LTC Bullet Reality Check: Budish and Gordon on LTCI and Medicaid Planning
Monday February 12, 2001
*The following is the fifth in our series of "LTC Reality Check" Bullets. From time to time, we devote LTC Bullets to this "LTC Reality Check" effort. The goal is to provide accurate and timely information on how long-term care is financed and to demonstrate how easily information on this subject can be misunderstood, misinterpreted or misstated. For those of you new to LTC Bullets, we hope our "LTC Reality Check" series is helpful and contributes to raising the level and accuracy of discourse in this most critical public policy debate.*
There was a time when we lumped Armond Budish (best-selling author of the Medicaid estate planning self-help book "Avoiding the Medicaid Trap") and Harley Gordon ("How to Protect Your Life Savings from Catastrophic Illness and Nursing Homes") together as advocates of Medicaid planning and bashers of long-term care insurance. Boy, have times changed! Budish continues the same old schtick, but nowadays, Gordon advocates private insurance thoughtfully and criticizes Medicaid planning intensely. Here's the story.
Over the years, Family Circle and Modern Maturity magazines have published numerous articles by Attorney Armond Budish that endorse his specialty, Medicaid estate planning, at the expense of intelligent long-term care planning. A recent example ("Can You Afford Old Age?: What You Need to Know," Family Circle, February 20, 2001, pps. 35-36) uses the public's growing preference for private long-term care insurance to slyly promote the Medicaid planning alternative. A sample:
"Combining LTC insurance with Medicaid may let you reduce costs, retain control of your assets longer and leave more to your heirs. Here are two 'combos': (1) Insure and Hold. Say you're age 60 and in good health, with $150,000 in savings. You buy a three-year LTC policy for only $1,400 a year, much less than you'd pay for a longer-term policy. You then keep your assets until right before you enter a nursing home. You also sign a durable power of attorney allowing your adult child or other agent to transfer your savings later on. Ten years later you become ill and enter a nursing home. You (or your agent) then give your $150,000 to your heirs. That transfer makes you ineligible for Medicaid for three years, but your insurance covers your care during that period. When the insurance runs out, Medicaid takes over, and your savings are protected. (2) Insure and Gift. Suppose you're 65 and in good health. Using this plan, you buy an LTC policy and immediately give your children your $150,000 in savings. That transfer makes you ineligible for Medicaid benefits for three years. During that time, you pay the LTC premiums, and if you become ill and enter a nursing home, the insurance covers your costs. If you're still healthy after three years, you may drop the insurance and stop paying premiums. Your $150,000 is now secure. For more information, contact an elder-law attorney or a financial planner specializing in long-term care…." (p. 35)
Do you see any problems with this advice? Attorney Harley Gordon does. (Gordon is currently President of the Corporation for Long-Term Care Certification, a private company that trains and certifies long-term care insurance agents.) Here's the letter he sent to the editor of Family Circle magazine.
"Dear Sir / Madam
"I want to take strong exception to the advice given by Armond Budish in his 'Can you Afford Old Age' column. As a founding member of the National Academy of Elder Law Attorneys and practicing elder law attorney for more than 24 years I have all to often seen the type of incomplete and misinformed legal advice given to families regarding planning for long-term care. It is they not the attorneys who suffer the consequences.
"Mr. Budish's article featured in your February 20th issue is a particularly egregious example. Ostensibly it appears that Mr. Budish supports the sale of long-term care insurance. A closer look tells another story entirely.
"First he suggests that long-term care insurance is a smart idea but that the benefit period should be for only 3 years. That way, 'You then keep your assets until right before you enter a nursing home.' His point of course is that if you need care, you simply transfer your life savings and wait for the three-year look-back period to expire (Medicaid can only look-back three years from the date of application). In other words Mr. Budish is encouraging people to rely on Medicaid, a program for the poor to pay for care.
"Ethics aside, his advice makes absolutely no sense. Consider the substantial economic consequences of transferring assets:
* "Qualified money. The individual will have to pay taxes on the lump sum distribution. Keeping the asset in your name allows for a free rollover to your spouse and a favorable distribution upon death of the survivor.
* "The loss of a free step-up on low cost based assets. For example if you have a stock portfolio that has appreciated a great deal, giving it to your kids means giving them the low basis (the amount paid for the investment). They in turn get hit with a minimum 18% tax when they sell it. If the stock is in the individuals name at death there is little or no tax
* "Transfer your home as well? That eliminates the capital gains exemption. Again, as in the case with other low cost based assets, the transferors pick up a small cost basis which means there will be a substantial tax when they sell it. However if the home is in the individuals name at death there is little or no tax
* "Transfers in excess of $675,000 in 2001 create a significant gift tax.
*"Can the children handle the assets? What happens to your life savings if there is a divorce or a failed business? Forget financial aid for college once the parents receive the money from their parents.
"Then there is the issue of care. Mr. Budish pure and simple does not understand that nursing homes are last choices for families. We all struggle to keep our parents home. Did he stop to think about the years of care a person needs before institutionalization? Medicaid pays little if any for the custodial care needed. It pays little or nothing for adult daycare or assisted care living.
"What people like Mr. Budish do is perpetuate the belief that Medicaid, a program for the poor is just another middle class entitlement. I believe I speak for many elder law attorneys who think his advice does our clients a grave disservice.
"My father suffered a stroke 12 years ago. Nursing home care was never an option. Nothing paid for his care except my parent's lifesavings. My family is no different from the tens of thousands who step up to the plate and do the right thing when a parent or relative gets sick. I could have gotten my dad on Medicaid but it would have paid little if any benefits for home and adult daycare. I raised the issue exactly once. He almost took my head off. Lewis Gordon, a World War II veteran and hero wanted to stay home. He wanted to pay his own way. He did not want to suffer the indignity of impoverishing himself so he could get into a nursing home. My dad died August 13, 1999 with his family at his bedside. At home.
"Long-term care insurance provides the one thing we all want; to remain at home in the world we created for ourselves. It provides options for care. It helps maintain independence. Medicaid creates dependency.
"I'm surprised your publication did not vet this advice or get a second opinion.
"PS A disclosure. I along with others have created the insurance industry's first professional designation for long-term care producers. One of our goals is to educate people about the risks of needing care and what will pay for it. There is a substantial chapter on Medicaid planning and it's issues."
Hear, hear! A fine and moving letter. We'd have placed a little more emphasis on Medicaid's deficiencies of access, quality, and discrimination, but nevertheless, well said. If there really are "many elder law attorneys" out there who share Harley's views about the negatives of Medicaid planning and the benefits of private insurance, we'd sure like to hear more from them, especially in print.
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