Robert M. Slutsky Associates
Elder Law Newsletter

Newsletter17: November 2007

The holiday season is approaching. The weather is changing. Thanksgiving is here. Keep warm and read on .....

Be Thankful

As we enter the holiday season we tend to forget how lucky we are for all of the blessings we have. The commercialization of the holidays (for all religions) gets everyone all excited about the gifts they would like and the things they need. We forget to appreciate what is really important.

Forget all of the static. Forget all of the commercials. Forget the sales. Forget the advertisements. Remember that without the family and friends that we have, the stuff we buy would give us less enjoyment.

Investing IN Retirement

Most articles you read about financial planning discuss the accumulation phase, i.e. saving and investing prior to retirement to build up a nest egg. With corporate pensions becoming more rare you now have to concentrate not only on accumulating the nest egg but how to draw it down in the most effective manner.

With most of use being responsible for our own retirements via 401(k) plans and private savings we have to try to balance our need for current income in retirement with the need to have the accounts continue to grow so we will not be left pennyless in our old age. With corporate pensions the employer takes the risk of having to guarantee a certain monthly benefit for the rest of your life. For most of us this is no longer an option and the risk is on us.

The fixed deferred annuity can be an option here. This is where you build up money in the annuity and then get payments for the rest of your life. The problem is that these payments are based on interest rates at the time of annuitization and rates are low now so payments will be lower. Another problem with this is that the payments are fixed and do not go up with inflation (which you can choose but it will lower your payments early on in exchange for higher payments later). Finally, as I have mentioned many times before, these annuities tend to have high internal costs and therefore have a relatively low return on investment. However, you can use these in combination with more aggressive investments that will grow over time knowing your basic living costs are covered.

Another option is that many mutual fund companies are now offering funds that are intended to throw off a good deal of income while providing some investments in stocks to grow over time. This allows you monthly income and some growth to offset inflation.

This is far from a comprehensive discussion of what to do to deal with your investments in retirement. It is simply important to understand that saving for retirement really has two components, the accumulation phase and the draw down phase, both being equally important.

Real Estate and Mortgages

We have talked about the real estate market and interest rates but not really how to purchase a mortgage. Some commentators on the subprime debacle have put the blame at least partially on mortgage brokers. Mortgage brokers can be both an asset and a liability when looking for a loan.

Until about 20 years ago most residential real estate loans were originated by banks who took customer deposits and lent them to people who needed loans. Since then a public secondary market has developed for the buying and selling of loans. Wholesale lenders provide funding for mortgage brokers, who then sell loans to the end customer and then the wholesale lenders turn these loans into securities and sell them in the securities market. When the loans are sold the wholesale lenders now have new money to fund loans.

Mortgage brokers have become the primary source of funding for home loans today. This can be both a positive and a negative for consumers. A mortgage broker can be compensated on the "front end" or the "back end." Front end compensation comes in the form of points charged to the borrower. A point is equivalent to 1% of the value of the loan.

Back end compensation is calculated the same way but is paid by the lender at settlement and does not get charged to the borrower directly. The broker is given a rate sheet by the lender which quotes "prices" for different interest rates for different periods that the lender will hold ("lock") the rate. For instance a price of 100 (called "par") the lender pays nothing to the broker and gets nothing from the borrower to get that rate. If the price is 98 the borrower must pay 2 points to the lender to get that lower rate ("buying down the rate") and then pay any compensation for the broker's services. If the price is 102 that means the broker will get 2 points of compensation on the back end.

The reasonableness of compensation for the broker depends on several factors including the quality of the borrower and the size of the loan. If the borrower is a W-2 employee with excellent credit and the loan size is $200,000.00 or more, 1.5% total compensation (meaning total of front and back end compensation) is probably fair compensation. If it is a smaller loan amount and/or the loan is going to be more difficult to underwrite because of credit problems or unusual terms compensation (as a %) are likely to be higher.

Brokers and banks can find other ways to increase their income by charging application fees, commitment fees, origination fees, documentation fees and processing fees. These should often be viewed with skepticism. Fees such as title insurance, attorney fees, appraisals and lender administration fees are typically out of the control of the broker and cannot be negotiated.

Why does all of this stuff matter? Because to be an educated purchaser you need to understand the compensation of the broker and other costs to understand the overall value of the transaction.

A good broker can shop several sources to get you the best rate and the lowest fees. A bad broker can lie, cheat and steal and do many things that are not in the best interest of the client.

Interest rates for those with excellent credit are where they have been, lower 6s for a 30 year no point fixed rate loan.

People with adjustable rates should still try to refinance into fixed rate products if they can.

Housing is still dropping. New home builders are having a hard time moving their homes and are giving many incentives. Analysts are not really seeing a recovery until late 2008 or in 2009. If you do not have to sell, it is probably better to wait.

In addition to Elder Law, our firm practices real estate law and originates mortgages. Please call us at (610) 940-0650 with any questions or for rate quotes.

The Need for Planning Reviewed : Part 2

Permitted Transfers:

While most transfers are penalized with a period of Medicaid ineligibility of five years, certain transfers are exempt from this penalty. Even after entering a nursing home, you may transfer any asset to certain individuals (such as a spouse or children under certain circumstances) without penalty.

Trusts:

The problem with transferring assets is that you have given them away. You no longer control them, and even a trusted child or other relative may lose them. A safer (but more complex and costly) approach is to put them in a living (or "inter vivos") trust. A trust is a legal entity under which one person -- the "trustee" -- holds legal title to property for the benefit of others -- the "beneficiaries." The trustee must follow the rules provided in the trust instrument. Whether trust assets are counted against Medicaid's resource limits depends on the terms of the trust and who created it.

A "revocable" trust is one that may be changed or rescinded by the person who created it. Medicaid considers the principal of such trusts (that is, the funds that make up the trust) to be assets that are countable in determining Medicaid eligibility. Thus, revocable trusts are of no use in preserving assets.

Income-only Trusts:

An "irrevocable" trust, on the other hand, is one that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the "grantor") for life, and the principal cannot be touched during your life. At your death the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or for your benefit. However, if you do move to a nursing home, the trust income will have to go to the nursing home.

You should be aware of the drawbacks to such an arrangement. It is very rigid, so you cannot gain access to the trust funds even if you need them for some other purpose. For this reason, you should always leave an ample cushion of ready funds outside the trust.

You may also choose to place property in a trust from which even payments of income to you or your spouse cannot be made. Instead, the trust may be set up for the benefit of your children, or others. These beneficiaries may, at their discretion, return the favor by using the property for your benefit if necessary. However, there is no legal requirement that they do so.

One advantage of these trusts is that if they contain property that has increased in value, such as real estate or stock, you (the grantor) can retain a "special testamentary power of appointment" so that the beneficiaries receive the property with a step?up in basis at your death. This will also prevent the need to file a gift tax return upon the funding of the trust.

Testamentary Trusts:

Testamentary trusts are trusts created under a will or inter vivos trusts. The Medicaid rules provide a special "safe harbor" for testamentary trusts created by a deceased spouse for the benefit of a surviving spouse. The assets of these trusts are treated as available to the Medicaid applicant only to the extent that the trustee has an obligation to pay for the applicant's support. If payments are solely at the trustee's discretion, they are considered unavailable.

Therefore, these testamentary trusts can provide an important mechanism for community spouses to leave funds for their surviving institutionalized husband or wife that can be used to pay for services that are not covered by Medicaid. These may include extra therapy, special equipment, evaluation by medical specialists or others, legal fees, visits by family members, or transfers to another nursing home if that became necessary. But remember that if you create a trust for yourself or your spouse during life (i.e., not a testamentary trust), the trust funds are considered available if the trustee has the ability to use them for you or your spouse.

Supplemental Needs Trusts:

The Medicaid rules also have certain exceptions for transfers for the sole benefit of disabled people under age 65. Even after moving to a nursing home, if you have a child, other relative, or even a friend who is under age 65 and disabled, you can transfer assets into a trust for his or her benefit without incurring any period of ineligibility. If these trusts are properly structured, the funds in them will not be considered to belong to the beneficiary in determining his or her own Medicaid eligibility. The only drawback to supplemental needs trusts (also called "special needs trusts") is that after the disabled individual dies, the state must be reimbursed for any Medicaid funds spent on behalf of the disabled person.

Supplemental needs trusts are usually created by a parent or other family member for a disabled child (even though the child may be an adult). Or, the disabled individual can create the trust with his or her own money, provided the trust meets certain requirements.

Estate Recovery:

Under changes in the federal Medicaid law in 1993 all states are required to have Estate Recovery rules. This means that the state must attempt to collect some or all of the Medicaid funds they have paid for a person while alive after the death of the person. In most cases there are not assets left to collect against. Occasionally there is a home left (because Medicaid does not force the sale of the home). As a result when someone dies who has received Medicaid funded services there is a statutory lien against any property in the probate estate (in Pennsylvania, the rules are different from state to state). The probate estate includes assets that are only in the name of the deceased Medicaid recipient. For instance, if that house was owned jointly with a sibling it will transfer to the sibling by operation of law at death and is not in the probate estate.

Protection of the House:

For many people, setting up a "life estate" is the most simple and appropriate alternative for protecting the home from estate recovery. A life estate is a form of joint ownership of property between two or more people. They each have an ownership interest in the property, but for different periods of time. The person holding the life estate possesses the property currently and for the rest of his or her life. The other owner has a future or "remainder" interest in the property. He or she has a current ownership interest but cannot take possession until the end of the life estate, which occurs at the death of the life estate holder. As with a transfer to a trust, the deed into a life estate can trigger a Medicaid ineligibility period.

This is far from an exhaustive review of the reasons for the need to plan or tools that can be used to protect yourself or your loved ones. The goal of this discussion is to simply emphasize that there are many risks in the planning arena and that a good plan can prevent a huge amount of stress and the unnecessary loss of all you have worked hard to accumulate.

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Robert Slutsky, Esq. has been practicing Elder Law for 14 years. He helps families in Montgomery, Delaware, Philadelphia, Chester and Bucks Counties. Mr. Slutsky has represented local Area Agencies on Aging, long term care facilities and was a member and officer on the CAPS Board of Directors for over 10 years. Home visits are available. You may reach him at (610) 940-0650, robslutsky@comcast.net or the website at www.slutskyelderlaw.com.

DISCLAIMER: The content of this Newsletter is for general information only. It is not intended to be legal, tax, financial, medical or other advice. The reader should obtain legal, tax, medical or other advice from a competent professional to address his or her specific needs. We do not endorse any particular service provider. If a service provider is mentioned in an article it is simply because we may have come across them in our travels and cannot speak to their quality of service or integrity.