Paul O. Dillon, Attorney at Law

How Can I Protect My Child’s Inheritance, If They Have a Substance Abuse Problem?

Kiplinger’s recent article, “Selecting the Right Trustee and Protector for a Substance Abuse Trust,” explains that selecting the trustee for a substance abuse trust should start with a good idea of the duties they will perform. Next, find a person or institutional trustee that’s most qualified to fulfill those obligations. Parents should then think about naming a trust protector, who serves in a supervisory role to ensure that the trust is being properly administered.

The basic duties of a trustee include a fiduciary duty to administer the trust in good faith and in accordance with its terms and purposes; loyalty to the beneficiaries, by acting solely in their interests; invest the trust property prudently by considering the purposes, terms, distributional requirements, and other circumstances of the trust; and to act impartially, when there are multiple beneficiaries.

There may also be special duties of the trustee. For a child with a substance use disorder, the trustee’s duties for distributions could be linked specifically to paying for the costs of rehab, job training, professional service fees and other items that are part of the treatment plan developed by the beneficiary’s treatment team. Tying distributions into the treatment plan would mean the trustee, and maybe someone familiar with treatment management, would have to work closely with the treatment team to carry out the plan.

If the trust has incentive clauses, the trustee will also have to determine if the beneficiary has attained the goal (like sobriety for a certain period of time) and if so, the benefit to which he or she’s entitled. These can be hard to administer, since it can be hard to verify if the beneficiary has actually met the goals.

If the beneficiary is eligible for government program benefits, like SSI or Medicaid or from private health insurance, another set of duties will be placed upon the trustee to make certain that distributions won’t be classified as “maintenance” or “support.” If so, it could result in the child being declared ineligible. Since distributions from the trust are meant only to supplement the benefits that SSI or Medicaid is providing (and not duplicate or supplant them), the trustee will have to closely watch the uses of the distributions, so they aren’t support and maintenance.

You must next look at potential candidates to see who’s best suited for the role of trustee. There are two categories of trustees: individual and institutional. Individual trustees can include family members. The advantage here is that they’ll know the beneficiary and can give more personalized service than an institutional trustee. However, appointing a family member or friend as trustee may ruin the relationship, if the trustee denies the beneficiary’s demands.

You can appoint a trust company, bank trust department, or a corporate trustee connected to a brokerage firm to serve as the trustee to avoid possible family conflicts. However, some institutional trustees may be more focused on their investment performance, than on tending to the mental and physical needs of their beneficiaries. In the case of a substance abuse trust, “hands-on” involvement with the beneficiary is vital.

One alternative may be to appoint an individual and an institutional company to serve as co-trustees. The individual could be personally involved with the beneficiary and their treatment plan, and the institutional trustee could deal with and handle the investments. However, both trustees should make distribution decisions. The best type of institutional trustee for a substance abuse trust, would be one that works primarily in administering special needs trusts. These are created for the benefit of children with disabilities. These trustees will be knowledgeable about SSI and Medicaid eligibility rules.

A trust protector, depending on applicable state law, acts as the settlor’s surrogate. This continues even after the settlor dies. This allows the trust to adapt to changing circumstances. The trust protector could also direct the trustee’s actions concerning how the trust assets would be invested and could approve or deny proposed disbursements from the trust. The trustee would be obligated to comply with such directions, unless they would be manifestly contrary to the trust’s terms or a breach of the protector’s duties.

As far as a substance abuse trust, a trust protector can provide supervision, if the trustee doesn’t possess experience in coordinating trust distributions with a substance abuse treatment plan, or with monitoring the beneficiary’s eligibility for government aid programs. Instead of the trustee appointing agents to assist in these matters, the protector would actively monitor the progress of the beneficiary’s recovery and, if necessary, direct the trustee to engage a treatment manager for the beneficiary or an advocate to secure SSI and Medicaid benefits.

Support from all parties will help the beneficiary continue on the road to recovery, which is the ultimate goal of the trust.

Reference: Kiplinger (March 8, 2019) “Selecting the Right Trustee and Protector for a Substance Abuse Trust”

When Should I Review My Estate Plan?

As life changes, you need to periodically review your estate-planning documents and discuss your situation with your estate planning attorney.

WMUR’s recent article, “Money Matters: Reviewing your estate plan,” says a common question is “When should I review my documents?”

Every few years is the quick answer, but a change in your life may also necessitate a review. Major life events can be related to a marriage, divorce, or death in the family; a substantial change in estate size; a move to another state and/or acquisition of property in another state; the death of an executor, trustee or guardian; the birth or adoption of children or grandchildren; retirement; and a significant change in health, to name just a handful.

When you conduct your review, consider these questions:

• Does anyone in your family have special needs?
• Do you have any children from a previous marriage?
• Is your choice of executor, guardian, or trustee still okay?
• Do you have a valid living will, durable power of attorney for health care, or a do-not-resuscitate to manage your health care, if you’re not able to do so?
• Do you need to plan for Medicaid?
• Are your beneficiary designations up to date on your retirement plans, annuities, payable-on-death bank accounts and life insurance?
• Do you have charitable intentions and if so, are they mentioned in your documents?
• Do you own sufficient life insurance?

In addition, review your digital presence and take the necessary efforts to protect your online information, after your death or if you’re no longer able to act.

It may take a little time, effort, and money to review your documents, but doing so helps ensure your intentions are properly executed. Your planning will help to protect your family during a difficult time.

Reference: WMUR (January 24, 2019) “Money Matters: Reviewing your estate plan”

How Does the Medicaid Look-Back Work?

Say that an investment house in New Jersey worth $300,000 is passed from mother to daughter for sale of $1 today. Just two years later, the mother applies for Medicaid. (In Maine Medicaid is called MaineCare)  There’s a look-back penalty period that will apply, says nj.com in the recent article, “If mom sells her house for $1, what Medicaid penalty will apply?” The article explains that when someone applies for Medicaid, gifts create periods of Medicaid ineligibility.

A Medicaid applicant is required by the government to document all of her financial transactions during the "look-back period." That period is five years immediately prior to the date of application.

If the applicant’s financial records show a transfer of assets within that period, the Medicaid administrators will presume that the assets were transferred to promote eligibility for Medicaid benefits. This could be a check or withdrawal, for which there is no explanation other than a gift.

The value of the transfer will be divided by the statewide daily nursing home rate to get the number of months of the ineligibility, also known as the penalty period. In New Jersey, that rate is currently $343.85, or $10,459 per month.

The five-year year look-back period commences when the transfer is made. However, the penalty period of ineligibility starts on the date the applicant is otherwise eligible for medical assistance under the State plan, but for the application of the penalty period.

So, in our $1 house example, if the New Jersey Medicaid applicant transferred $300,000, the monthly penalty period of ineligibility for this transfer would be calculated by dividing $300,000 by $10,459, which equals 28.68 months of ineligibility. There is no rounding down, by the way.

The penalty period would start when the applicant medically needs an institutional level of care, has countable resources below $2,000 and has filed a Medicaid application to establish that she would have been otherwise eligible but for the asset transfer. Note: there’s no limit on the length of the penalty period.

Thus, assuming the applicant otherwise would have qualified for Medicaid but for the asset transfer, the applicant wouldn’t be eligible for Medicaid for an additional 28.68 months.

However, if the application was made more than 60 months after the transfer date, then the transfer would be outside of the 60-month lookback period and, if no other transfers were made, then no penalty period would be imposed, and the applicant would be eligible 61 months after the transfer date.

Contact an elder law attorney in your state to learn how the rules would apply under local law. There are a number of strategic asset protection tools available, but they must be completed in a timely fashion.

Reference: nj.com (December 25, 2018) “If mom sells her house for $1, what Medicaid penalty will apply?”

Don’t Let These Mistakes Crack Your Retirement Nest Egg

While half of those Americans who aren’t retired believe they don’t have enough money to retire, 78% of those in retirement say they have enough money to live comfortably.

However, a Fox Business article, “10 mistakes that can sabotage your retirement savings,” advises that wherever you are on the retirement curve—whether you’re just starting to save for retirement or are already retired—there are mistakes that can poke a big hole in your retirement nest egg. Let’s take a look the list:

1. Failing to consider the effect of taxes on retirement income. You need to calculate how taxes could affect your savings. Some retirement savings plans are taxed, when they’re withdrawn. A big mistake many retirees make is believing that Social Security isn’t taxed, but 85% of Social Security can be taxed.
2. Failing to consider the effect of health care costs in retirement. This can be expensive and includes things like deductibles and out of pocket payments—not just the costs for a health care plan.
3. Failing to consider the effect of potential long-term care costs in retirement. It’s easy to forget to consider the day-to-day costs of long-term care, like assisted living, nursing homes, and in-home care. Medicare will pay for certain care for 30 days, but after that it has to come from your own savings.
4. Failing to have enough liquidity and an emergency fund. You need to have money invested appropriately for retirement, so it can be accessed when you need cash.
5. Having too much money tied up in your home. This isn’t a liquid investment, and if you have too much of your net worth tied up in your home, you may experience a lack of liquidity when you need it.
6. Starting your retirement with significant levels of debt. Pay off or reduce your debt before retirement. Otherwise, your debt can debilitate your finances.
7. Failing to plan for Social Security. There are a lot of strategies for using Social Security to maximize the amount of money you’ll receive. You can begin receiving Social Security payments at age 62. However, if you wait, you’ll see more money.
8. Spending too much early in your retirement. Trips are nice, but your money has to last as long as you do! People who spend too much during the early part of their retirement years, can find themselves in a financial pinch later on.
9. Failing to assess your risk. You need to have risk-appropriate investments in retirement. Consider your risk tolerance, since being too risk averse could eat into the value of a savings plan.
10. Thinking you can do it yourself without a professional. Work with a qualified estate planning attorney to have an estate plan in place.

Reference: Fox Business (August 3, 2018) “10 mistakes that can sabotage your retirement savings”

What Will Care Cost For My Parent?

Hiring a caretaker in your home for a day may cost about $200 a day. At an assisted living facility, at a very low-level tier of care, the price is somewhere between $5,500 and $6,500 per month. For skilled nursing, it’s $8,500 or more, based on the amount of care you receive.

New Jersey 101.5’s recent article, “Mom or Dad Goes to a Nursing Home: Will You Go Broke?” explains that New Jersey is one of the more expensive areas for long-term care. As a result, when looking at paying for that care and trying to protect assets, it’s important to work with an attorney who specializes in elder law. That person can draft the legal documents and also handle counseling issues on housing, placement and level of care.

Many folks think they’ll have to spend their parents’ entire savings or assets before becoming eligible for some type of government assistance. However, there are four ways to pay for elder care: your own money, long-term care insurance, Medicaid or the VA. You should ask an experienced elder law attorney to try and protect as much of their individual assets as possible. The sooner you begin the planning process, the more options you’ll have as far as the type of care and how long you’re able to pay for it.

An elder law attorney will discuss ways to protect the assets of someone going into long-term care. Strategies usually focus on leveraging the Medicaid and VA regulations.

An elderly person who requires 24/7 care, can exhaust all of his or her financial resources.  However, Medicaid can help. This program lets the person stay with their care, when they’ve spent everything down.

In some situations, an elderly parent requires a significant amount of care, and his or her assets must be used to pay for assisted living or a nursing home. That can make things tense. The children may be anticipating inheritances to help with their own retirements, and they could be resentful when that money's being spent on mom’s care.

However, most families are focused on the welfare of the elderly parent or relative. Those who are facing a crisis with an aging parent, should know they can ask for help. Speak with an elder law attorney and explore all of your options.

Reference: New Jersey 101.5 (August 20, 2018) “Mom or Dad Goes to a Nursing Home: Will You Go Broke?”

How Do Annuities Work with Medicaid Eligibility?

Financial Advisor’s recent article, “Annuities Can Help or Harm Medicaid Eligibility,” explains that Medicaid rules include both asset limitations and income limitations. Annuities can be exceptionally beneficial for a retirement income plan, such as for an older individual facing long-term care costs.  However, the annuity will be viewed as a resource available for payment, which will make the applicant ineligible for Medicaid.

An annuity can help with Medicaid eligibility by transforming otherwise countable assets, like savings accounts, into a non-countable income stream, which will shield the assets for heirs, while spending down what counts against you in Medicaid eligibility. A good type of annuity for this is the Single Premium Immediate Annuity (SPIA). It’s the simplest, most transparent type of fixed annuity. It has a lump-sum premium payment at the start and a predetermined, contracted payback schedule. In contrast, variable annuities invest in a range of securities that don't have guaranteed returns.

However, the use of annuities in Medicaid planning is complex. Years ago, these annuities were treated more favorably. In 2006, federal law was amended to limit the ability to benefit from these annuities. The Deficit Reduction Act (DRA) of 2005 introduced new rules to limit the transfer of assets for purposes of gaining Medicaid eligibility. Nevertheless, there are still some uses for SPIAs in Medicaid planning.

Generally, to assist with Medicaid eligibility, a SPIA must be non-cancelable, non-assignable and actuarially sound. Therefore, it must be irrevocable, and the funds stay in the annuity, except for contracted monthly payments. Second, the annuitant must receive back at least as much as was paid into the annuity during his or her actuarial life expectancy. If there’s a guaranteed minimum number of payments, it can’t exceed that actuarial life expectancy. Finally, the DRA says that annuities must name the state as beneficiary for at least the value of the Medicaid assistance received (there may be an exception for a disabled child).

Therefore, you can convert an asset into an income stream, but you can't change it back. The income rules must also be analyzed, to see if the additional income will be a problem. If the annuity can be converted to a lump sum or sold for a lump sum, Medicaid still treats it as an asset. This is the reason why most annuities don’t work for Medicaid purposes.

 It is important to note that because of income limits for some programs and income contribution rules for other programs, conversion of an asset to a stream of income isn’t always in the best interests of a person seeking Medicaid long-term-care benefits. Talk to an elder law attorney first.

Reference: Financial Advisor (May 11, 2018) “Annuities Can Help or Harm Medicaid Eligibility”

Michigan Legislature Looks at Medicaid Work Requirements

The Medicaid work requirement bill was sponsored by State Senator Mike Shirkey, a Republican from Clarklake. The Macomb Daily’s recent article, “Michigan lawmakers move toward work requirements for Medicaid recipients,” reported that the committee spent more than two hours reviewing the bill but did not take a vote to advance the legislation. Michigan is the fourth state to take up legislation that will affect those getting health care through Medicaid or the Healthy Michigan program, which is health insurance for low income people and families.

The legislation would require employment for people receiving health care through Medicaid. Recipients would lose coverage for a year, if they fail to document their work activity, a provision that opponents say is the most stringent devised by any of the four states to date. Opponents say the state’s attempts to impose work requirements will cost the state up to $30 million to administer. The bill would exempt the disabled and the elderly from work requirements.  However, opponents estimate that it could potentially impact health coverage for between 150,000 to 1 million people and increase uncompensated emergency room care.

Healthy Michigan currently insures 695,820 people, according to the Michigan Department of Health and Human Services. It covers people earning up to 138% of the poverty level.

According to a survey of Healthy Michigan enrollees by the Institute for Healthcare Policy and Innovation at the University of Michigan, 48.8% are working. Of that segment, 5.2% were students, 4.5% were homemakers, and 2.5% were retired.

Most Medicaid recipients who can work, are already working, opponents argue. A big issue is that those who are working are not allowed to work more than 25 hours because employers try to stay below 29 hours. That’s nearly 30 hours, which might require an employer to pay full benefits.

One estimate projects that 46% of Michigan Medicaid enrollees would be at risk of losing Medicaid coverage for at least one month during the year.

Reference: The Macomb (MI) Daily (May 7, 2018) “Michigan lawmakers move toward work requirements for Medicaid recipients”

How to Budget for Retirement

After spending years working, bringing in income and saving for the future, you now must spend and manage that money. It’s a big change, and requires a thoughtful approach.

US News & World Report’s recent article, “7 Myths About Finances in Retirement,” says that moving into this new phase of life, can create changes in your finances and lifestyle. For most of us, despite the planning, there’ll still be some surprises when you enter retirement. Here are some of the most common financial myths about retirement, as well as the realities behind them.

1. Medicare covers everything. You’ll be eligible for Medicare the month you turn 65. However, you should remember that there’ll still be ongoing health care expenses. Medicare only covers some services for free. Unless you qualify for Medicaid, you’ll need to budget for costs like premiums, copays, and deductibles. You’ll also need a Medicare supplement plan, which can be affordable but is not free. Note that Medicare only provides some coverage for long-term care. Consider buying long-term care insurance to help pay for additional services.
2. I’ll just need 70-80% of my pre-retirement income. You may discover that you want to spend money on travel, dining, or a new hobby. Because people are healthier and more active today than in past generations, they actually require more money to go out and do what they’d like in their retirement.
3. Taxes are nothing in retirement. Since you’re no longer bringing home a paycheck from working each month, you may assume that your taxes will decrease in retirement. Maybe, but you’ll likely need to plan on paying taxes each year.
4. Downsizing means more savings. A common retirement transition plan includes moving out of the family home and into a smaller place. You might think this means fewer home-related costs, but that’s not always true.
5. $1 million is all I need for a comfortable retirement. For years, building a $1 million nest egg was thought of as a goal for retirement. However, that figure may no longer be accurate, due to longer life expectancies, increasing costs, and active lifestyles. There’s no specific one-size-fits-all amount to save for retirement.
6. I can withdraw 4% each year from my portfolio. This rule refers to the concept of withdrawing 4% from a retirement account each year. The idea is that you’ll be able to maintain a steady stream of income, while keeping the funds sustainable for many years. But again, with increased life expectancy and recent challenges, many retirees are severely underfunded for retirement. Consider withdrawing a lower percentage, such as 3% each year.
7. No need for assisted care. You may believe that once you’ve settled in the home where you want to spend your retirement days, you’ll avoid assisted living or nursing home care, resulting in substantial savings. However, there could also be many expenses to stay in your own place and getting the right level of care. You might save money by staying in your home, but you could spend a lot more on care.

Reference: US News & World Report (April 18, 2018) “7 Myths About Finances in Retirement”