ride along and observe any health issues causing problems like vision, hearing or cognitive changes. You can suggest that he refresh his driving skills by taking a driver safety course, or if it's time to stop driving, give him other viable transportation options.
4. Isolation. Does your mom appear to be disconnected from friends, family and community? If her support system seems to be deteriorating, her physical and mental well-being are at risk. Discover with whom she regularly interacts. Ask if she feels lonely. Look for some activities she’d enjoy and help make arrangements for ongoing participation and transportation. Regular phone calls can help her connect, as well as using technology, including video chat, online communities and social media.
5. A change in appearance. If you notice a change in your mom’s appearance, like a big gain or loss of weight, wearing the same clothes every day, or lack of personal hygiene, or if she appears sad, anxious, and distressed or has sleep issues—something is not right. Propose a complete medical and psychological evaluation to determine what’s normal for her, because there may be several reasons for these changes. Depression or anxiety may call for treatment.

Review her medications with a pharmacist and set up a pill organizer for her. Find out how she’s making or receiving meals. If appropriate, arrange for home-delivered meals, housekeeping, medication management and laundry assistance.

Tackle these conversations with love, concern, and a supportive attitude. Your objective is to help her remain as independent as possible, for as long as possible.

Reference: AARP (December 12, 2019) “5 Signs Your Loved One May Need Caregiving Support”