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Planning for retirement years: smart estate planning can be disastrous if illness strikes.

When it comes to Medicaid, your accounting practices could get you sued. In fact, if you've set up an estate to save death taxes, your clients could lose the whole ball of wax before anybody dies.

The problem is this: Good estate planning isn't necessarily good old age planning. With the life expectancy climbing past 80, and more and more people entering nursing homes, it's extremely important for financial advisors to comprehend the differences.

To begin with, Medicaid, the only public program that pays for long-term care, is a law unto itself--one you must understand before drafting an estate plan. Medicaid was originally conceived as a program to assist the poor. But today, it is increasingly being used by the middle class, as more and more families are driven into poverty by the staggering cost of long-term care.

The best way to protect assets is to plan early, when there are no clouds on the horizon. Why? Because of this all-important rule: If someone makes a transfer of countable assets for less than fair market value within 30 months of going into a nursing home, it is presumed that the transfer was made to hide the assets. Therefore, the person will be disqualified from receiving Medicaid. At a cost of $35,000 to $50,000 for a year in a nursing home, that spells, "Goodbye life savings."

What are "countable assets?" Under Medicaid, assets are considered "countable" or "non-countable" (exempt). Most, like stocks, bonds, CDs, second homes and second cars, are countable. A few, such as primary residences and pre-paid funerals, are non-countable. When one spouse enters a nursing home, Medicaid takes a "snapshot" of the couple's total assets--regardless of whose name they're in--and leaves only the non-countable assets and a pittance for the stay-at-home spouse. Clearly, this joining of assets wreaks absolute havoc with good estate planning.

For example, basic estate planning would dictate that you consider dividing assets to minimize death taxes. Many accountants are under the impression that this also avoids nursing home fees, assuming that all the facility can get are the assets of the patient. Wrong. Under Medicaid, all assets, regardless of whose name they are in, are joined together. Barring non-countable exclusions, they are virtually all liable to be lost, regardless of where they came from, who earned them, or whose name they're in. Therefore, to say that splitting assets not only avoids death taxes but saves the assets from the nursing home is not only incorrect, it's a mistake that could be devastating.

In the case of a couple where one spouse is not well, you might consider transferring the assets to the name of the healthy spouse. Putting aside gift tax considerations (both federal and state taxes are applicable), it is likely that there would be moderate savings in death taxes upon the demise of the ill spouse. Again, this idea gets you absolutely nowhere with Medicaid. All assets, regardless of whose name they are in, are joined together. Transferring assets to the healthy spouse does not keep them from the nursing home. In fact, to do so could cause serious repercussions.

Another estate plan is the establishing of trusts. If established correctly, a trust can save thousands of dollars in death taxes, particularly for the surviving spouse. However, unless these trusts are set up correctly, all assets could also be available to Medicaid. Under the Congressional Omnibus Reconciliation Act of 1986, any irrevocable trust established by donors in which they become the beneficiaries and reserve the right to give themselves principal at their discretion become liable to being spent on a nursing home. Medicaid's position is that if the donors reserve the right to get principal from a trustee (regardless of whether or not the trustee can say no), these monies would be available. Therefore, good estate planning could subject these assets to being spent on long-term care.

Another common device for minimizing death taxes is the sale of assets and the taking back of paper. In a typical situation, the parent would "sell" the property to the children and take back paper which is worth approximately fair market value for the property. This debt would then be forgiven over a period of years. The problem, of course, is that the note becomes a countable asset under Medicaid and would be used in determining eligibility.

As you can see, it's extremely important to understand that although good accounting practices may save death taxes for middle class families, this planning often conflicts with Medicaid planning.

One additional point. It is no longer safe to assume that you're under no obligation to recommend estate planning for the purposes of catastrophic illness. Clients come to you to deal with their existing problems and to receive guidance from you as to what problems they might face in the future.

Just because they don't specifically state that they fear losing their assets to a nursing home is no reason to assume you're under no obligation to give them this information or at least to point them in the right direction. Failure to appraise an at-risk client of the dangers of not planning to protect assets from catastrophic illness and nursing homes could leave the practitioner open to a malpractice action.

Harley Gordon is a founding member of the National Academy of Elder Law Attorneys. His book, How to Protect Your Life Savings from Catastrophic Illness and Nursing Homes, is available from Financial Planning Institute, P.O. Box 135, Boston, MA 02258; 1-800-955-2626 (price: $19.95 plus $4.00 postage and handling).
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Title Annotation:Debits and Credits
Author:Gordon, Harley
Publication:The National Public Accountant
Date:Jan 1, 1993
Previous Article:A rose by any other name? 'accountant' versus 'CPA.' (opinion on restrictions imposed on unlicensed public accountants)
Next Article:Long term liabilities.

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