The Family Care Plan: Navigating Aging, Costs, and Coverage

00:00 — Matt:
Welcome to EWA’s FinLit podcast. EWA is a fee-only RIA based out of Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you. And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time.

00:29 — Matt:
Welcome everybody here today with Chris Pavzic from the EWA team. And we’re here tackling long–term care planning and how to bring it up with your parents. So a lot of our clients, well, we have a lot of clients that are in their seventies and eighties and we’ve addressed the long–term care planning. And I think this really boils down to three categories and the same categories are going to apply if you’re, you know, let’s say a doctor or executive in your forties or fifties.

00:56 — Matt:
And now this is front of mind because your parents are of that age where some health concerns are rising. How you bring that up could have more of an effect than you realize. Well, one, obviously, you just want to make sure your parents are protected. But how this has an effect on your plan is what we’re here to discuss today and really how to broadly cover the topic.

01:20 — Matt:
As easy as possible. We’ve helped quarterback a lot of those conversations where we’ll get the parents on the phone and just kind of have a full transparent conversation. Mixed finances and emotions and it’s got to be handled with care for sure. So a couple of talking points to start out with. Statistically, over 70% of people over the age of 65 are going to need some form of long–term care. Whether that’s in-home care, nursing home, skilled nursing, et cetera. Right now in America, costs could exceed over one hundred thousand a year for high quality care. And so, you know, typically if we’re dealing with like high income or high net worth, they’re going to want the best for their parents. So, you know, those are the numbers we’re looking at. Specifically more for the skilled nursing and lack of planning really shifts emotional and financial burden from the parents to children, a lot of cases. So the sooner you can have these conversations, having the plan in place, understand the structure, understand, you know, where you may chip in if you want to, can be extremely important. So Chris, give us some more background on the different scenarios you see this as.

02:32 — Chris:
You spend out assets, Medicaid planning to you’re kind of in this weird in-between where you have a substantial amount of assets, but if something really happens to both of you, they could get wiped out pretty quickly. So kind of that in-betweener. That’s where insurance would come into play. And the third scenario would be if you could self-insure. So let’s just start with number one. Medicaid planning. How does this work? Why is this important? Give us an example of what could happen to the parents and kids.

03:00 — Matt:
So with Medicaid, it’s the government helping you pay. In order to qualify, you have to meet income and asset level tests. So the first one, in most cases, you have to get your assets below $2,400. So if you have any investment accounts, retirement accounts, you need to spend those down first. Just a quick example there, Chris, if your parents, 80 years old, needing to go to a nursing home, they have half a million bucks. They’re going to spend the half a million dollars to pay the medical cost until assuming they’re in the parents’ name until they’re left with $2,400.

03:27 — Chris:
Right.

03:27 — Matt:
Only at that point is the government going to come in and start covering some of those.

03:27 — Chris:
Correct. Yeah, that’s right. Yep. So they would continue to pay as long as you’re living. The one note is with a primary residence, if you have an intent to return to home, regardless of whether that’s likely to happen or not, even if it’s low likelihood of the parent going back home, the house would be protected while they’re living, but there’s a recovery process that if Medicaid paid any benefits, they’re going to try to recover that against the parents’ estate. So we can talk about how that could be addressed and how to avoid losing that asset.

03:57 — Matt:
Yeah, let’s talk about that. My understanding in most states is both spouses are still alive. One spouse goes, the house is still protected, right? In generality, and every state is different. But once that first spouse dies, that second spouse now owns the house outright and then goes — walk us through that.

04:24 — Chris:
Yeah. So there’s a program called the Medicaid expense recovery program and it starts when they eventually pass. They look at just probate assets. So depending on the titling and if you did any gifting before living — maybe the house or any other assets — they wouldn’t be considered because it’s again, only anything that goes through probate. So if you do any gifting, whether that’s to the child or to a trust, you have to have a five-year look back. You have to live at least five years to get past that look back period. If we don’t do that, then potentially the titling of the home, titling of the deed could bypass probate. If there’s a transfer on death provision, in theory, that should go directly to the child and wouldn’t be in the probate court process. So that asset wouldn’t be included. So one workaround for that would be, five years in advance, gift the house to your kids.

05:24 — Matt:
Yeah. Now don’t do this if there’s any mistrust with the kids. Once you gift that, it’s not yours — they could kick you out hypothetically. So if you have that relationship where it’s really tight with your kids, let’s say maybe gift the house to your kid. By the way, there’s a lot — this is not telling you what to do — this is just educational options. Sign a lease that you can live there for the next 20 years for an agreed-upon rent agreement that’s below the gifting limit. And so something like that. Then when you pass, assuming that you’ve been able to self-fund for five years, the house would at least go clean and clear to your kids because they would already own it. And you’d also avoid, you know, in Pennsylvania, you’d avoid the Pennsylvania estate tax as well.

05:53 — Matt:
Now, if you did that too late, part of the value is going to come back and that’s where they could look at the kids’ assets. The kid owns the house. If it happened two years in and the government could have taken that value of the house, they’re going to come back and take that. So that’s where that five-year look-back period, that clawback period, comes into play. So there’s lots of different opinions. This is just educational today.

06:31 — Matt:
If you’re kind of like, let’s say under a half million dollars, one strategy for long–term care planning would be to get money out of your name and into your kid’s name. Huge downside of that is once the money’s out of your name, the kids could run away with it. So you’d only do this if you’re extra sure. And most attorneys would say never do this — rightfully so, because their job is to protect their client. And if there’s that risk, they’re not going to tell them to do that. So you have to approach that with care. You could set up an irrevocable trust five years in advance with that five-year look-back and have your kids in control of that. So there’s lots of ways to do that. But if the goal is to — the only reason for this to occur would be if you’re trying to go spend down your assets, which is basically giving control to the government of where you end up receiving care or what the quality of care is. So this is really just to be clear — a bad situation. You want to have control of what care you’re getting; you don’t want the government deciding.

07:29 — Matt:
So spending down assets because you’re worried about your kid’s inheritance is one thing, but we’d recommend you first protect yourself. You spent your whole life accumulating these assets — make sure you’re getting the quality of care. Spending down on purpose is ultimately a last-case scenario. It’s kind of like a reverse mortgage, you know, where you’re relying on that last pillar standing, essentially. Anything else to add for the Medicaid spend down?

07:57 — Chris:
No, I think that’s it. Some states — like Pennsylvania is one of the few — have a filial law where the state could come after the parents’ children for any unrecovered costs for the Medicaid. From what we’ve found and from consulting attorneys, this rarely happens in practice, but it technically is a law that’s been in place and could happen.

08:24 — Matt:
Is this a law because people are gifting in the five years, or is it just in general that they could come to the kids? I mean, that’s kind of scary if you’re high income — like a physician or something — and your parents, you know, because we see this very commonly, right? A lot of physicians came from very humble beginnings, parents are maybe blue-collar workers, have a pension, not a lot of assets. So, yeah, they can come after — you’re a neurosurgeon or whatever, coming out of your student loans and a million-dollar house, trying to put your kids into school, and now suddenly this cost comes on — it could be devastating.

08:51 — Chris:
Yeah. So the advice that we give is never personally guarantee anything. Whenever you sign up, there’s probably going to be a big packet of paperwork you have to go through. Make sure you carefully read through that. If you’re the POA, make sure you’re only signing as the POA — never personally guarantee anything. Because the more that we can keep it separate, the more it reduces that likelihood of something happening or them coming after you in the future.

09:21 — Matt:
Absolutely. Yeah — important too, it’s only the children of the parent. So if you’re married, the spouse’s assets couldn’t be included. Or if it’s certain titling like tenancy in the entirety, both spouses have to be considered in the same lawsuit or whatever — same situation for the same reason. So if maybe you have a brokerage account, make sure it’s titled in TIE, or tenancy in entirety, so that asset couldn’t be included in any clawbacks or any retirement accounts.

09:50 — Matt:
Yeah. So make sure you maximize your retirement accounts. Make sure you have, you know, if you’re a high-income earner, maybe a spousal lifetime access trust. Make sure you’ve got the 401(k)s and Roth IRAs maxed out. Make sure your brokerage accounts are labeled tenancy in entirety. You just don’t keep that — if this is the case, you wouldn’t want to keep money in your individual name, essentially. Not an often-use case, but I would say — so I’m thinking of a specific example we’ve done, I don’t know, probably twenty times where the high-income earning physician is worried about the parents’ long–term care.

10:20 — Matt:
They don’t do any planning. I mean, it could be suddenly, you know, $150,000 a year that person’s paying. So why not plan in advance? Recently we’ve had some clients purchase life insurance on the parents. So just as an example — a million-dollar policy that can have a long–term care rider. Maybe that costs $20,000 a year. So instead of worrying in the future that I need to pay $150,000 a year per parent — how many can come up with that? Well, most high-income physicians could afford $20,000 a year premiums and purchase that.

10:49 — Matt:
You know, it’s a half-million or million-dollar policy. You maintain ownership of that. So if you do end up paying, you’re only out of pocket once the parent goes in. Because typically a nursing home is four years and once they pass, you get all that money back tax-free. So your contribution was kind of a lower amount along the way, but you’re planning in advance. Or that policy would have an option to cover. You could take, for example, two percent of that out per month. So you could — two percent of the million would be $20,000 a month, or $240,000 a year. You basically have a little over four years worth of withdrawals you could make. So for that surgeon — this was an orthopedic surgeon I’m thinking of that did this for his dad — he could take out $240,000 a year tax-free if he decided to; he doesn’t have to. He could keep with the Medicaid planning if the dad’s okay with the governmental care — great. When he passes, the million bucks…

11:16 — Matt:
If he’s like, this care is awful, I want him in a better facility, he could start withdrawing around that $20,000 a month. Now the benefit of that for the surgeon is that it’s tax-free. So he’s the owner of the policy, the dad’s the insured, but the long–term care benefit comes out tax-free. It works dollar for dollar against the death benefit. So if he ends up needing $240,000 for two years, that’s $480,000 — he’s able to get the dad into a quality home. It’s tax-free and doesn’t affect his personal situation. All he did was contribute those premiums along the way that were manageable.

12:18 — Matt:
And then when the parent passes, he gets the million dollars minus whatever, say the $480,000. So he’d still have a $520,000 death benefit that would come to him tax-free. So that example — $1,500 to $2,000 a month is doable for most high-income earners. Suddenly coming up with $12,500 a month — that’s going to hurt anybody, even if you’re making a million a year. That’s going to be really tough when you’ve got kids in private school or college and you’re trying to make other things happen. Anything else to add on that before we get to that middle scenario?

12:47 — Chris:
No, not on the insurance side. I think that all sounds good.

12:50 — Matt:
Yes. I think if your parents are, let’s say, below a million dollars of net worth, it’s worth a very transparent conversation and just getting a game plan. Like, hey — are we going to protect assets for the next generation? Are we just taking a wait-and-see approach? Are we okay with spending the assets and then making sure the kids are protected so they don’t come after the kids’ money? Are we trying to save that million dollars, get it to the kids, get it to a trust, let the government pay the way, and then there’s a legacy in place? So those are some of the considerations and discussions if you’re at a million or below of net worth.

13:16 — Matt:
If your parents are, I would say if you’re one to seven million, you’re kind of in this middle — not self-insured but should probably do some planning. Typically we’d recommend the parents, if you have that much money, probably allocate some funds separately that are going to be tax-efficient. When you go to a long–term care facility, if you’re already taking Social Security, taking required minimum distributions, you have a taxable account — you’re already filling up those 10, 12, 22, 24 percent tax brackets. And suddenly one spouse needs $150,000 a year on top of that for long–term care — you’re going to skyrocket tax brackets. Maybe it’s in a market downturn. Now you’re taking a dollar out, getting 65 cents on the dollar, and the market’s down. You’re basically taking a 50 percent haircut in the worst-case scenarios.

14:13 — Matt:
That’s where having some planning in place and having part of this covered out of the hybrid — the life insurance, long–term care combo — we’re big believers in that. Because no matter what, you get the money. If you die — you get the money, your spouse gets the money, your kids get the money. If you need the long–term care, you get to take it out tax-free. Some of them have cash value you can withdraw during market downturns. So that’s that one-to-seven million range.

14:41 — Matt:
And then we found, Chris, that typically seven million is kind of the safe point to self-insure — and you could be below that if you’re like five million and live very modestly. I’m just thinking in generalities, like averages — if you’re seven million plus of net worth, that’s where it would be safe to say, you know what, you’re fine, you can self-insure, you can cover this cost out of your lifestyle and the interest that you make. Any other considerations on that second or third layer of net worths and what kind of conversation should happen?

15:10 — Chris:
I think finances are always kind of private. So just trying to lead into it and be as proactive as you can is important. Like you said at the start of this — it’s emotional to start with because it’s about health and end-of-life planning. So it’s a delicate situation, but really important for everybody to have a thoughtful discussion around it.

15:37 — Matt:
Yeah, I think some very important questions — I think having an advisor that has the knowledge to quarterback these conversations is key. But whether the kids are your clients or the parents are your clients, I think both ways, advisors should be quarterbacking these conversations. Once the clients are retired and they’re 60 or 70 — for sure. But a couple of questions we need to have answers to: Who’s going to coordinate the care? If you’ve got three kids — which one of them? Or all three of them? If all three of them are going to do it, it’s tough because this is typically where, after the parents die, kids don’t talk to each other because there’s big disagreements — emotions, finances, everything gets mixed up.

16:07 — Matt:
And you’re trying to manage the busiest part of your life because typically your kids are maybe not even in college yet. Who’s going to coordinate the care — not just pay for it but coordinate it? Who’s going to make the decisions? Are the powers of attorney up to date? If something happens to you, who’s taking care of the financial decisions? Who’s taking care of the medical decisions? Who’s taking care of the rest of the decisions? So your durable power, healthcare power, your financial power of attorneys — who are those, are they up to date? Do the right people have access to the documents? Are they aware they’ve been named?

16:36 — Matt:
A power of attorney is useless if it’s all a surprise. A document’s great, but actually having that conversation in advance is what matters. And is there a written game plan in the case of cognitive decline? So — two out of six activities of daily living — if you lose two of those, you qualify for long–term care from an insurance perspective. Who’s familiar with how you want things to be handled? Most people do not want to go to a nursing home — they want to try to stay in their house as long as possible in general. So what’s the game plan for that?

17:05 — Matt:
And what proactive things are we doing in advance to make that a reality? Any other thoughts? This is a tough conversation, but yeah — I think we’ve covered the bulk of it.

17:17 — Chris:
Absolutely. Well, we welcome any questions from anybody. If you’d like us to specifically quarterback a conversation between you and your parents — or from parents for you to your kids — we’re happy to accommodate.

17:35 — Matt:
I think having the conversation, regardless of just getting a solution right in place, the conversation itself gets us 80 percent of the way there. And typically it can take six, twelve, eighteen, twenty-four months to make some of the decisions. But doing that in a position of strength before you need it is so much more powerful than waiting until it’s too late — that’s where the arguments and disagreements start.

17:55 — Chris:
Yeah. Totally agree. Well, Matt, thanks for having me — looking forward to catching everyone next week.

18:02 — Matt:
Thanks for tuning in to our podcast. Hopefully you found this helpful. We really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast, and please share it with any friends or family members that would also find this beneficial. Thank you very much.