What Is a ‘Caregiver’ Agreement? – Annapolis and Towson Estate Planning

The idea that a family member or trusted friend may be paid to take care of an aging parent or sibling is a welcome one. However, most family members do not understand the legal complexity involved in privately paying for care, says the recent article “Paying a family member for care” from The Times Herald. Payments made to a family caregiver or a private caregiver can lead to a world of trouble from Medicaid and the IRS.

This is why attorneys create caregiver agreements for clients. The concept is that the care and services provided by a relative or friend would otherwise be performed by an outside person at whatever the going rates are within the person’s community. The payment should be considered a fully compensated transfer for Medicaid eligibility purposes and should not result in any penalty being imposed if it is done correctly.

This is more likely to be avoided with a formal written caregiver agreement. In some states, like Pennsylvania, a caregiver agreement is required to be sure that the payments made to the caregiver are not deemed to be a gift under Medicare rules.

The caregiver agreement must outline the services that are being provided and the rate of pay, which can be in the form of weekly, monthly or a lump sum payment. This is where it gets sticky: that payment should not be higher than what an outside provider would be paid. An excessively high payment would trigger a red flag for Medicaid and could be viewed as a gift.

Medicaid has a five-year look back period, where the applicant’s finances are examined to see if there were efforts to minimize the person’s financial assets to qualify for Medicaid. If any transfers of property or assets are made that are higher than fair market value, it is possible that it will be viewed as creating a period of ineligibility. That is why it is so important to have a contract or written agreement in place, when a family member or other person is hired to provide those services and is paid privately.

There are also income tax consequences. The caregiver is considered a household employee by the IRS. They are not considered to be an independent contractor and should not be issued a 1099 to reflect their payment. If that is done, it could be considered to be tax evasion.

Speak with an estate planning attorney about crafting a caregiving agreement and how to handle the tax issue, when privately paying for care. They will help avoid putting Medicaid eligibility in jeopardy, as well as avoiding problems with the IRS.

Reference: The Times Herald (Aug. 13, 2020) “Paying a family member for care”

 

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Social Security and Medicare and the Impact on Retiree Taxes – Annapolis and Towson Estate Planning

A 70% increase in Medicare premiums to $559 was a complete surprise to a woman who became a single taxpayer when her husband died. She felt like she was being punished for being a widow, she said in a recent article titled “Retirees, Beware These Tax Torpedoes” from Barron’s. With a 2018 modified adjusted gross income of $163,414, a combination of required minimum distributions, Social Security and her husband’s pensions, she went from being in the third-highest Medicare bracket into the second highest Medicare bracket. All it took was $414 dollars to exceed the $163,000 limit.

This is not the only tax trap awaiting unwary retirees. Lower- and middle-income taxpayers get hit by what is commonly referred to as “tax torpedoes,” as rising income during retirement triggers new taxes. That includes Social Security income, which is taxed after reaching a certain limit. The resulting marginal tax rate—as high as 40.8%—is made worse by a Medicare surtax of 0.9% on couples with taxable income exceeding $250,000. Capital gains taxes also increase, as income rises.

It may be too late to make changes for this tax-filing year, even with a three-month extension to July 15. However, there are a few steps that retirees can take to avoid or minimize these taxes for next year. The simplest one: delay spending from one year to the next and be extra careful about taking funds from after-tax accounts.

What hurts most is if you are on the borderline of a bracket. Just one wrong move, like selling a stock or taking a distribution, puts you into the next bracket. You need to plan carefully.

One thing that will not be a concern for 2020 taxes: required minimum distributions. While many retirees get pushed into tax traps because of taking large RMDs, the emergency legislation passed in response to the coronavirus crisis (the CARES Act) eliminated RMDs for this year.

However, the RMDs will be back in 2021, so now is a good time to start thinking about how to avoid any of the typical tax torpedoes. RMDs used to start at age 70½; the SECURE Act changed that to 72.

If you do not need the money from an RMD in 2021, one workaround is to take it as a qualified charitable distribution. That avoids triggering higher taxes or higher future Medicare premiums. The administrator of the tax-deferred account needs to be instructed to make a donation directly to a charity.

An even better strategy: take steps long before Medicare income limits or tax torpedoes hit. If you can, live on after-tax savings, Roth IRA accounts or inherited money. Spend that money first, before tapping into tax-deferred accounts. You can then take advantage of being in a lower tax bracket to convert money from tax-deferred money to convert to Roth IRAs.

Another story of a tax hit that was avoided: a man with an income of about $80,000 prepared to take $4,000 from a tax-deferred account for a vacation. The couple’s normal top tax bracket was 12%, but they hit the income limit on Social Security taxes. The $4,000 in additional income would have caused $3,400 in Social Security income to be taxed, making his marginal tax rate 22.2% instead of 12%. With the help of a good advisor, the couple instead took $3,000 from a Roth IRA and sold a stock position for $1,000, where there were practically no capital gains generated.

Incomes at all levels can be hit by these tax and Medicare torpedoes. A skilled advisor can help protect your retirement and Social Security funds.

Reference: Barron’s (July 6, 2020) “Retirees, Beware These Tax Torpedoes”

 

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Your Estate Plan Needs to Be Customized – Annapolis and Towson Estate Planning

The only thing worse than having no estate plan, is an estate plan created from a ‘fill-in-the-blank’ form, according to the recent article “Don’t settle for a generic estate plan” from The News-Enterprise. Compare having an estate plan created to buying a home. Before you start packing, you think about the kind of house you want and how much you can spend. You also talk with real estate agents and mortgage brokers to get ready.

Even when you find a house you love, you do not write a check right away. You hire an engineer to inspect the property. You might even bring in contractors for repair estimates. At some point, you contact an insurance agent to learn how much it will cost to protect the house. You rely on professionals, because buying a home is an expensive proposition and you want to be sure it will suit your needs and be a sound investment.

The same process goes for your estate plan. You need the advice of a skilled professional–the estate planning lawyer. Sometimes you want input from trusted family members or friends. There other times when you need the estate planning lawyer to help you get past the emotions that can tangle up an estate plan and anticipate any family dynamics that could become a problem in the future.

An estate planning attorney will also help you to avoid problems you may not anticipate. If the family includes a special needs individual, leaving money to that person could result in their losing government benefits. Giving property to an adult child to try to avoid nursing home costs could backfire, making you ineligible for Medicaid coverage and cause your offspring to have an unexpected tax bill.

Your estate planning lawyer should work with your team of professional advisors, including your financial advisor, accountant and, if you own a business, your business advisor. Think of it this way—you would not ask your real estate agent to do a termite inspection or repair a faulty chimney. Your estate plan needs to be created and updated by a skilled professional: the estate planning lawyer.

Once your estate plan is completed, it is not done yet. Make sure that the people who need to have original documents—like a power of attorney—have original documents or tell them where they can be found when needed. Keep in mind that many financial institutions will only accept their own power of attorney forms, so you may need to include those in your estate plan.

Medical documents, like advance directives and healthcare powers of attorney, should be given to the people you selected to make decisions on your behalf. Make a list of the documents in your estate plan and where they can be found.

Preparing an estate plan is not just signing a series of fill-in-the-blank forms. It is a means of protecting and passing down the estate that you have devoted a lifetime to creating, no matter its size.

Reference: The News-Enterprise (June 23, 2020) “Don’t settle for a generic estate plan”

 

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Possible Pitfalls for Special Needs Planning for Parents – Annapolis and Towson Estate Planning

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”

 

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Quirk in Medicare System’s Observation Status – Annapolis and Towson Estate Planning

There is 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 is no downside to the hospital, since this is covered by Medicare, just under Part B, rather than Part A.

However, for the patient, it is 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 are not 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 does not 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”

 

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Your Children Wish You Had an Estate Plan – Annapolis and Towson Estate Planning

It is the adult children who are in charge of aging parents when they need long-term care. They are also the ones who settle estates when parents die. Even if they cannot always come out and tell you, the recent article, “Why your children wish you had an Elder Law Estate Plan” from the Times Herald-Record spells out exactly why an elder law estate plan is so important for your loved ones.

Avoid court proceedings while living. In a perfect world, everyone over age 18 will have an advance directive, including a power of attorney, a health care proxy, and a living will. These documents appoint others to make financial, legal, and medical decisions, in case of incapacity. Without them, the children will have to get involved with time-consuming, expensive guardianship proceedings, where a judge appoints a legal guardian to make these decisions. Your life is turned over to a court-appointed guardian, instead of your children or another person of your choosing.

Avoid court proceedings after you die. If you die and assets are in your name alone, then your estate will go through probate, a court proceeding that can be time consuming and costly. Not having any assets in trusts leaves your kids open to the possibility of wills being challenged, disputes among family members and litigation that can drag on for years.

Wills in probate court are public documents. Trusts are private documents. Do you really want a stranger to access your will and learn about your assets?

An elder law estate plan also plans for the possibility of long-term care and costs. Nursing home care costs can run between $12,000—$18,000 per month. If you do not have long-term care insurance, you can create a Medicaid Asset Protection Trust (MAPT) that protects assets in the trust from nursing home costs, once the assets are in the trust for five years. The MAPT also protects assets from homecare provided by Medicaid, called “community” Medicaid, once the assets are in the trust for 30 months under a new rule that starts on October 1, 2020.

The “elder law power of attorney” has unlimited gifting powers that could save about half of a single person’s assets from the cost of nursing homes. This can be done on the eve of needing nursing home care, but it is always better to do this planning in advance.

Having a plan in place decreases stress and anxiety for adult children. They are likely busy with their own lives, working, caring for their children and coping in a challenging world. When a plan is in place, they do not have to start learning about Medicaid law, navigating their way through the court system, or wondering why their parents did not take advantage of the time they had to plan properly.

You probably do not want your children remembering you as the parents who left a financial and legal mess behind for the them to clean up. Speak with an elder law estate planning attorney to create a plan for your future. Your children will appreciate it.

Reference: Times Herald-Record (May 23, 2020) “Why your children wish you had an Elder Law Estate Plan”

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Should I Give My Kid the House Now or Leave It to Him in My Will? – Annapolis and Towson Estate Planning

Transferring your house to your children while you are alive may avoid probate, the court process that otherwise follows death. However, gifting a home also can result in a big, unnecessary tax burden and put your house at risk, if your children are sued or file for bankruptcy.

Further, you also could be making a big mistake, if you hope it will help keep the house from being used for your nursing home bills.

MarketWatch’s recent article entitled “Why you shouldn’t give your house to your adult children” advises that there are better ways to transfer a house to your children, as well as a little-known potential fix that may help even if the giver has since passed away.

If you bequeath a house to your children so that they get it after your death, they get a “step-up in tax basis.” All the appreciation that occurred while the parent owned the house is never taxed. However, when a parent gives an adult child a house, it can be a tax nightmare for the recipient. For example, if the mother paid $16,000 for her home in 1976, and the current market value is $200,000, none of that gain would be taxable, if the son inherited the house.

Families who see this mistake in time can undo the damage, by gifting the house back to the parent.

Sometimes people transfer a home to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the poor. However, any gifts or transfers made within five years of applying for the program can result in a penalty period, when seniors are disqualified from receiving benefits.

In addition, giving your home to someone else also can expose you to their financial problems. Their creditors could file liens on your home and, depending on state law, get some or most of its value. In a divorce, the house could become an asset that must be sold and divided in a property settlement.

However, Tax Code says that if the parent retains a “life interest” or “life estate” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift.

There are specific rules for what qualifies as a life interest, including the power to determine what happens to the property and liability for its bills. To make certain, a child, as executor of his mother’s estate, could file a gift tax return on her behalf to show that he was given a “remainder interest,” or the right to inherit when his mother’s life interest expired at her death.

There are smarter ways to transfer a house. There are other ways around probate. Many states and DC permit “transfer on death” deeds that let people leave their homes to beneficiaries without having to go through probate. Another option is a living trust.

Reference: MarketWatch (April 16, 2020) “Why you shouldn’t give your house to your adult children”

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What Should I know about Financial Powers of Attorney? – Annapolis and Towson Estate Planning

A financial power of attorney is a document allowing an “attorney-in-fact” or “agent” to act on the principal’s behalf. It usually allows the agent to pay the principal’s bills, access her accounts, pay her taxes and buy and sell investments. This person, in effect, assumes the responsibilities of the principal and can act for the principal in all areas detailed in the document.

Kiplinger’s recent article from April entitled “What Are the Duties for Financial Powers of Attorney?” acknowledges that these responsibilities may sound daunting, and it is only natural to feel a little overwhelmed initially. Here are some facts that will help you understand what you need to do.

Read and do not panic. Review the power of attorney document and know the extent of what the principal has given you power to handle in their stead.

Understand the scope. Make a list of the principal’s assets and liabilities. If the individual for whom you are caring is organized, then that will be simple. Otherwise, you will need to find these items:

  • Brokerage and bank accounts
  • Retirement accounts
  • Mortgage papers
  • Tax bills
  • Utility, phone, cable, and internet bills
  • Insurance premium invoices

Take a look at the principal’s spending patterns to see any recurring expenses. Review their mail for a month to help you to determine where the money comes and goes. If your principal is over age 72 and has granted you the power to manage her retirement plan, do not forget to make any required minimum distributions (RMDs). If your principal manages her finances online, you will need to contact their financial institutions and establish that you have power of attorney, so that you can access these accounts.

Guard the principal’s assets. Make certain that her home is secure. You might make a video inventory of the residence. If it looks like your principal will be incapacitated for a long time, you might stop the phone and newspaper. Watch out for family members taking property and saying that it had been promised to them (or that it belonged to them all along).

Pay bills. Be sure to monitor your principal’s bills and credit card statements for potential fraud. You might temporarily suspend credit cards that you will not be using on the principal’s behalf. Remember that they may have monthly bills paid automatically by credit card.

Pay taxes. Many powers of attorney give the agent the power to pay the principal’s taxes. If so, you will be responsible for filing and paying taxes during the principal’s lifetime. If the principal dies, the executor of the principal’s will is responsible and will prepare the final taxes.

Ask about estate planning. See if there is an estate plan and ask a qualified estate planning attorney for help. If the principal resides in a nursing home paid by Medicaid, talk to an elder law attorney as soon as possible to save the principal’s estate at least some of the costs of their care.

Keep records. Track your expenditures made on your principal’s behalf. This will help you demonstrate that you have upheld your duties and acted in the principal’s best interests, as well as for reimbursement for expenses.

Always act in the principal’s best interest. If you do not precisely know the principal’s expectations, then always act with their best interests in mind. Contact the principal’s attorney who prepared the power of attorney for guidance.

Reference: Kiplinger (April 22, 2020) “What Are the Duties for Financial Powers of Attorney?”

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How Do I Protect Property If I Need Long-Term Care? – Annapolis and Towson Estate Planning

Nearly 90% of those over age 65 would say they would prefer to stay in their home and live independently as they age. However, even if you are one of those people, you need to make certain that you have a plan in place to ensure your assets can go toward the things you want, rather than unexpected healthcare costs.

The Observer-Reporter’s recent article entitled “Protecting Your Assets is Only Half of Your Long-Term Plan” explains that there are many factors, like chronic conditions and lifestyle choices, that can increase healthcare expenditures as you get older. Understanding and planning for the potential costs now, could be the difference between spending your savings on health care expenses, instead of on the things you want.

You may be concerned about being a burden to family and friends as you age. That is common since nearly three-quarters (72%) of parents expect their children to become their long-term caregivers. However, just 40% of those children are aware they were tapped for that role!

Research shows that when family and friends assume the role of primary caregivers, they have a 60% chance of exhibiting clinical signs of depression—six times more than the general population. Having your family and friends become your caregivers may be best for you financially, but it probably is not in their best interest.

You should have a sound understanding of the cost and burden that long-term care can put on your family and friends. This is the first step to preparing your long-term plan. It is important to understand that there are a few different long-term planning options available, with varying levels of care coverage. One is Medicaid, which is a means-tested government health insurance plan that can cover some or all of the care you may need in a skilled nursing facility. However, what it covers is income- and asset-based. Medicare may cover some limited long- term care for rehabilitation but typically not custodial care.

There is also long-term care insurance which can fill many of the gaps that Medicare and Medicaid may leave. Most plans are customizable and have options for full or partial coverage for all of the types of long-term care. However, there may still be gaps in your coverage.

Ask an elder law attorney about other options and resources.

Reference: (Washington, PA) Observer-Reporter (Feb. 17, 2020) “Protecting Your Assets is Only Half of Your Long-Term Plan”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Medicare Mistakes can Ruin Retirement? – Annapolis and Towson Estate Planning

Healthcare expenses can loom large in retirement. Therefore, failing to totally understand Medicare could be a costly mistake. The Motley Fool’s recent article entitled “3 Medicare Mistakes That Could Wreck Your Retirement” warns that these three mistakes could throw a wrench in your retirement plan.

  1. Thinking that Medicare will cover all your healthcare costs. It is critical that you understand that Medicare will help cover some of your medical expenses in retirement—but it does not cover everything. You will still be liable to pay all your premiums, deductibles, co-insurance, and co-pays. Medicare Part A usually does not have a premium, but you will have a deductible of $1,408 per benefit period. Part B’s standard premium is $144.60 per month with a deductible of $198 per year. Note that Medicare Parts A and B do not cover prescription drugs or routine vision and dental care. For those things, you will have to purchase Medicare Part D or a Medicare Advantage plan at an additional cost.

It is also important that you understand that Medicare typically does not cover long-term care, a major expense. Prior to retirement, it is a good idea to add these costs into your plan.

  1. Failing to research your plan options each year during open enrollment. Medicare open enrollment is from October 15th until December 7th each year. In this period, retirees can make changes to their plans, such as switching from Original Medicare (Parts A and B) to a Medicare Advantage plan or vice versa. You can also change from one Advantage plan to another or add Part D coverage. After you have been on Medicare, you should look into options available to you and shop around to save money.
  2. Failing to enroll in Medicare when first eligible. When you become eligible for Medicare, you must enroll during your initial enrollment period (IEP). This begins three months prior to the month you turn 65 and ends three months after the month you turn 65. Failure to enroll could mean a penalty of 10% of your Part B premium. The longer you go without enrolling, the higher your penalty will be, and you usually must continue paying the penalty for as long as you have Part B coverage.

Note that if you are not ready to enroll in Medicare at 65, you may qualify for a special enrollment period. Say, for example, if you (or your spouse) are still working at age 65 and are covered by insurance through your employer, you can delay your Medicare enrollment until after you quit your job.

Medicare can be confusing. The better educated you are about the program, the wiser decisions you will be able to make sure your retirement fund lasts longer.

By avoiding these common mistakes, you can save money and prepare for your senior years.

Reference:  The Motley Fool (March 20, 2020) “3 Medicare Mistakes That Could Wreck Your Retirement”

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