Heckerling 2018: Day 3

Heckerling 2018: Day 3

Today’s blog post about the Heckerling Institute on Estate Planning is written by Withum’s Estate & Trust Services Partner, Donald Scheier.
Today’s session started with The Beatles 1967 hit “When I’m Sixty-Four.” Bernard A. Krooks, Esq. of Littman Krooks LLP, New York, New York started the presentation by reminding us that this is a question we will all most likely ponder eventually (I am thinking more at 84 than 64). His discussion focused on the variety of options available to people in need of long term care, how to pay for it, and other factors to consider.
The significance of Long Term Care (“LTC”) is now more important today than it has ever been. Below are some of the important facts and issues to consider.

1. Seventy percent of Americans will require some form of LTC. People are living longer past age 65 (average of 19.3 years for men, 21.6 years for women). For the highly educated and higher-income demographic the average lifespan is even longer.
2. There are over 40 million Americans age 65 or older; by 2050, 20% of Americans will be age 65 or older.
3. The reliance on family and friends for support will be much less likely. Children are now more scattered across the country and do not live close by their parents. The increase in divorces is another factor of not moving in with their children.
4. Over five million individuals in the United States have Alzheimer’s disease. That number is expected to triple by 2050.

Medicare Benefits

Many people are unaware that Medicare does not pay for LTC. Although Medicare will sometimes pay some costs for very specific kinds of care like “skilled nursing care” while after a qualifying hospital stay “custodial care” is never covered. In addition, even if some rehabilitation services are covered for a limited time, the LTC related costs of a chronic illness, such as dementia or Alzheimer’s disease, are not covered.
LTC includes an array of services including help with activities of daily living, such as bathing, dressing, toileting, transferring, caring for incontinence and eating. It may also include assistance with instrumental activities of daily living, such as housework, managing finances, taking medication, shopping or using the telephone.

LTC Costs

The average annual cost of LTC can exceed $100,000; in major metropolitan areas, the cost can approach $200,000 or more. These costs often bankrupt middle-class families since the United States has no health insurance system for LTC. Medicare does not cover long-term care and Medicaid’s income and asset requirements is often difficult to meet.
Married individuals are usually responsible for the cost of their spouse’s care. Although the law does provide some limited protections. The good spouse living at home (the “community spouse”) is entitled to certain allowances, including a community spouse resource allowance and a minimum monthly maintenance needs allowance. Even for couples who maintain separate finances, the responsibility for LTC costs of the spouse exists since the marital estate is deemed to be one entity for these purposes.
Divorced individuals will not be the responsibility for payment of costs in the future for their ex-spouses, but the distribution of marital assets in the hands of the sick spouse will be available to pay for the cost of his/her care. Prenuptial agreements limiting or eliminating the responsibility for the cost of a spouse’s LTC are typically disregarded by government agencies.
In the case of second marriages, it often makes sense for the spouse with the greater net-worth to consider purchasing LTC insurance for his spouse, if possible or consider setting aside funds in a trust to pay for LTC. These issues can become extremely contentious, especially in a second marriage involves children from a prior marriage who do not agree with the individual’s spouse.

Long-term Care Options: Home Care

Advantages

• Stay in familiar surroundings
• Family and friends can provide much of the required care sometimes up to 80%, spending 20 hours a week, on average, giving care and compensation to
• Informal or family caregivers can receive compensation for their services
• If the ultimate goal is Medicaid qualification, there generally must be a written caregiver agreement in place, Medicaid may require payback for the unused portion not spent on caregiving
• The performance of caregiving services raises a number of significant income tax issues, including whether the caregiver is an independent contractor or an employee

Draw Backs

• Home care can be very expensive, sometimes costing as much as or more than an institutional level of care
• Increased risk of both financial and physical elder abuse by caretakers at home
• Sequester in the home often contributes to social isolation and may place an individual at risk for both physical and psychological medical problems

Assisted living facility.

Advantages

• An assisted living facility is an option for those who do not wish to, or cannot, remain in the community but do not yet need the skilled level of care provided by a nursing home
• The facility will provide for custodial care in an apartment-like setting, providing three meals a day, and supportive assistance

Draw Backs

• Assisted living facilities are generally not licensed to provide medical care
• Restrictions and requirements imposed on residents in an assisted living facility that do not apply to other settings, in particular, there are no federal regulations governing these facilities, although many states have their own laws, regulations and licensing standards
• Signed admissions agreement is typically required and is often non-negotiable and can contain personal guarantees
• may require private payment

Nursing home

Advantages

• Facilities participating in the Medicare and Medicaid programs must meet certain requirements giving families far more recourse in dealing with the facility
  Cannot require or request a third-party guarantee of payment, a resident representative may be required
• Some nursing home admissions agreements attempt to impose additional liability on the responsible party
• Nursing homes may not require a security deposit, as a condition of admission, from an individual who is being admitted to the facility for skilled nursing care after a qualifying hospital where the individual is eligible for Medicare coverage for a portion of his stay in the nursing home

Draw Back

• If the prospective resident does not have a qualifying hospital stay prior to admission to the nursing home, then there is no Medicare coverage available for the nursing homestay. In these cases, the facility is permitted to require a security deposit and often requires payment in advance for the first month’s charges as well as a two-month security deposit
• Mandatory pre-dispute arbitration provisions are common in nursing home admission agreements

Continuing Care Retirement Community (“CCRC”)

Advantages

• They offer the entire residential continuum, from independent housing to assisted living, to nursing home care
• Allows the highest quality of life possible for married couples, admission to a CCRC can aid in ensuring that they are not separated as a result of their differing care needs. Spouses at varying care levels can remain near one another while receiving the appropriate level of care

Draw Backs

• CCRCs can be very expensive. Typically, there is an entrance fee, which can range from over one hundred thousand ($100,000) dollars to more than one million ($1,000,000) dollars (all or a portion of the fee may be refundable)
• In addition to the entrance fee, the CCRC will require a monthly fee of several thousand dollars

Read Moore, Esq. of McDermott Will & Emery LLP discussion entitled “Theory Meets Reality: A Practical Look At the U.S. Income Taxation Of Beneficiaries Of Foreign Trusts” focused on the many challenges faced by U.S. beneficiaries of Foreign Trusts.
The United States has extensive statutes and regulations related to the taxation of trust beneficiaries on distributions from trusts, and these rules generally apply equally to beneficiaries of domestic trusts and foreign trusts; however beneficiaries of foreign trusts, are subject to a number of additional rules and regulations that do not apply to beneficiaries of domestic trusts, including the accumulation distribution or “throwback” tax. Beneficiaries of foreign trusts are also subject to extensive information reporting requirements that do not apply to beneficiaries of domestic trusts.
The differences in trust law and the administration of trusts in countries other than the United States presents significant challenges in advising U.S. citizen and resident beneficiaries of foreign trusts. In addition to having to know which set of U.S. rules must be followed, you must be aware of the filing requirements in the foreign jurisdiction.
A trust is either classified as a Domestic Trust or a Foreign Trust. A Domestic Trust, in general, is one in which:

1. a court in the United States has authority over and
2. a U.S. person has basically the authority to control all substantial decisions. A foreign trust is one in which a U.S. court may not have authority over or a non-U.S. person has the authority to control some substantial decisions. The classification of a Trust is required in order to determine which rules under Subchapter J apply in addition to which compliance rules must be followed.

You must know who the grantor of a foreign trust is in order to evaluate whether the trust is a grantor trust. This, in turn, affects the taxation of the grantor and the trustee on U.S.-source income as well as the beneficiaries on trust distributions. Congress in 1996 limited the application of the grantor trust rules to trusts settled by nonresident aliens. The grantor trust rules now apply only to the extent their application results in income being taken into account in computing the income of a U.S. citizen or resident individual or a domestic corporation. IRC § 672(f)(1). In other words, the grantor trust rules generally do not apply to treat a nonresident alien as the owner of a trust’s items of income, gain, and loss for U.S. federal income tax purposes. Under certain limited circumstances, however, a nonresident alien may be treated as the owner of a trust’s income, gain, and loss. The criteria that must be met makes it very difficult to qualify as a foreign grantor trust.
The more common situation is to have foreign non-grantor trusts. Foreign non-grantor trusts will pay U.S. income tax on U.S. source income. The beneficiaries of foreign non-grantor trusts will pay income tax on distributions made to them to the extent of Distributable Net Income (“DNI”). DNI has generally calculated the same way as it is for Domestic Trusts with the exception that capital gains and foreign taxes paid are included. If DNI is not distributed in a particular year it is accumulated and there is a concept of Undistributed Net Income (“UNI”). If there is UNI and there is a distribution in a year in excess of DNI then the “throwback rule” applies to the excess income. A special calculation must be performed on Form 4970 and interest is charged on the UNI amount. As you can tell, these rules are extremely complex!
Foreign trusts have many special rules in determining what are distributions, loans, and beneficiary reporting requirements, also it is mandatory to determine the forms that must be filed.
In summary, the planning and paying for long-term care must be analyzed thoroughly well in advance of its need. More commentary about the conference to come from Withum’s Alfred LaRosa coming tomorrow!