Newsletter: March 2009
Newsletter 28: March 2009
Gifts and How Not to Make Them
Parents often make legal and estate planning mistakes because of a lack of accurate information and guidance.
These mistakes can impact the retirees’ financial security and prevent them from achieving important goals.
It is wonderful to gift both from the giving and receiving point of view. Gifting, however, as we age can have pitfalls, as well as joy, attached to it. People make gifts for many reasons including love and affection and the desire to assist another family member, people in need, or a charity. But be careful — making gifts may have unintended consequences.
From a legal perspective, a gift is made when you transfer your money or property without receiving something of equivalent value in return. If you sell a property worth $100,000 to your child for $20,000, you have made a partial gift worth $80,000. For a gift to be complete, several legal requirements must be met:
1) you must intend to make a gift;
2) you must give up dominion and control over the gifted asset, and
3) the gift must be accepted by the recipient. There are lots of ways to make gifts. They can be structured to take effect immediately with no strings attached, or they can be made to take effect at some point in the future or be made with restrictions.
There are many things you need to consider before making any substantial gift. An example: When he dies, P wants his home to go to his son, R. P is concerned that R will have to pay inheritance tax. P is also worried that if he gets sick and needs expensive care, he may lose the home to nursing home costs. He also wants to avoid probate although, in truth, he isn’t sure what that is, or why it is a worry.
P goes to an elder law lawyer and tells him he wants to deed the home to R now. The lawyer says that he will be happy to prepare the deed, but asks if P has considered all the consequences. The lawyer explains that the house could be lost if R ever runs into financial or marital difficulties. And he asks what will happen to the home if R predeceases P. In addition, the lawyer explains that if the home is given to R and then sold, R will have to pay capital gains taxes that would have been avoided if P had died with the home in his estate. While inheritance taxes might be lessened, income taxes might be increased.
After talking with his lawyer and considering a number of options, P decided not to deed the home to R directly but to put it into a trust that will protect it from nursing home costs, capital gains taxes, and R’s future divorce or creditors.
And while gifting a property away may someday protect it from nursing home costs, making the gift can negatively impact the donor’s current eligibility for important Medicaid benefits for a period of five years. If you think you or your spouse may need long-term care within the next five years, consult an experienced elder law attorney before making the gift. You should also think about the consequences the gift may have on the recipient. For example, will the gift impact the eligibility of a child or grandchild for college financial aid?
Here are some tips. Before you make a large gift, look carefully at your own personal situation. Are you in financial position to make the gift without jeopardizing your financial security? How does it affect your estate planning goals – for example, how will it impact your desire to treat your children with equality? Will you need to update your Will and beneficiary designations to compensate? And how will you feel if the recipient of your gift does something with it you didn’t contemplate?
Gifts involve income, estate, inheritance, and gift tax issues that should be reviewed in advance. Often the cost is far higher to engage in seemingly “simple” transactions than to engage competent counsel to advise you of the various consequences of your well meaning, but not always well understood, transactions. After you have considered these issues, get some expert advice. Talk with your elder law attorney, financial planner, and accountant. They can help you decide whether a gift, and what kind of a gift, makes the most sense for you. Gifts are simple to make but have complicated consequences. Seniors should take their time and get expert advice before making any substantial gifts.
Be Careful When You Get That Buyout
You cannot read the news today without news of another mass layoff or “right sizing.” Nothing is worse than losing your job then blowing your severance package before you find new employment.
Baby Boomers who have been in their jobs for many years are often given a severance package, typically 1-2 weeks pay for every year of service. So an average buyout is 11-15 weeks pay. However, it takes an average of 22 weeks to find a new job for people 45-64. Knowing that the goal is to reduce stress and pay your bills until the next reliable paycheck arrives, follow these tips:
Don’t Take Any Risks: Put the money in a money market or savings account (not in the market to make money).
Look for areas to trim expenses: Cutting to the bone may depress you more than the loss of a job. Reducing a few key expenses will improve your cash flow without making you feel poor. For instance cancel the swim club membership, eat out less often and at more moderate restaurants. Have the cleaning service come once a month instead of once every two weeks.
Don’t Pay Down Debt: Now is not the time to use the money to pay down debt. If you are unemployed getting loans and credit cards will be more difficult and during that time, cash reserves are the most important.
Get A Little Cash: If you are having difficulty getting a full-time job in your field, try some freelancing or part-time work. Not only will this provide cash to tide you over, but may turn into something more as you can use your skills and knowledge to impress a potential employer.
Real Estate and Mortgages
Lately with the market making daily gains and drops in excess of 4%, it is almost impossible to give guidance in a monthly newsletter. You can see daily interest rate swings for a standard mortgage of close to 5%. Rates have been hovering in the 5.375-6.375 range for the last several months. Those are historically low rates and make homes fairly affordable, especially with the recent drops in home values.
We originate mortgages and practice real estate law. Call us at (610) 940-0650 for rate quotes or questions.
AARP Report Says States Have Ability to Curb Power of Attorney Abuse
An AARP report says that states can improve protections for older people by adopting a model law that addresses this type of abuse.
For most people, the power of attorney is the most important estate planning instrument — even more useful than a will. A power of attorney (POA) allows an individual to name a trusted person — their agent — to make financial decisions for them if they ever become incapacitated.
But while a POA avoids the costly and time-consuming process of having a court appoint a guardian or conservator, it also confers a great deal of authority on the agent. This is why advocates for the elderly often call the POA a “license to steal.” Increasingly, it seems, dishonest agents have been taking advantage of this license. AARP says that adult protective services and criminal justice professionals are reporting “an explosion” of financial exploitation cases of this type against the elderly.
Powers of attorney are regulated by state law and most states lack adequate safeguards, AARP contends. But help is available. In 2006, the Uniform Law Commissioners, which draft and propose model laws for states, approved the Uniform Power of Attorney Act (UPOAA) to offer states a set of provisions that will help protect people who execute POAs and discourage POA abuse. The UPOAA includes stringent requirements for agents to exercise certain powers, as well as provisions making malfeasant agents liable for damages, attorney’s fees and costs.
So far, two states — New Mexico and Idaho — have enacted the UPOAA and 12 states are considering adopting it in 2009. AARP’s study of current state POA statutes found that “a large majority of state laws lack most of the UPOAA’s protections for individuals creating powers of attorney.”
The AARP report, “Power of Attorney Abuse: What States Can Do About It,” compiled by the American Bar Association Commission on Law and Aging under contract to AARP, offers advocates tips for enacting the UPOAA provisions and includes a list of stakeholders who may want to collaborate in the study and recommendation process.
Tax Benefits for Families Paying for Long-Term Care
Many families fail to take advantage of tax deductions that can provide economic relief for people who are paying long-term care costs.
The Internal Revenue Code (IRC) allows a taxpayer to deduct non-reimbursed medical expenses incurred for medical care of the taxpayer, his spouse, or a dependent to the extent that such expenses exceed 7.5 percent of adjusted gross income. The cost of qualified long-term care services are deductible as medical expenses under special rules set out in IRC Section 7702B.
The tax law defines deductible “qualified long-term care services” rather broadly as “necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, rehabilitative services and maintenance and personal care services” which are: required by a chronically ill individual; and provided pursuant to a plan of care prescribed by a licensed health care practitioner. This means that the costs incurred for a wide range of long-term care services, including maintenance and personal care services, are potentially deductible.
To qualify as chronically ill, an individual must be certified by a licensed health care practitioner within the previous 12 months as meeting one of the following two tests:
1) The individual is unable, for at least 90 days, to perform at least two activities of daily living (ADLs) such as bathing, dressing, eating, etc. without substantial assistance from another individual, due to loss of functional capacity; or
2) The individual requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
A licensed health care practitioner must certify that the care recipient meets one or the other of these tests. The certification can be made by a physician, registered professional nurse, or a licensed social worker and this can be the same professional who has prescribed the plan of care. The certification is only good for the preceding 12-month period and thus must be reissued at least each year. The licensed health care practitioner who signs the certification is frequently the taxpayer’s physician or a nurse or social worker who is on the staff of a home care agency, assisted living facility, or other provider.
If these requirements are met, the taxpayer should be able to deduct the cost of unreimbursed qualified long-term care services whether they are received at home, in a personal care or assisted living facility, or in a nursing home. The federal income tax savings can be dramatic.
For more information see IRS Publication 502, Medical and Dental Expenses; IRS Publication 17, Your Federal Income Tax.
Medicare Advantage Prices Rise as Overhaul Plan Nears
As President Obama prepares to push for an overhaul of
the medical system, providers of U.S.-backed health plans for the elderly are raising prices. Humana Inc., Health Net Inc., and nearly 200 other providers increased 2009 premiums by 13 percent on average, or more than five times as much as last year, for people who use Medicare
Advantage, according to Avalere Health, a consulting company in Washington.
Advantage plans add features such as drug coverage to Medicare and are run by commercial insurers.
Obama has vowed to control health-care spending while extending coverage to more people, and, during his campaign, criticized the costs of Advantage plans. Some believe Medicare Advantage plans are not a good deal for the government or recipients. Medicare will spend 14 percent more this year, on average, for Advantage enrollees than for beneficiaries with basic coverage, concluded a staff report in December by the Medicare Payment Advisory Commission, an independent agency that advises Congress.
Obama considers the government payments “excessive,” says Jen Psaki, a spokeswoman on the White House staff. During his campaign Obama promised to cut subsidies to Advantage by as much as $15 billion a year, or about 15 percent from last year’s total of $100 billion.
Insurers also collected about $5 billion in Advantage premiums from consumers last year, said Thomas Scully, the former top administrator of the U.S. Centers for Medicare & Medicaid Services. Scully, who helped design the Advantage program, said that he did not consider the premiums excessive and that Advantage was less expensive than alternatives.
Medicare is the U.S. health plan for the disabled and those over 65. Basic Medicare, with a monthly fee of $96, lets patients use nearly all U.S. doctors or hospitals. Beneficiaries can also buy separate private policies to cover prescription drugs and expenses exempted from standard benefits. Advantage, which covers 10.5 million people, bundles those options.
“There are almost 11 million people who have chosen to participate in Medicare Advantage because they feel they’re good plans,” said Richard Barasch, chief executive officer of Universal American Corp., an insurer in Rye Brook, N.Y.
Long-Term Care Insurance Tax-Deductibility Rules
Recognizing that government can’t pay the bill for long-term care, federal and a growing number of state tax codes now offer tax incentives to encourage Americans to take personal responsibility for their future long-term care needs.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) included provisions for favorable tax treatment of qualified Long-Term Care insurance (LTCi) contracts.
Tax-qualified LTCi premiums are considered a medical expense. For an individual who itemizes tax deductions, medical expenses are deductible to the extent that they exceed 7.5% of the individual’s Adjusted Gross Income (AGI). The amount of the LTCi premium treated as a
medical expense is limited to the eligible LTCi premiums, as defined by Internal Revenue Code 213(d), based on the age of the insured individual. That portion of the LTCi premium that exceeds the eligible LTCi premium is not included as a medical expense.
Individual taxpayers: Individual taxpayers can treat premiums paid for tax-qualified long-term care insurance for themselves, their spouse or any tax dependents (such as parents) as a personal medical expense.
The yearly maximum deductible amount for each individual depends on the insured’s attained age at the close of the taxable year (see Table 1 for current limits). These deductible maximums are indexed and increase each year for inflation.
2008 Federal Tax Deductible Limits (Table 1)
Taxpayer’s Age At End of Tax Year – Deductible Limit
40 or less $310
More than 40 but not more than 50 $580
More than 50 but not more than 60 $1,150
More than 60 but not more than 70 $3,080
More than 70 $3,850
Source: IRS Revenue Procedure: 2008-66
2009 Federal Tax Deductible Limits (Table 2)
Taxpayer’s Age At End of Tax Year – Deductible Limit
40 or less $320
More than 40 but not more than 50 $600
More than 50 but not more than 60 $1,190
More than 60 but not more than 70 $3,180
More than 70 $3,980
Source: IRS Revenue Procedure: 2008-66
Some LTC insurers offer “shared care” policies where two people share one pool of benefits.
This may be used to maximize the eligible tax deductibility when there is a difference in ages between the spouses.
Tax Savings Tip: Long-term care insurance premiums may be paid from a Health Savings Account (HSA) up to the limits shown above.
Taxability of Benefits Received: Generally, benefits received from a tax-qualified LTCi policy that was purchased by an individual are non-taxable and therefore excluded from Adjusted Gross Income. Benefits paid under an indemnity policy are not taxed unless they exceed the higher of the cost of qualified long-term care or $270-per-day (the 2008 limit). The 2009 limit is $280-per-day.
Self-Employed: A self-employed individual can deduct 100% of his/her out-of-pocket long-term care insurance premiums, up to the Eligible Premium amounts listed above [IRC 162(l)]. The portion of LTCi premiums that exceeds the Eligible Premium (see Table 1) amount is not deductible as a medical expense. The deductible amount includes eligible premiums paid for spouses and dependents [IRC 162(l)]. It is not necessary to meet a 7.5% AGI threshold in order to take this deduction.
There are different rules for shareholders of corporations and members of LLCs. The important concept is that business provided policies may be advantageous.
Planning Tip: In a sole proprietor or a partnership situation, the owner/partner who has a spouse who is a true employee can deduct the actual (full) premium for that spouse’s policy. If that spouse’s policy had a shared benefit rider, that would be included in the deductible premium amount (actual total premium is deductible).
Health Savings Account (HSA): Tax-qualified LTCi premiums can be reimbursed through an HSA, tax-free up to the Eligible Premium amounts listed in Table 1, even if the HSA is offered through an employer-provided cafeteria plan.
Many states also offer tax benefits for the purchase of LTCi but they are beyond the scope of this article.
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.
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Robert Slutsky, Esq. has been practicing Elder Law for 15 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.