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Understanding the Significance of Trusts

Volume 2, Issue 9

This issue of our newsletter addresses a topic that is important to clients and all wealth planning professionals – trusts. When used properly, trusts can provide significant advantages to clients and to the advisors who recommend them. Given the numerous types of trusts, this newsletter explores the general advantages of trusts as well as some of the most common types of trusts.

Revocable vs. Irrevocable Trusts

There are two basic types of trusts: revocable trusts and irrevocable trusts. Perhaps the most common type of trust is revocable trusts (aka revocable living trusts, inter vivos trusts or living trusts). As their name implies, revocable trusts are fully revocable at the request of the trust maker. Thus, assets transferred (or “funded”) to a revocable trust remain within the control of the trust maker; the trust maker (or trust makers if it is a joint revocable trust) can simply revoke the trust and have the assets returned. Alternatively, irrevocable trusts, as their name implies, are not revocable by the trust maker(s).

Revocable Living Trusts

As is discussed more below, revocable trusts do not provide asset protection for the trust maker(s). However, revocable trusts can be advantageous to the extent the trust maker(s) transfer property to the trust during lifetime.

Planning Tip:  Revocable trusts can be excellent vehicles for disability planning, privacy, and probate avoidance. However, a revocable trust controls only that property affirmatively transferred to the trust. Absent such transfer, the revocable trust may not control disposition of the trust maker’s property.
Planning Tip:  Unlike with a trust, one cannot affirmatively transfer title of property during life using a will. Also, whether estate planning is by will or trust, it is important to ensure that the client’s property passing pursuant to contract (e.g., by beneficiary designation for retirement plans and life insurance) does not thwart the client’s planning objectives set forth in the trust or will.

Asset Protection for the Trust Maker

The goal of asset protection planning is to insulate the client’s assets that would otherwise be subject to the claims of his or her creditors. Typically, a creditor can reach any assets owned by a debtor. Conversely, a creditor cannot reach assets not owned by the debtor. This is where trusts come into play.

Planning Tip:  The right types of trusts can insulate assets from creditors because the trust owns the assets, not the debtor.

As a general rule, if a trust maker creates an irrevocable trust and is a beneficiary of the trust (i.e., it is a so-called self-settled spendthrift trust), assets transferred to the trust are not protected from the trust maker’s creditors. This general rule applies whether or not the transfer was done to defraud a creditor or creditors.

Until fairly recently, the only way to remain a beneficiary of a trust and get protection against creditors for the trust assets was to establish the trust outside the United States in a favorable jurisdiction. This can be an expensive proposition.

However, the laws of a handful of states (including Alaska, Delaware, Nevada, Rhode Island, South Dakota, and Utah) now permit self-settled spendthrift trusts or what are commonly known as domestic asset protection trusts. Under the laws of these few states, a trust maker can transfer assets to an irrevocable trust and the trust maker can be a trust beneficiary, yet trust assets can be protected from the trust maker’s creditors to the extent distributions can only be made within the discretion of an independent trustee. Note that this will not work when the transfer was done to defraud or hinder a creditor or creditors. In that case, the trust will not protect the assets from those creditors.

Planning Tip:  A handful of states permit self-settled spendthrift trusts or what are commonly known as domestic asset protection trusts.

For those clients unwilling to give up a beneficial interest in their assets to protect those assets from future creditors, trusts established under the laws of a jurisdiction that permits self-settled spendthrift trusts or a trust established under the laws of a foreign country, may be appealing.

Asset Protection for Trust Beneficiaries

A revocable trust provides no asset protection for the trust maker during his or her life. Upon the death of the trust maker, however, or upon the death of the first spouse to die if it is a joint trust, the trust becomes irrevocable as to the deceased trust maker’s property and can provide asset protection for the beneficiaries, with two important caveats.

First, the assets must remain in the trust to provide ongoing asset protection. In other words, once the trustee distributes the assets to a beneficiary, those assets are no longer protected and can be attached by that beneficiary’s creditors. If the beneficiary is married, the distributed assets may also be subject to the spouse’s creditor(s), or they may be available to the former spouse upon divorce.

Planning Tip:  Consider trusts for the lifetime of the beneficiaries to provide prolonged asset protection for the trust assets. Lifetime trusts also permit the client’s financial advisor to continue to invest the trust assets as the client desired, which also helps ensure that trust returns are sufficient to meet the client’s planning objectives.

The second caveat follows logically from the first: the more rights the beneficiary has with respect to trust distributions, the less asset protection the trust provides. Generally, a creditor “steps into the shoes” of the debtor and can exercise any rights of the debtor. Thus, if a beneficiary has the right to compel a distribution from a trust, so too can a creditor compel a distribution from that trust.

Planning Tip:  The more rights a beneficiary has to compel distributions from a trust, the less protection that trust provides for that beneficiary.

Therefore, where asset protection is a significant concern for the client, it is important that the trust maker not give the beneficiary the right to automatic distributions (for example, 5% or $5,000 annually). A creditor will simply salivate in anticipation of each distribution. Instead, the client should consider discretionary distributions by an independent trustee.

Planning Tip:  Consider a professional fiduciary to make distributions from an asset protection trust. Trusts that give beneficiaries no distribution rights, but rather give complete discretion to an independent trustee, provide the highest degree of asset protection.

Lastly, with divorce rates at or exceeding 50% nationally, the likelihood of a client’s child becoming divorced is quite high. By keeping assets in trust, the trust maker can ensure that the trust assets do not go to a former son-in-law or daughter-in-law, or their bloodline.

Irrevocable Life Insurance Trusts

With the exception of the self-settled spendthrift trusts discussed above, a transfer to an irrevocable trust can protect the assets from creditors only if the trust maker is not a beneficiary of the trust. One of the most common types of irrevocable trust is the irrevocable life insurance trust, also known as a Wealth Replacement Trust.

Under the laws of many states, creditors can access the cash value of life insurance. But even if state law protects the cash value from creditors, at death, the death proceeds of life insurance owned by your clients are includible in their gross estate for estate tax purposes. Clients can avoid both of these adverse results by having an irrevocable life insurance trust own the insurance policy and also be its beneficiary. The dispositive provisions of this trust typically mirror the provisions of the client’s revocable living trust or will. And while this trust is irrevocable, as with any irrevocable trust, the trust terms can grant an independent trust protector significant flexibility to modify the terms of the trust to account for unanticipated future developments.

Planning Tip:  In addition to providing asset protection for the insurance or other assets held in trust, irrevocable life insurance trusts can eliminate estate tax and protect beneficiaries in the event of divorce.

If the trust maker is concerned about accessing the cash value of the insurance during lifetime, the trust can give the trustee the power to make loans to the trust maker during lifetime or the power to make distributions to the trust maker’s spouse during the spouse’s lifetime. Even with these provisions, the life insurance proceeds will not be included in the trust maker’s estate for estate tax purposes.

Planning Tip:  With a properly drafted trust, the trust maker can access cash value through policy loans.

Irrevocable life insurance trusts can be individual trusts (which typically own an individual policy on the trust maker’s life) or they can be joint trusts created by a husband and wife (which typically own a survivorship policy on both lives).

Planning Tip:  Since federal estate tax is typically not due until the death of the second spouse to die, clients often use a joint trust owning a survivorship policy for estate tax liquidity purposes. However, a joint trust limits the trust makers’ access to the cash value during lifetime. In these circumstances, consider an individual trust with the non-maker spouse as beneficiary.


Clients can protect their assets from creditors by placing them in a well-drafted trust, and they can protect their beneficiaries from claims or creditors and predators by keeping those assets in trust over the beneficiary’s lifetime. By working together, the wealth planning team can ensure that the plan meets each client’s unique planning objectives.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Understanding the Opportunities with Aid & Attendance Benefits

Volume 2, Issue 8

A prior issue of our newsletter addressed the planning opportunities that exist with planning for Medicaid (Medi-Cal in California), particularly where the client’s advisors work together to create a plan that addresses all aspects of the client’s planning needs. This issue addresses a related topic, VA Aid and Attendance pension benefits.

Even advisors who focus on higher net worth clients should not discount the opportunities that exist with Aid and Attendance pension benefits. There are now over 25 million US veterans eligible for some type of VA benefits, many of whom have no idea Aid and Attendance pension benefits exist (and their local VA office won’t tell them about it!). Moreover, World War II veterans are dying at the rate of approximately 1,800 per day. Thus, the need for this type of planning is greater than ever.

What is Aid & Attendance?

Aid and Attendance is a “special monthly pension” available to wartime veterans or surviving spouses of wartime veterans. Aid and Attendance is not actually a stand-alone benefit. Rather, it is an additional allowance that a veteran or surviving spouse who is already entitled to certain VA pension benefits (because of his or her wartime service and non-service-connected disability) may additionally be entitled to upon meeting certain medical and financial requirements. Aid and Attendance differs from compensation, which is available to all veterans who suffer from a service-connected disability.

Planning Tip:  Aid and Attendance pension benefits are additional veterans’ benefits available to wartime veterans who need the “aid and attendance” of another to meet their daily needs.

Prerequisite Benefits

A veteran or surviving spouse (called a claimant by the VA) must first be eligible for what the VA refers to as “regular pension.” Regular pension is available when a wartime veteran (one with 90 days of active duty, and at least one day beginning or ending during a period of War) has limited income and assets and suffers from a non-service-connected permanent and total disability. In some circumstances, being over the age of 65 may qualify a claimant without the need to show a disability.

Permanent and total disability includes a claimant who is:

  1. In a nursing home;
  2. Determined disabled by the Social Security Administration;
  3. Unemployable and reasonably certain to continue so throughout life; or
  4. Suffering from a disability that makes it impossible for the average person to stay gainfully employed.

Asset & Income Requirements

The financial eligibility requirements of Aid and Attendance benefits address a claimant’s net worth and income. A married veteran and spouse can currently have no more than $80,000 in countable assets (less for a single veteran or surviving spouse), which includes retirement assets but excludes a home and vehicle. However, the $80,000 limit is a guideline only; it is not a rule set by the VA. The VA looks at a claimant’s total net worth, life expectancy, income and medical expenses to determine whether the veteran or surviving spouse is entitled to special monthly pension benefits.

Planning Tip:  Many times the advisor’s most difficult task in this area is to reduce a claimant’s assets down to the applicable level (or what one hopes will be acceptable to the VA). Like Medicaid planning, this often requires income tax planning and the utilization of financial products such as annuities.

There is no income limit for VA pension benefits. There is, however, what the VA refers to as Income for VA Purposes (IVAP), or a claimant’s gross income from all sources less countable medical expenses. If a claimant’s IVAP is equal to or greater than the annual benefit amount, the veteran or surviving spouse is not eligible for benefits.

Is the Claimant Housebound?

If a claimant qualifies for regular pension and is housebound, the claimant’s maximum allowable income increases (as does the annual benefit amount) to the special monthly pension. The VA defines housebound as being substantially confined to the home or immediate premises due to a disability that will likely remain throughout the claimant’s lifetime. A veteran with no dependents who is housebound is eligible for benefits of up to $13,356 in annual income.

Unreimbursed medical expenses will reduce a claimant’s income dollar for dollar. But remember, to be eligible for a special monthly pension for being housebound, the claimant’s IVAP must be less than the annual income threshold.

To illustrate, a veteran with exactly $13,356 in annual income would not be eligible for a special monthly pension for being housebound. However, if that veteran was able to show annual income of $20,000 and unreimbursed medical expenses of $25,000, the veteran would be eligible for $13,356 in annual special pension (paid on a monthly basis) because the veteran has negative IVAP. A surviving spouse with no dependents who is housebound can have an annual IVAP of up to $8,957.

Does the Claimant Require the Aid and Attendance of Another?

If a claimant can show, through medical evidence provided by a primary care physician or facility, that the claimant requires the aid and attendance of another person to perform activities of daily living, that veteran or surviving spouse may qualify for an additional monthly special pension commonly referred to as aid and attendance pension benefits.

The VA defines the need for aid and attendance as:

  1. Requiring the aid of another person to perform at least two activities of daily living, such as eating, bathing, dressing or undressing;
  2. Being blind or nearly blind; or
  3. Being a patient in a nursing home.
Planning Tip:  The maximum pension for a married veteran is $1,801 per month ($21,615 per year), while the maximum pension for a veteran’s widow is $1,165 per month ($13,976 per year). The VA pays this pension directly to the claimant, and it makes no difference whether the claimant receives medical care at home, in an assisted living facility or in a nursing home.


As stated above, the VA looks at a claimant’s total net worth, his or her life expectancy, and his or her income and expenses to determine whether the claimant should qualify for special monthly pension. Unlike Medicaid, there is no look-back period and no penalty for giving assets away. However, one must use caution when considering a gifting strategy to qualify a veteran or surviving spouse for special monthly pension benefits, as this will cause a period of ineligibility for Medicaid which could be as long as five years. Other Medicaid planning strategies may apply when trying to qualify a veteran or surviving spouse for special pension with aid and attendance.

Planning Tip:  The client’s advisors (particularly the attorney and financial advisor) must work together to determine the best combination of strategies and financial products that will gain eligibility for special monthly pension but not disqualify the client from Medicaid.

For example, Bob, an unmarried wartime veteran, suffers from dementia and needs help dressing, taking medication and bathing. He has assets of $150,000 and social security income of $1,100. Bob lives at home and pays a home health aide $2,000 per month. He has negative income for VA purposes (the applicable annual rate is $18,234 or $1,519 monthly) and is running short $900/month in covering his medical expenses. However, Bob’s assets will most likely prevent him from receiving improved pension with aid and attendance.

To qualify Bob for special monthly pension with aid and attendance, one option might be for him to use $100,000 of his assets to purchase an immediate annuity structured to pay less than $900 per month (the annuity should be actuarially sound so as not to cause a problem with Medicaid eligibility). Even with the annuity payment, Bob can a show negative annual income, assets of only $50,000, and he can show a medical need for the benefit. Therefore, Bob would most likely be eligible for the maximum annual pension rate of $18,234 (paid in monthly payments of $1,519.50).

The Application Process

While the application process for special monthly pension can be agonizingly slow – some applications take over a year before the VA makes a decision – the benefit is retroactive to the month after application submission. Having the proper documentation in place at the time of application (for example, discharge papers, medical evidence, proof of medical expenses, death certificate, marriage certificate and a properly completed application) can cut the processing time in half.

Planning Tip:  Benefits are retroactive to the month after application submission, so advisors should help clients apply as quickly as possible while also helping to ensure that the application is complete.


Even advisors who do not wish to practice in the area of Aid and Attendance special pension benefits should be able to recognize the opportunity for prospective and existing clients. They should also be ready to recommend someone who can assist in this area.

Because of the impact transfers may have on the client’s eligibility for other benefits such as Medicaid, it is critical that the client’s advisor team work together to maximize the benefits available to the client.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Life Settlements: Understanding the Opportunity for Your Clients

Volume 2, Issue 7

This month’s issue of our newsletter addresses a topic that many professionals do not understand fully, life settlements. For the right clients, a life settlement offers a significant advantage over the alternatives – and one that the client and the planning team should at least consider.

Life Settlements – The Basics

The secondary market for life insurance policies has entered the mainstream of financial services products. Therefore, advisors whose clients include seniors or aging baby boomers should have a working knowledge of how a life settlement can provide liquidity to meet a variety of estate planning and elder care needs.

A life settlement is a product for seniors (generally over the age of 70) who are seeking an economically sensible exit strategy from unwanted life insurance policies. A life settlement transaction involves the sale of an existing life insurance policy, typically valued at $250,000 or more, to an institutional investor (known as a “provider”) in exchange for a lump-sum payment greater than the cash surrender value, but less than the death benefit. The institutional buyer becomes the new owner of the policy, assumes responsibility for premium payments, and collects the death benefit upon the insured’s death.

Planning Tip:  Where the owner/insured no longer needs or desires a life insurance policy, a life settlement can generate significantly more income than a policy surrender. As long as the life settlement payment does not exceed “basis” or the premiums paid for the policy, the payment will not be subject to income tax.

Based on industry statistics, the average life settlement candidate is a 78 year-old male who owns a universal life insurance policy valued at $1.8 million, and the average lump sum payment typically ranges from 3 to 5 times the cash surrender value. In addition to universal life insurance policies, most other types of life insurance policies may qualify for a life settlement, including variable universal life (VUL); term policies (if convertible); whole life; survivorship; and group policies (if portable and convertible).

Planning Tip:  Life settlement offers from providers can vary widely. To obtain the highest possible value for a client’s life insurance policy, advisors should seek the services of an experienced settlement broker who can shop the market and obtain multiple offers from providers authorized to do business in the state in which the policy ownership resides. A listing of settlement brokers operating in the secondary market is available online at: http://www.lisassociation.org.

Life Settlements for VUL Policies Are Securities Transactions

Although universal life insurance policies comprise the bulk of life settlement transactions, VUL policies – particularly those with investments in subaccounts that have not performed according to market expectations – may be prime candidates for settlement in the secondary market. In August 2006, NASD issued Notice to Members 06-38 addressing member obligations with respect to the sale of existing VUL policies to third party investors operating in the secondary market for life insurance. This notice reminded us that, according to the NASD, the sale of a VUL policy is a securities transaction subject to applicable NASD rules.

Those elements of Notice 06-38 directly impacting the handling of VUL life settlement transactions concern:

    1. Establishing the client’s suitability for the product;

Conducting due diligence on the confidentiality practices of brokers and providers; Performing “best execution” by soliciting bids from multiple licensed providers; Establishing written procedures involving product training and supervision; and Prohibiting the payment of compensation on a transaction except by another member firm (broker-dealer).

Some broker-dealers have taken the position that although they will not proactively promote or advertise the product, they are putting procedures in place to make the option available to their registered reps in situations where a life settlement may be the most suitable solution for the client.

Planning Tip:  Following the issuance of NASD Notice 06-38, many independent broker-dealers began screening life settlement brokers and establishing preferred vendor relationships to service this business from their registered reps. Financial advisors should check with the broker-dealer home office regarding the procedures for transacting a VUL life settlement and any preferred vendor relationships.

Life Settlements for Trust-Owned Life Insurance

As baby boomers prepare themselves for the great wealth transfer, financial advisors and legal professionals are poised to establish more trusts. According to the results of the sixth annual “Industry Attitudes” survey published in October 2006 by InvestmentNews, 70 percent of the financial advisors responding to the survey indicated that they expected to set up a greater number of trusts for their clients.

This statistic is important because life settlement industry statistics indicate that approximately 40 percent of life insurance policies sold in the secondary market involve trust-owned life insurance policies. For financial and legal professionals acting as trustees or fiduciaries for trust-owned life insurance policies, or for any professional whose clients have trust-owned life insurance, conducting periodic reviews of policy performance is highly recommended.

For example, policies purchased with the expectation that policy values or dividends would be available to pay future premiums may now require additional premium payments to maintain coverage. In some cases, the trust makers may choose a life settlement for the underperforming policy and then use the proceeds from the life settlement toward replacement coverage with a better-performing product.

Planning Tip:  All wealth planning professionals whose clients have trust-owned life insurance should consider engaging an insurance professional with expertise in conducting regular policy reviews. Life insurance policies are complex financial instruments, and once a trustee discovers that a trust-owned life insurance policy is at risk, they will want to discuss all possible options with the insurance professional and the insured.

Common Uses for Life Settlements

There are numerous reasons why seniors choose a life settlement, but some of the most common scenarios are: (1) the preferred alternative to a 1035 exchange; (2) the insured’s estate tax burden has decreased and thus the insured’s beneficiaries no longer need liquidity to pay estate taxes; (3) the insured wants cash to give to family or their favorite charity; (4) the insured can no longer afford the policy or plans to surrender it; (5) the policy is a key-person policy and no longer needed by a retiring executive; (6) the insured needs funds for medical or long-term care.

Planning Tip:  Life settlements are often preferable to the client accepting a low cash surrender value or surrendering the policy.


Within the past five years, the secondary market for unwanted life insurance policies has grown exponentially and is now estimated to be a $20 billion industry. Due to increased regulatory oversight and the infusion of institutional capital from investment banks such as Credit Suisse, Bear Stearns, Goldman Sachs, Deutsche Bank, and foreign and domestic hedge funds, this emerging industry is approaching a plateau of tenability and maturation.

Consider working with an experienced insurance professional to conduct periodic reviews of your clients’ life insurance policies, and if suitable, recommend a life settlement.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Understanding Medicaid Planning Opportunities

Volume 2, Issue 6

The last issue of our newsletter addressed the significant need for clients to plan for the possibility of disability, and how proper disability planning more often than not involves the coordination of financial and legal solutions. This issue addresses a related and often misunderstood topic, Medicaid planning.

What is Medicaid?

Medicaid is a federal government program that provides financial assistance to persons age 65 and over, or those under 65 who are disabled and who are in need of substantial medical assistance. Medicaid is a needs-based program – a person must have a medical need for the assistance and must be of limited financial means before he or she may qualify.

Planning Tip:  Medicaid is very different from Medicare. Medicare is health insurance available to all persons over age 65 who qualify for Social Security, as well as those who are under 65 and who the Social Security Administration determines to be disabled. Medicare will not pay for nursing home, assisted living or home health care on a long-term basis. Medicare will only pay for this type of care for up to 100 days, and only for the purpose of providing rehabilitation following a three-day or longer hospital stay.

Unfortunately, with the rising costs of long-term care, many people cannot afford to pay privately for home health care, assisted living, or nursing home care. According to the 2006 Study of the MetLife Mature Market Institute, the national average cost for a private room in a nursing home is over $75,000 annually. The national average cost of in-home care is between $17 and $19 per hour. As noted in a recent Harvard University Study, 69% of single people and 34% of married couples would exhaust their assets after 13 weeks in a nursing home. For those whose assets won’t last 13 weeks – much less the rest of their lives – Medicaid planning becomes an important consideration.

Planning Tip:  Most people do not have sufficient assets to pay privately for long-term care. Medicaid planning is most appropriate for these individuals, a growing segment of the population.

What is Medicaid Planning?

The term “Medicaid planning” involves either spending down or otherwise protecting a person’s assets so that he or she has minimal assets and can meet the financial criteria for Medicaid qualification (which can be as low as $2,000 for a single person). Although based on federal law, Medicaid rules are different from state to state, and even county to county, and therefore it is important to consult with a legal expert in the field of Medicaid. Furthermore, the transfer of assets, purchase of financial products, or otherwise disposing of assets has tax implications for the transferor as well as the recipient, necessitating the advice of a tax advisor. Finally, a financial advisor is a necessity to help clients choose the correct financial products as part of an overall Medicaid planning strategy.

Planning Tip:  Medicaid planning requires input and a coordinated effort from the client’s legal, financial and tax advisors, all of whom should be knowledgeable in Medicaid planning.

Medicaid Pre-Planning

Medicaid planning can be divided into two types: pre-planning and crisis planning. Pre-planning is for those individuals who have not yet begun to spend their assets on private care, but may need to in the coming years. Crisis planning is for those individuals using their life savings for long-term care (either at home or in a facility) with a substantial risk that they will run out of money.

In pre-planning cases, life insurance can provide tremendous planning benefits when implemented correctly. The purchase of a single premium life insurance policy by an irrevocable trust, or subsequent transfer to such a trust, will not only replace a couple’s net worth, it will protect the cash value of that policy from Medicaid. Alternatively, if not owned by an irrevocable trust, the cash value of any life insurance policy will count against the amount of assets a person can keep and still qualify for Medicaid.

For example, assume Mr. and Mrs. Jones, both age 65 and in good health, have $450,000 of assets. At their age, a single premium of $100,000 would buy a second-to-die death benefit of nearly $450,000. If an irrevocable trust owns the policy and neither Mr. or Mrs. Jones have access to the trust assets, after a certain period (most likely 5 years), their entire net worth would be protected from Medicaid, and Mr. and Mrs. Jones would still have $350,000 left to live on. Mr. and Mrs. Jones could transfer more assets to the irrevocable trust, if they desire. In fact, if the couple also purchased a five-year long-term care policy (or a life insurance policy with a long-term care rider), they could protect all of their assets from Medicaid, even with a 5 year look-back period.

Planning Tip:  With pre-planning clients, life insurance owned by an irrevocable trust, perhaps combined with long-term care insurance or a long-term care rider, can provide significant Medicaid planning benefits.

For those who choose to plan early, the use of an irrevocable trust combined with life insurance and/or long-term care insurance can provide optimum asset protection for an aging client. When gifting is used as a planning strategy, the person receiving the gift often needs advice on how to invest the money they receive. Thus, Medicaid planning also opens the door for the financial advisor to converse with younger family members about the need for proper planning, including the need for disability insurance and long-term care insurance.

Planning Tip:  Medicaid planning can open the door for the financial advisor to begin working with and planning for younger generations, while establishing the need for disability insurance and long-term care insurance.

Medicaid Crisis Planning

Even with crisis planning there are significant planning opportunities for our clients. While transfers either outright to a family member or to an irrevocable trust create a penalty period for the person making the gift, sometimes a planned strategy involving gifting and the use of an annuity can provide a valuable crisis planning tool. For example, assume Mr. Jones suffers a stroke and ends up in a nursing home, and his cost of care exceeds the couple’s monthly income by $4,500 per moth. Since the couple has assets of $450,000, they are $346,360 over the allowable limit of $101,640 for a married couple. One under-utilized but very effective strategy is for the couple to purchase a Medicaid Qualifying Annuity (MQA) in favor of the healthy community spouse, Mrs. Jones. By converting the excess assets into an income stream, Mr. Jones can now qualify for Medicaid and the MQA provides Mrs. Jones with extra income to supplement the loss of her husband’s income (which must be paid to the facility).

For a single person in crisis planning, a plan of partial gifting plus the purchase of a single premium immediate annuity may be appropriate. Keep in mind that any time a Medicaid applicant makes a gift, whether it is to another person or to a trust, Medicaid will impose a penalty based on the size of the gift. The penalty is the equivalent of a waiting period – the larger the gift, the longer a Medicaid applicant must wait to obtain eligibility. Because of the severe penalties for gifting, clients should not undertake this type of strategy without the legal advice of a Medicaid planning attorney.

Planning Tip:  Annuities play a crucial role in Medicaid planning, particularly with crisis planning.

Identifying Possible Medicaid Clients

In determining which clients are appropriate for Medicaid planning, it is important to consider the client’s age and life expectancy, monthly income, monthly medical expenses and other assets. Take Anna, a 72 year-old woman residing in an assisted living facility costing $3,500 per month. She has other medical expenses, including prescriptions, of $300 per month. Her only income is from social security, which amounts to $1,200 per month. Anna is depleting her savings at a rate of $2,600 per month, just for medical expenses. Anna has $450,000 in a brokerage account, which on its face sounds like a lot of money, given she is only spending approximately $36,000 per year on her care. But when we take into consideration the fact that Anna may very well need more care in the future, which could cost as much as $10,000 per month, and given her life expectancy of 13.96 years, it is clear that Anna’s assets may not be sufficient to cover her long-term care expenses for the rest of her life. Anna is not only an appropriate client for Medicaid planning, she is a crisis planning client.

Planning Tip:  It is important to take a client’s age, medical needs, monthly expenses and income into consideration to determine whether Medicaid planning is necessary or appropriate.


Due in part to the rising costs of long-term care and the fact that we are an aging population, Medicaid planning is a growing area of practice for attorneys, CPAs, financial planners and insurance professionals. However, as evidenced by the content of this newsletter, Medicaid planning requires that these disciplines work together collaboratively to ensure that the client avoids the numerous pitfalls that exist in this area.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Planning for Disability

Volume 2, Issue 5

No one likes to think about the possibility of their own disability or the disability of a loved one. However, as we’ll see below, the statistics are clear that we should all plan for at least a temporary disability. This issue of our newsletter examines the eye-opening statistics surrounding disability and some of the common disability planning options. Disability planning is one area where we can give each and every one of our clients great comfort in knowing that, if the day comes for themselves or a loved one, they will be prepared.

Most Clients Will Face At Least a Temporary Disability

Study after study confirms that nearly everyone will face at least a temporary disability sometime during their lifetime. More specifically, one in three Americans will face at least a 90-day disability before reaching age 65 and, as the following graph depicts, depending upon their ages, up to 44% of Americans will face a disability of up to 4.7 years. On the whole, Americans are up to 3.5 times more likely to become disabled than die in any given year.

Most Clients Will Face At Least a Temporary Disability

Planning Tip:  Many clients fear what will happen to them if they become disabled. Advisors who can help allay these fears will have more satisfied clients who move forward with their planning recommendations.

Many Clients Will Face a Long-Term Disability

Unfortunately, for many of our clients the disability will not be short-lived. According to the 2000 National Home and Hospice Care Survey, conducted by the Centers for Disease Control’s National Center for Health Statistics, over 1.3 million Americans received long-term home health care services during 2000 (the most recent year this information is available). Three-fourths of these patients received skilled care, the highest level of in-home care, and 51% percent needed help with at least one “activity of daily living” (such as eating, bathing, getting dressed, or the kind of care needed for a severe cognitive impairment like Alzheimer’s disease).

The average length of service was 312 days, and 70% of in-home patients were 65 years of age or older. Patient age is particularly important as more Americans live past age 65. The U.S. Department of Health and Human Services Administration on Aging tells us that Americans over 65 are increasing at an impressive rate:

Many Clients Will Face a Long-Term Disability

Nursing home statistics are equally alarming. According to the 1999 National Nursing Home Survey, the national average length of stay for nursing home residents is 892 days, with over 50% of nursing home residents staying at least one year. Significantly, only 18% are discharged in less than three months.

While a relatively small number (1.56 million) and percentage (4.5%) of the 65+ population lived in nursing homes in 2000, the percentage increased dramatically with age, ranging from 1.1% for persons 65-74 years to 4.7% for persons 75-84 years and 18.2% for persons 85+.

Planning Tip:  Many clients will require significant in-home care lasting, on average, close to a year. For clients requiring nursing home care, that care lasts, on average, nearly 2 years! Not surprising, the older the client or loved one, the more likely he or she will need long-term care – which is significant given that Americans are living longer.

Long-Term Care Costs Can be Staggering

Not only will many of our clients face prolonged long-term care, in-home care and nursing home costs continue to rise. According to the 2006 Study of the MetLife Mature Market Institute, national averages for long-term care costs are as follows:

  1. Hourly rate for home health aides is $19, higher than in 2004.
  2. Hourly rate for homemakers/companions is $17, higher than in 2004.
  3. Daily rate for a private room in a nursing home is $206, or $75,190 annually, a 1.5% increase over the 2005 rate.
  4. Daily rate for a semi-private room in a nursing home is $183, or $66,795 annually, a 3.9% increase over the 2005 rate.

These costs vary significantly by region, and thus it is critical that we know the costs where the client or his or her loved one will receive care. For example, the average cost for a private room in a nursing home is much higher in the Northeast ($346 per day, or $126,290 annually, in New York City) than in the Midwest (only $143 per day, or $52,195 annually, in Chicago) or the West ($199 per day, or $72,635 annually, in Los Angeles).

Planning Tip:  Nursing home costs will consume many Americans’ assets. A recent Harvard University study indicates that 69% of single people and 34% of married couples would exhaust their assets after 13 weeks (i.e., 91 days) in a nursing home!

Clients Should Consider Long-Term Care Insurance to Cover these Costs

As the Harvard University study demonstrates, if a client, client’s spouse, or family member needs long-term care, the cost could easily deplete and/or extinguish the family’s hard-earned assets. Alternatively, clients (or their families) can pay for long-term care completely or in part through long-term care insurance.

Most long-term care insurance plans let the client choose the amount of the coverage she wants, as well as how and where she can use her benefits. A comprehensive plan includes benefits for all levels of care, custodial to skilled. Clients can receive care in a variety of settings, including the client’s home, assisted living facilities, adult day care centers or hospice facilities.

Planning Tip:  Absent financial insolvency, government benefits for long-term costs are extremely limited, typically only for skilled care and only for a short duration. Given the costs of long-term care, clients should consider a long-term care insurance policy that meets their unique planning objectives.
Planning Tip:  Income-earning clients should also consider disability insurance to cover lost income as a result of a long-term disability. While long-term care insurance will cover in-home or nursing home costs, it will not replace the income lost due to the client’s inability to work.

Clients’ Estate Planning Should Thoroughly Address Disability

When a client becomes disabled, he or she is often unable to make personal and/or financial decisions. If the client cannot make these decisions, someone must have the legal authority to do so. Otherwise, the family must apply to the court for appointment of a guardian for either the client’s person or property, or both. Clients who are old enough to remember the public guardianship proceedings for Groucho Marx recognize the need to avoid a guardianship proceeding if at all possible.

At a minimum, clients need broad powers of attorney that will allow agents to handle all of their property upon disability, as well as the appointment of a decision-maker for health care decisions (the name of the legal document varies by state, but all accomplish the same thing). Alternatively, a fully funded revocable trust can ensure that the client’s person and property will be cared for as the client desires, pursuant to the highest duty under the law – that of a trustee.

Planning Tip:  Clients need properly drafted and well thought-out estate planning documents that address both their property and their person in the event of disability.
Planning Tip:  An estate plan that utilizes a revocable trust as its foundation not only helps ensure that the client will be cared for as he or she desires, but it can ensure consistent asset management through the continued use of the client’s existing financial advisors.

Clients Should Also Add HIPAA Language and Authorizations

Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), absent a written authorization from the patient, a health care provider or health care clearinghouse cannot disclose medical information to anyone other than the patient or the person appointed under state law to make health care decisions for the patient. The penalty for failure to comply with these rules is severe: civil penalties plus a criminal fine of $50,000 and up to one year of imprisonment per occurrence, and worse if the disclosure involves the intent to use the information for commercial advantage, personal gain, or malicious harm.

These HIPAA rules became effective only recently. As a result, doctors, hospitals and other health care providers now refuse to release any information absent a release from the patient. For example, hospital staff will go so far as to refuse to disclose whether one’s spouse or parent has been admitted to the hospital. The inability to receive information about a loved one could become very troubling when the information concerns treatment as part of long-term care.

Planning Tip:  A client’s “personal representative” for health care decisions has the same rights to receive information as the client. While it is arguably unnecessary, the safest approach to ensure release of information to a personal representative is to modify the document appointing him or her so that it expressly authorizes the release of HIPAA-protected information on behalf of the client.

The Regulations promulgated under HIPAA specifically authorize a HIPAA Authorization for release of this information to persons other than the patient or his or her personal representative. Thus, clients should consider creating such Authorizations so that loved ones and others can access this information in addition to the personal representative.

Planning Tip:  Clients should prepare HIPAA Authorizations for loved ones and others who potentially need access to their medical information during a time of disability.


The above discussion outlines the minimum planning clients should consider in preparation for a possible disability. It is imperative that clients work with you and their team of professional advisors to ensure that, in light of their unique goals and objectives, their planning addresses all aspects of a potential disability.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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