low cost health insurance

In this post we discuss two key issues that don’t draw much attention but are keys to the success or failure of your wealth transfer plans. They probably are not what you’d expect. Meeting a plan’s goals often does not hinge on the “headline issues” of trusts, family limited partnerships, and the like. The nitty gritty details are more important, such as stating who pays debts and taxes, ensuring the estate has enough cash, and choosing executors and trustees. I regularly remind my readers of the details requiring attention and provide recommendations.
Here are a couple of issues that don’t get much attention but deserve more of your time.
A recent court case shows what happens when details are overlooked.
A man owned a farm, sold it, and incurred capital gains taxes. He died before the year ended and before paying the taxes on the sale or filing his tax return for the year. His oldest son was named executor of the estate. It turned out a younger son was a joint owner with right of survivorship with his father of the farm and inherited the rights to the farm's checking account after it was sold. The checking account held the sale proceeds, minus mortgage repayments.
Because the farm and its checking account were held as joint owners with right of survivorship, the younger son automatically became sole owner of the farm business and its assets when the father died. The older son as executor oversaw the probate estate and had control of those assets. But the farm assets never were part of the probate estate, and the executor never had an interest in or control over the farm assets.
Yet, the estate and its executor are responsible for all taxes of the estate and the deceased. In this case, the executor was liable for the father's final income tax return and the taxes due under it. The IRS assessed the executor for the capital gains taxes from the sale of the farm. The executor went to court to challenge this, saying his brother should pay the taxes since he had the money.
The court said it had no choice but to rule for the IRS. The executor is responsible for paying the taxes on the deceased's final income tax return. The brother who served as executor could sue the other brother for the money, but he first had to pay the IRS the money.
Here we have a division within a family and an estate without cash to pay its bills, because the father either didn’t seek advice or received bad advice. The father did not pay estimated taxes that included capital gains taxes on the sale of the farm, and he did not ensure the estate had money to pay the taxes and other bills. He might not have been aware the farm would be included in the taxable estate though the executor had no rights to it.
Several key details were neglected that should be part of every estate plan. Estimate the cash flow for the estate. Be sure there are enough liquid assets to pay its obligations. The will should state who is responsible for paying taxes on the assets. Otherwise, one group of beneficiaries could pay taxes on assets received by another group of beneficiaries.
Otherwise, your estate could end up fighting with the IRS, and your family members fighting with each other. (U.S. v. Guyton, No. 3:07-cv-00273, D.C. Fla, May 7, 2009)
 
Giving Gifts — and a Lecture
 
Grandparents are filling only half their roles these days. They are providing financial help to their grandchildren. In fact, they increased their financial aid as the economy worsened. Unfortunately, they are providing financial aid without much advice.
About 63% of grandparents say they provided some form of financial assistance to their grandchildren over the last five years, according to a survey for the MetLife Mature Market Institute, an affiliated organization of MetLife Inc., the insurance company. The assistance over the five years averaged $8,661. The survey was of adults over age 45 who have grandchildren under age 25. About 40% of the gifts went toward "general financial support," while 26% was for educational expenses and 21% was to help grandchildren through major life events. Because of the declining economy, about 26% of grandparents said they increased support for grandchildren.
Despite the generosity with wealth, most grandparents are not generous with their advice and wisdom. About 68% of the grandparents said they provided no financial guidance to their grandchildren. Lower-income grandparents are more likely to give advice, with 83% of those earning $35,000 or less saying they warn their grandchildren to avoid large debts and to maintain financial security. Only 65% of those with incomes between $50,000 and $74,999 talked about finances with their grandchildren.
It is admirable that so many grandparents are willing to give now to help their grandchildren receive educations and establish a firm financial foundation. But it is a mistake to give money or other wealth without some guidance, or ensuring the grandchildren receive good advice elsewhere. Financial literacy is taught in very few schools. Most high school graduates lack basic financial skills such as balancing a checkbook and understanding a mortgage or other debt instrument. If the parents try to provide lessons, the grandchildren are likely to ignore them.
Grandparents are more likely to be listened to, and they can provide a lot of hard-earned wisdom. Grandparents can teach with authority principles such as avoiding debt, starting to save and invest early in life, living within one's income, working hard, and saving both for a rainy day and for specific goals.
Debt management is probably the lesson most grandchildren could benefit from. Their parents, like most of their generation, probably never learned the lessons of how to use credit wisely. Also, the credit picture is much more complicated than it used to be, with many different kinds of debt available but objective information about the credit hard to find. 
Grandparents should not give only wealth. They should give lectures and advice. Even a simple request that the grandchild read a basic book, such as The Richest Man in Babylon by George Clason, as a condition of receiving a gift can go a long way. The book is both entertaining and enlightening for most people, regardless of age. But the best advice would be direct from you.
Articles with helpful discussions on my members web site discuss compound returns, mutual funds for small investors, and financial lessons youngsters need to know. Share this and other advice with your grandchildren so they will remember it when key decisions have to be made. It also will make your financial gifts more valuable, making it more likely your wealth is well-used.
 
Bob Carlson is editor of the monthly newsletter Retirement Watch and the web site www.RetirementWatch.com. He also is author of the books The New Rules of Retirement and Invest Like a Fox…Not Like a Hedgehog.
more to read in our archives

Readers with homes or other property in more than one state need to give special attention to their estate plans. Each state has different rules and requirements, and your estate might have to run probate proceedings in each state. There is more work involved for either you or your executor or both.
There are lawyers who advise drafting separate wills and other estate planning documents for each state involved. You shouldn't need to do that much work. The estate plan, however, does need to recognize that multiple states are involved and make appropriate adjustments.
An estate generally must go through the probate process in order for title to the assets to be transferred to the beneficiaries. Real estate is probated in the estate where it is located. Personal property is probated in the deceased's state of residence, even if he or she dies in another state.
Occasionally there is a dispute over a person's state of residence, but that doesn't happen often. When you have houses in more than one state, part of your estate plan should be to clearly establish one state as the legal residence to avoid a dispute over your residence.
When there will be probate in more than one state, the same will can be submitted in probate proceedings in the different states. Each state, however, sets its own qualifications for wills, trusts, powers of attorney, medical directives, and other documents. Some have more requirements than others. For example, some states require only two witnesses to a will while others require three. Louisiana, because it is based on French law, has its own peculiar rules.
Estate planning attorneys, especially when they know that a person spends a significant time in more than one state, will draft a will so that it is valid in every state except Louisiana. The documents are written to comply with the state that has the toughest requirements. Be sure your estate planner knows where your different assets are located and where your time is spent. The planner then should ensure the will is valid at least in the relevant states.
The same strategy should be used with trusts. A trust is resident in and controlled by the law of the state where the trustee is located. A trust should be written, however, so the trustee or the location can be changed. To avoid problems with those changes, a trust should be written to be valid in as many states as possible.
Another way to deal with the potential of estate proceedings in more than one state is to plan your estate to avoid the cost and inconvenience of having the estate probated in two or more states.
One way to minimize probate is to create a revocable trust. The trust can hold a few key assets, such as real estate that is held outside the state of primary residence. Or it can hold title to all your assets. Anything owned in a trust does not have to be probated. The trust agreement should state how a successor trustee is determined and how the assets are managed and distributed. A will still would be needed for assets not held in the trust, but assets in the trust would avoid probate.
Another option to avoid probate for real estate is to own it through a partnership, LLC or trust. The partnership or LLC interests are personal property and could be probated with the rest of your personal property. The real estate would avoid probate.
Another way to avoid the probate problem is to establish joint title with right of survivorship for major properties. There are pitfalls to this, as I have discussed in past issues of Retirement Watch and don’t have space for here, but it might be an appropriate strategy for married couples whose estates are small enough to avoid estate taxes.
Your other estate documents also should be drafted to comply with the requirements of all states you frequent. These could include the general power of attorney, financial power of attorney, health care power of attorney or proxy, health care advanced directive, and living will. The health care documents should be drafted to comply in as many states as possible, because the governing law will be the state in which you need the medical care.
With a financial power of attorney, the key is to make the document acceptable to the financial institutions holding your accounts. Most institutions require that the power be filed with them in advance, and many will acknowledge only powers using their own forms or approved by their attorneys before they are needed.
Spending time or owning assets in multiple states adds a few complications to an estate plan. An experienced estate planner who has all the information can smooth out the complications and make the estate administration process easier. With a little work, you can avoid having probate cost extra time and money.
 
Bob Carlson is editor of the monthly newsletter Retirement Watch and the web site www.RetirementWatch.com. He also is author of the books The New Rules of Retirement and Invest Like a Fox…Not Like a Hedgehog.
wonder what this really means

Hedge funds continue to make headlines, and most of them are not good. The big insider-trading case involved a hedge fund firm, and news stories indicate the investment process of the firm was to get an “information edge” that apparently included insider information on a regular basis. Forbes magazine had an article asking “How Dirty Are Hedge Funds?” Its answer was “filthy.”
The latest evidence for Forbes was an academic paper that concluded 21% of hedge funds lie about their legal and regulatory problems and 28% issue either incorrect or unverifiable information about other topics.
You can receive the benefits hedge funds are supposed to have without the high fees, lack of liquidity, uncertainty about investment strategies, and other disadvantages of hedge funds. My portfolio of mutual funds that have hedge fund qualities persists in meeting or surpassing my goals. The portfolio is delivering higher returns than the S&P 500 with less risk. It took a hit in the last half of 2008, but it did not fall as much as the indexes and most portfolios. It lost 13.25% for the last three months of 2008 and 18.49% for all of 2008. Though disappointing, the losses were far less than for the S&P 500.
In the rally, it bounced back faster, widening its long-term return above the S&P 500. It was up 9.88% for the three months ended September 30, 2009, and 4.79% for the prior 12 months. Its performance is ahead of the S&P 500 for all periods but the latest three months, and the portfolio has far less risk and volatility.
My “hedge fund” portfolio is composed of mutual funds that use strategies similar to those followed by the better hedge funds. The strategies include distressed asset investing, deep value investing, and tactical asset allocation. We also have funds that can hedge and leverage their portfolios and funds with "go anywhere" investment strategies. Most can raise cash when they perceive market risks to be high. The portfolio also has special assets such as high yield bonds, international bonds, and real estate investment trusts. What these funds have in common is investment strategies that differ greatly from the conventional approach of only buying stocks or bonds that closely resemble a given market index.
The differences these funds have from each other also are important. Over time different investment strategies have their good and bad returns during different periods. In academic terms, they have low correlations with each other. When a group of funds that are not correlated with each other are put together, they form a portfolio that has much smoother, steadier returns than a traditional portfolio. For example, over 10 years the hedge fund portfolio has about half the volatility as the S&P 500.
Another advantage of the portfolio is its low correlation with the S&P 500. That means our returns and net worth are not closely tied to the returns of the market indexes. While the returns from the stock market indexes have been flat or close to it for the last 10 years, the hedge fund portfolio has returned 8.68% annualized.
The quarter ending Sept. 30 was consistent with the portfolio’s history. Our return was less than the S&P 500 for the quarter, which is not surprising. Because of its diversification, the portfolio trails the stock indexes when there are strong bull rallies. The rest of the time, the portfolio’s returns equal or exceed those of the indexes.
This is a buy and hold portfolio. Because the funds are uncorrelated with each other, there is no reason to make adjustments for the market cycle. The fund managers do that for us. The only changes I make are when there are changes in the funds or when I discover a fund that will enhance the portfolio. For example, Schwab Hedged Equity changed its name and ticker and modified its strategy. Instead of keeping the new version, I recommended selling it and spreading the proceeds among the other funds.
The portfolio includes some non-traditional balanced funds such as Oakmark Equity & Income and FPA Crescent. Among the other funds are Hussman Strategic Growth, PIMCO All Assets, Wintergreen, and Berwyn Income.
The mutual fund “hedge fund” portfolio delivers what traditional hedge funds are supposed to. The portfolio’s fluctuations have a low correlation to the stock market indexes, but the returns equal or exceed those of stocks over the long term. It has the reasonable expenses of no-load mutual funds and their daily liquidity. Even the wealthy who meet the minimum income and net worth requirements for traditional hedge fund investing probably would be better off with this mutual fund portfolio.
 
Bob Carlson is editor of the monthly newsletter Retirement Watch and the web site www.RetirementWatch.com. He also is author of the books The New Rules of Retirement and Invest Like a Fox…Not Like a Hedgehog.
Rome wasnt built in a day!

Most estate plans are missing a key ingredient. Many estate planners don’t recommend it, and it isn't even mentioned in many estate planning discussions. One reason might be that, despite its importance, the document is not legally binding on anyone.
This document can clear up a lot of issues. It can save time and money in processing the estate, answer many questions of loved ones, and prevent the heirs from going to court. The document also can make clear one's final wishes in many areas that are not covered in wills and trusts.
The document often is called a letter of final instructions. That is a bit of a misnomer, because properly done it is more than a letter. It should be several documents contained in a three-ring notebook or other device that makes it easy to update the papers yet keep them together.
The letter of instructions is your last word on a number of issues. It also is a practical guide to handling your estate and managing the property. It can provide advice and guidance. Preparing a letter of instructions also is an excellent way to help do your planning and uncover forgotten information. Let's take a look at the details.
Contacts. Your executor will need to contact your estate planning attorney, accountant or tax preparer, life insurance agent, and any other financial professional who helped you. There also might be investment managers and employers or former employers who are paying benefits. Also include personal contacts: friends, relatives, organizational leaders. Include the name, address, telephone number, and e-mail address of each.
Where to look. Unfortunately, in many cases much of an executor's time is spent looking — for documents, account statements, contact information, personal items, or long-forgotten assets. May you know where everything is (though you probably don't). Make things easy and inexpensive for your executor by leaving behind an inventory of assets that includes where the assets and any documents related to them can be found. If you keep valuables in a safe deposit box or safe, be sure to note this and how the executor can gain entry. Let the executor know where you keep receipts, canceled checks, and any other supporting documents.
How it is divided. Your will, beneficiary designations, trusts and other documents legally determine who gets what. But you can make a plain English explanation of the division in your letter. You might explain why things are divided as they are — especially if you think someone might be surprised, disappointed, or have questions.
If you own a business, be sure to get periodic valuations and asset inventories. The business might own assets your heirs might not be aware of. You should provide separate detailed information about the business, its assets, its operations, and suggested actions to take with it.
You probably have several credit cards and belong to one or more associations, societies, or other groups that offer membership benefits. The benefits might include some kind of life insurance, disability insurance, or medical insurance. Take the time to review your benefits and list them somewhere. Provide full information, such as the brochure received from the provider. Your executor can make claims and boost your estate.
All of these lists can be included as separate statements that are attached to the letter or included in a separate divider in the binder. Also include in the binder copies of recent tax returns for you and your business along with your will and any other estate planning documents. Of course, a copy of your will and any trusts should be included. Recent copies of statements from any financial accounts and employee benefits also should be attached.
In most states, your instructions on funeral arrangements and some other matters are not legally binding even if included in the will. You also don't want to update the will each time a new idea occurs to you. These items can be included in the letter of instructions or notebook. Here are topics to consider:
* Burial, organ donation, and similar preferences. Naturally, if arrangements have been made in advance, these should be explained.
* A suggested obituary or items to include in an obituary.
* Preferences for the funeral, memorial service or other ceremony. You can be as detailed or general as you would like.
* The disposition of special collections or assets, pets, and memorabilia.
* Care for dependents who are incapacitated or for minor children or grandchildren.
Every estate planner with any experience has stories about searches for assets or disputes over seemingly minor matters. You can avoid being part of one of these stories by leaving a letter of instructions.
A letter of instructions has the benefit of being easy to update. You don't need to incur lawyer's fees or have a signature witnessed. Sit down once a year, review it, and determine what needs to be updated. After the revisions, make some copies. Your lawyer and executor each should have a copy, and there should be one in your desk drawer or other place you keep documents.
Preparing a letter of final instructions can provide benefits now. The letter ensures that your financial affairs and documents are organized. It probably will cause you to throw away unneeded items and carefully consider some items that have been put off or neglected. The process will cause you to do things that should have been done some time ago. Make it easy by not trying to do the entire project at once. Break it into manageable pieces and give each the attention it deserves.
 
When You Don’t Prepare
Without a letter of instructions and good organization, the heirs are forced to engage in the old-fashioned property and document search. Sometimes it is comical. Sometimes things get ugly. Always a lot of time and effort is wasted.
Estate planners tell stories of important documents that never are found and of other documents that are found in the most unlikely places. Cash, jewelry, and other property are found hidden in the backs of closets, in attics, or under floorboards. Sometimes evidence of real estate or stocks is found stuffed where they are discovered only by accident.
When heirs remember seeing property, such as jewelry, or hearing the loved one talk about real estate, suspicions are aroused when the property or documents are not found during the estate settlement process. The results can include accusations, lawsuits, and broken relationships.
Don’t leave your heirs in this position. Prepare a proper letter of instructions and supporting documents. In the process, you probably will re-learn things about the estate you forgot and also realize that some important papers need to be replaced.
 
Bob Carlson is editor of the monthly newsletter Retirement Watch and the web site www.RetirementWatch.com. He also is author of the books The New Rules of Retirement and Invest Like a Fox…Not Like a Hedgehog.
thats funny

Heirs routinely lose a large percentage of inherited IRAs to unnecessary taxes. The rules are simple, but they aren't obvious and most heirs don't know about them or to ask about them. If you don't want a large portion or your hard-earned wealth and careful plans wasted, be sure your heirs know how to manage their new IRAs. Here are some key points.
* Spouses vs. non-spouses. A spouse who inherits an IRA has one big advantage over other beneficiaries. He or she can roll over the IRA to an IRA in his or her own name, providing the spouse with a fresh start for the IRA. The beneficiaries and required minimum distribution schedule can be reset. This often is a good idea for an inheriting spouse. But non-spouses who are beneficiaries cannot rollover the IRA to a new IRA.
* Naming the IRA. Other than a spousal rollover, heirs should not make the mistake of changing the IRA to their own names or allow the custodian to do so. That would require a rapid distribution of all the IRA. An inherited IRA needs three things in its title: the name of the deceased owner; the word "IRA"; and the statement that it is "for the benefit of" the beneficiary. An appropriate title is "Max Profits IRA (deceased), F/B/O Hi Profits, beneficiary.
* Deadlines. After inheriting an IRA, beneficiaries have options and reuirements. Required minimum distributions must begin, for example, and joint beneficiaries can split the IRA into separate IRAs for each beneficiary. But these actions must be taken by the end of the year after the year in which the owner died. Failure to act by the deadline ends the right to take an action and can result in higher taxes than would otherwise be paid.
* Splitting the IRA. A single IRA can be left to multiple beneficiaries. For example, Max Profits can name his three children as equal beneficiaries. If they decide to share the IRA, required minimum distributions are based on the age of the oldest beneficiary. The owners also would have to agree on how to invest the IRA and on rules for taking distributions beyond the required minimums. An alternative is to split the IRA into a separate one for each beneficiary. Most IRA custodians allow the IRA to be split in this way. Beneficiaries need to know this option is available and how to exercise it.
* Distributions. Most heirs tend to withdraw all the money from an inherited IRA quickly, pay taxes, and spend the after-tax amount. When beneficiaries prefer to use the IRA’s tax deferral, they should know how to compute required minimum distributions. The amount of the RMDs depends on whether or not the original owner was already taking RMDs, and the beneficiary also has two options in each case.
Suppose the deceased owner was not over age 70½ and had not begun RMDs.
The first option for the beneficiary is to begin taking distributions using the beneficiary's life expectancy. The second option is to distribute 100% of the inherited IRA to the beneficiary by the end of the fifth year following the year of the original owner's death. In the second option, the distributions can be taken on any schedule the heir wants. For example, the entire amount could be left in the IRA until the end of the fifth year. Or roughly equal amounts could be taken each year. Or money could be withdrawn as needed, with whatever is left in the IRA distributed by the end of the fifth year.
The first option is best for an heir who wants to use the IRA's tax deferral for as long as possible. Remember, an amount exceeding the RMD for the year can be withdrawn at any time. The second option is for an heir who doesn't intend to use the long-term tax deferral of the IRA. The five-year period gives the beneficiary time to search for ways to reduce income taxes on the distributions.
The options are a little different when the deceased owner already started RMDs.
The first choice again is for the heir to take annual installments over the beneficiary's life expectancy. The second option does not include a five-year rule. Instead, the heir can continue the RMDs on the schedule begun by the deceased owner, using what would have been the deceased’s age and life expectancy each year. The IRS says that the second method is the default method if the beneficiary does not make a selection or the IRA custodian does not name the other method as the default.
* An overlooked deduction. Most taxpayers and even many tax advisers are unaware of the deduction for "income in respect of a decedent.” Many people who inherit a substantial IRA are eligible for this deduction, which essentially is a deduction for the estate taxes that were paid on the IRA. The deduction is best explained with an example.
Suppose someone left a large estate with an IRA. The estate tax accountant computes that the IRA was responsible for 36.7% of the estate tax paid, and that the IRA's dollar share of the estate tax was $175,000. When the beneficiary takes distributions from the IRA, a miscellaneous itemized deduction (not subject to the 2% floor) of 36.7% of each distribution is allowed. This continues until the beneficiary has deducted a total of $175,000 over the years.
The estate tax accountant should determine the data for the deduction. Details can be found in the IRS Publication 559, Survivors, Executors, and Administrators, available free on the IRS web site, www.irs.gov.
* Disclaimers. The details of who should inherit an IRA can be left to your executor who, along with family members, can determine from both a financial and tax standpoint who should be the Designated Beneficiary. The Designated Beneficiary does not have to be selected until Sept. 30 of the year following the year of the owner's death. The first required distribution does not have to be made until Dec. 31 of that year. But the Designated Beneficiary must be one of a group of primary and contingent beneficiaries named by the account owner.
The way to take advantage of this provision is for you to name both primary and contingent beneficiaries. After your heirs and executor decide who should inherit, those who are ahead of that person in the beneficiary chain can disclaim their interests.
There is a procedure in the tax law for making qualified disclaimers. Your heirs and executor should be aware of your intentions and this process, and you should give the executor guidelines for making the decision and advising the beneficiaries.
All your work of growing and preserving the IRA over the years and planning your estate could come to naught when your heirs mishandle the IRA. Be sure they know their options and obligations and have good advice on how to handle the inherited IRA.
 
Bob Carlson is editor of the monthly newsletter Retirement Watch and the web site www.RetirementWatch.com. He also is author of the books The New Rules of Retirement and Invest Like a Fox…Not Like a Hedgehog.
Rome wasnt built in a day!

Many people still expect that government programs, such as Medicare and Medicaid, will pay for their long-term care needs. Unfortunately, these programs provide limited assistance for long-term care needs.
Medicare, the program for those 65 and older, has restricted coverage for stays at long-term care facilities. The coverage generally is only for brief periods of rehabilitation after surgery or injuries. Medicare pays only about 15% of national nursing home expenses. It does not pay much of the cost for those in assisted living facilities or receiving home health care.
Medicaid offers extended long-term care coverage and pays about 45% of total nursing home expenses. But to receive the coverage you must meet the Medicaid asset limits. This generally means you must be impoverished by Medicaid standards. There are strategies people use to qualify for Medicaid, but they became less practical after changes in the law about 10 years ago and even less practical after a 2005 law. Now, it is difficult to qualify for Medicaid without impoverishing yourself long before any coverage is needed.
Medicaid is a joint federal-state program. There are umbrella federal rules, but the states are allowed to add to them by making eligibility more restrictive. You have to know not only the federal rules but any modifications your state makes. In this post, I review the federal rules and some state variations.
Understanding Asset Ownership Limits
First, you generally can’t own assets worth more than $2,000 ($3,000 if you are married). But there are exempt assets you can own that do not count against the limit. The states have some flexibility in setting the details of the definitions of exempt assets.
You are allowed to own household goods and personal effects up to $2,000, one car, term life insurance with a face value of up to $2,000, and a burial plot.
You also are allowed to own a home, up to a point. When a spouse is occupying a house, an unlimited amount of home equity is allowed. If there is no spouse, home equity is limited to $500,000 ($750,000 in some states).
There is no limit on the value of the automobile you can own. Some advisors recommend reducing your non-exempt assets by using cash to purchase an expensive car.
When you limit your asset ownership to these levels, you probably will qualify for Medicaid. But that is not the end of the story. After a Medicaid enrollee dies, the state is allowed to recover from the estate the money Medicaid paid for care. Normally the state limits its cost recovery to the sale proceeds of the enrollee's home. The recovery cannot come from the home, however, if the surviving spouse still is living there. The spouse also can sell the home a year after the enrolled spouse qualified for Medicaid and not owe any money to Medicaid.
Even if the state eventually recovers its costs from the sale of the house, using Medicaid might not be a bad deal financially. The state reimburses nursing homes at a rate far less than private patients pay. That means the eventual reimbursement your estate makes to Medicaid would be lower than the cost of paying the nursing home cost out of your pocket at non-Medicaid rates. For example, the estate might pay Medicaid $90 per day instead of the $200 or more per day you would have paid as a private patient.
Using Trusts
For years, the standard Medicaid qualification strategy was to give assets to family members so the applicant owned no more than was allowed by Medicaid. The assets still were in the family and were preserved for heirs instead of being spent on nursing home care.
This strategy is more difficult now, because of the "look-back" rule. All assets that were given away in the 60-month period before someone applied for Medicaid are considered part of the applicant's assets when reviewing the application. Before the 2005 law, the look-back period was 36 months for outright gifts and 60 months for gifts in trusts. Now, all gifts face the 60-month look-back period.
This makes planning difficult, because you must make yourself impoverished at least five years before entering the nursing home. Any assets transferred during the look-back period result in a waiting period before becoming Medicaid eligible.
Suppose Max Profits transferred $300,000 to his son, Hi, within the look-back period. Suppose the average monthly cost of a nursing home in Max's area is $10,000. The $300,000 is divided by $10,000 to arrive at 30. After Max both enters the nursing home and meets Medicaid eligibility requirements, it will be another 30 months before Max can enroll in Medicaid.
But in some states each month of expenses paid by the applicant or a family member reduces the waiting period by one month. So if Hi begins paying for the nursing home as soon as Max enters it, Max will be eligible for Medicaid after 15 months.
Annuities used to be a way to allow one spouse to become eligible for Medicaid while ensuring income for the other. But the rules now are very limited and have some uncertainty. Buying annuities to game the Medicaid system is a complicated, risky strategy.
In some states, owning a long-term care policy can make it easier to qualify for Medicaid. The Partnership for Long-Term Care program, which is a trial program in some states, allows an applicant to spend down fewer assets if a qualified long-term care policy is in place. For example, if the policy pays $100,000 in LTC benefits, the individual can qualify for Medicaid with $100,000 more assets than other applicants.
Strategies That Work
The best strategy these days is to use Medicaid as a back-up for extended long-term care needs. For the initial care, buy a long-term care policy that covers long-term care for up to five years. Or use a combination of personal assets and a long-term care policy to get you through five years.
When you know you will begin long-term care, you can give your children any assets that exceed the cost of five years of care. After five years in long-term care, you can apply to Medicaid and there will be no gifts in the 60-month look-back period. You won't own assets above the Medicaid limit and will not face a waiting period beyond the first five years.
A benefit of insurance is it covers home care and assisted living care in addition to nursing home care.
The difficulty of qualifying for Medicaid is not the only reason to consider another way to pay for any long-term care. You should ask yourself if you really want to rely on Medicaid. Its reimbursement rates for nursing home care are very low, a fraction of private pay rates. Nursing homes with a lot of Medicaid residents simply cannot afford to offer a lot of quality care at those rates.
Most quality nursing homes will not accept Medicaid patients or limit the number they will accept. These facilities require financial statements proving the applicant is able to pay for several years of care before they will admit the person.
With the difficulty of qualifying for Medicare and the lower quality of care, you might prefer to use long-term care insurance and your own assets to pay for any long-term care. An alternative is to plan to spend your own assets and buy permanent life insurance to provide an inheritance for your heirs.
 
Bob Carlson is editor of the monthly newsletter Retirement Watch and the web site www.RetirementWatch.com. He also is author of the books The New Rules of Retirement and Invest Like a Fox…Not Like a Hedgehog.
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As we roll into the traditional gift-giving season, let’s focus on both the financial and non-financial aspects of family gift giving.
Grandparents are filling only half their roles these days. They are providing financial help to their grandchildren. In fact, they increased their financial aid as the economy worsened. Unfortunately, they are providing financial aid without much advice.
About 63% of grandparents say they provided some form of financial assistance to their grandchildren over the last five years, according to a survey for the MetLife Mature Market Institute, an affiliated organization of MetLife Inc., the insurance company. The assistance over the five years averaged $8,661. The survey was of adults over age 45 who have grandchildren under age 25. About 40% of the gifts went toward "general financial support," while 26% was for educational expenses and 21% was to help grandchildren through major life events. Because of the declining economy, about 26% of grandparents said they increased support for grandchildren.
Despite the generosity with wealth, most grandparents are not generous with their advice and wisdom. About 68% of the grandparents said they provided no financial guidance to their grandchildren. Lower-income grandparents are more likely to give advice, with 83% of those earning $35,000 or less saying they warn their grandchildren to avoid large debts and to maintain financial security. Only 65% of those with incomes between $50,000 and $74,999 talked about finances with their grandchildren.
It is admirable that so many grandparents are willing to give now to help their grandchildren receive educations and establish a firm financial foundation. But it is a mistake to give money or other wealth without some guidance, or ensuring the grandchildren receive good advice elsewhere. Financial literacy is taught in very few schools. Most high school graduates lack basic financial skills such as balancing a checkbook and understanding a mortgage or other debt instrument. I believe this education gap is a major reason for the current financial crisis. Financially literate people would not have taken out the mortgages many people did and paid as much for homes as they did.
We all know if the parents try to provide lessons, the grandchildren are likely to ignore them. Grandparents are more likely to be listened to, and they can provide a lot of hard-earned wisdom. Grandparents can teach with authority principles such as avoiding debt, starting to save and invest early in life, living within one's income, working hard, and saving both for a rainy day and for specific goals.
Debt management is probably the lesson most grandchildren could benefit from. Their parents, like most of their generation, probably never learned the lessons of how to use credit wisely. Also, the credit picture is much more complicated than it used to be, with many different kinds of debt available but objective information about credit hard to find. 
Grandparents should not give only wealth. They should give lectures and advice. Even a simple request that the grandchild read a basic book, such as The Richest Man in Babylon by George Clason, as a condition of receiving a gift can go a long way. The book is both entertaining and enlightening for most people, regardless of age. But the best advice would be direct from you based on your experience or the experiences of people you’ve known.
In past issues of Retirement Watch we published helpful articles on compound returns, mutual funds for small investors, and financial lessons youngsters need to know. These articles are available on the members’ section of the Web site in the Archive and Back Issues sections. Share this and other advice with your grandchildren so they will remember it when key decisions have to be made. It also will make your financial gifts more valuable and increase the odds your wealth is well-used.

Bob Carlson is editor of the monthly newsletter Retirement Watch and the web site www.RetirementWatch.com. He also is author of the books The New Rules of Retirement and Invest Like a Fox…Not Like a Hedgehog.

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