He is 80 years old but looks like mid-60s.  When I told him that, he remarked, “Thanks, but the old noodle is giving out.  Doctor says I’ve got dementia.”  His wife nodded in vigorous affirmation.  She added, “He goes to the store with a list, but always messes it up.”  She was not trying to be hurtful—rather, she just wanted me to know how things really sit.  This time, he nodded in animated agreement.

They have been clients for years, and they had urgently called to “get their affairs in order.”  He has his brain scan results, and she has emphysema and COPD.  She has already signed a DNR for herself.

As I listened to the facts, she threw me a bombshell.  “I heard about the five-year Medicaid look-back rules, so I cashed in my IRA and gave $10,000 to each of our four adult children.”  I gulped and said, “That was a mistake.  Based on what you have told me about your health and your assets, it is highly likely that one of you will need nursing home care before 2015.  Your gifts to your children will create a six- to eight-month penalty period of ineligibility for Medicaid nursing home benefits.

She asked, “What should we do?”

I answered, “You should call your family members and tell them that you made a mistake and to please give you back the money.”

Her look told me that she would never do that.

Her husband said, “We screwed up, huh?  We should have called you first.”

Most elderly clients who give away money due to a medical crisis will need long-term care within a short period of time.  If you know a client or a client family member who is thinking about giving away assets “to protect them from being lost to nursing home expenses,” please tell them to call an elder law attorney first.  Our firm can be reached at 630-585-5200 or rick@lawelderlaw.com

A number of times I have had clients tell me that they love their adult children, but  they have a child who has chosen a destructive lifestyle.  Sometimes it’s a mental health issue, or sometimes it’s just a matter of making very bad choices.  These parents do not want to abandon any of their children—but they also do not want to give money to fuel the fire that is consuming their child.  They come to me and ask me what to do.  These are not persons with a legally defined disability—but they will squander all of their inheritance unless their parents find a way to provide “lifetime love and protection” over estate assets.  The answer is what I call the Lifetime Love and Protection Trust (LPT).

A Love and Protection Trust is designed to be a legal tool to provide protection, motivation, and encouragement for an adult child who is unable to make careful and supportive decisions with his or her money.  The LPT works to ensure that your investment in your adult child is used to further your caring purposes, positive values, and enduring concerns for his or her well-being.

A professional trustee will follow your written trust instructions and safeguard your property to benefit your child.  Trained investment professionals will safeguard the money and work to maximize a reasonable and profitable return on the assets that you have left to be invested.  By law and by the trust document itself, the trustee must make prudent and intelligent decisions to protect your child and your trust monies.

Unfortunately, it happens all too often that adult children squander their entire inheritance unless you take control and help them by making a final gift of love and protection by using a lifetime trust.  The LPT prevents an adult child from foolishly spending, wasting, and losing your hard-earned estate.  Your investment in your child is protected from creditors, failed marriages, and other predators.

Some adult children consistently make destructive choices and therefore are extremely vulnerable to creditor lawsuits and many other types of legal claims.  An LPT can be designed to discourage substance abuse and to provide for the special needs of your adult child.  You can and should build protective walls around the legacy that you have chosen to leave your child.

Build a fortress with this trust.  At its most basic, a love and protection trust will be there for your child long after you are no longer able to be directly involved.  Your legacy of love, protection, and sound investment management will give your adult child the best chance to still have money available if and when he or she eventually chooses to seek help to make a positive life transformation.

 During the year we get referrals from a number of financial advisors.  During 2008 I had the pleasure of working with Rocky Greene as he held the hand of one of his clients who was beginning to slip into the early stages of dementia.  Because of his proactive concern for his clients and at great expense of time, he worked with his clients (a husband and wife in their 70’s) and their adult children in helping them to modify their existing estate plan into a long-term care plan with asset preservation for the healthy spouse and appropriate distributions for the children at the time of the death of both of the spouses.  I decided to give Rocky a call to ask him what was going on in the financial investment world from his perspective.  What follows are some of the things that he had to say.

There are four crucial areas of investment management, all of which need to be addressed to have a truly healthy financial plan for the future:

Level of Risk.  When someone asks Rocky about investment management, he counters by asking them a question right back: How you are going to manage your money, not only in an up market, but also in a down market, or in a sideways market?  The key to getting the most out of your investments is not by blindly following your financial advisor, but by doing what is right for you.  The key to good investment management is communication.  Individuals need to be able to share with their financial manager what level of risk they are willing to tolerate.  Some will be comfortable playing the market and hoping they’ll win big.  But for those who insist upon guarantees, an annuity may be the best choice available to them. 

Proper Insurance Planning.  No matter what your level of risk, investment management also includes the having proper insurance for any of life’s risks.  This includes not only the obvious, life insurance, but also the less obvious: long-term care insurance, and appropriate liability insurance in the event that you are sued. 

Estate Planning.  It is absolutely critical that you put together a proper estate plan so that your inheritance goals will be properly structured in writing, not only from a tax standpoint but also to determine who is in charge.  Every person, regardless of the size of his or her estate, needs to take the time to put together a plan with directions to loved ones, detailing not only what should be done, but what should not be done with the worldly assets that are left behind. 

Medicaid/Public Benefits Planning.  Lastly, Rocky believes that Medicaid/public benefits planning is essential!  In today’s environment, even a $2 million net worth individual or couple can have their life savings completely destroyed by failure to properly plan for long-term care.  These days, when you have the very real possibility of one or both individuals needing long-term care for 8 to 12 years, it is easy to take an estate from $2 million or more to absolute zero in that period of time.  To avoid this, you need more than basic planning—you need long-term care planning as well.

A healthy body isn’t achieved by fixing one aspect of your lifestyle and then stopping; it includes giving attention to diet, exercise, mental health, and environmental factors.  Neither does a healthy financial plan stop after making a change in just one area.  You must give attention to all the components of your body of investments to have a truly healthy financial portfolio.

**  Rocky Greene can be reached at Greene Financial Services in Naperville, IL, e-mail rockyg@wideopenwest.com.

It happened again today. One of my clients said, “We have lost so much in our mutual funds that I should just sell EVERYTHING and start over.”  I asked him, “How do you know that you have a taxable loss?”  He looked at me and replied, “Everybody knows that the whole market is down by at least 40%! That’s how I know.”

Many seniors are panicking and making big mistakes in dealing with investment losses.  The two main errors made are:

• Thinking that perceived investment losses are the same as tax losses; and
• Failing to understand that any withdrawal from an IRA, 401(k), or 403(b) will always be treated as ordinary income. 

In today’s blog we’ll tell you how to avoid falling into these two traps.

The loss our client feels is what I call the “the quarterly statement loss,” but it is not usually the same as a taxable loss. If you ignore Mr. Taxman’s rules, you could wind up compounding your losses.  The way to compute a taxable loss is to look up what you originally paid for an asset and compare that purchase price to the current sale price.  Let’s say that your rental property would sell today for $200,000, but in 2007, it would have sold for $300,000. What kind of a loss have you suffered?  Does the tax-man think that you have a loss?  The answer is, no!

If you bought your investment real estate at $300,000 in 2007, and in 2009 you sell at $200,000, then Mr. Taxman will agree that you have a long-term capital loss of $100,000 (please assume that we are ignoring depreciation and other adjustments).

But, if you are like most of my senior clients, you may have purchased the asset a long time ago at a price that is lower than today’s sale price.  If you sell today, you may have a significant tax bill, even though you feel like you have ‘suffered’ a loss of value.

For example, if you bought the rental property in 1975 for $50,000, the actual gain or loss will be computed from the original sales price (less any depreciation that you took as a deduction on an annual basis) compared to the current sales price.  So, if you sell that property now, you will be looking at a significant taxable gain. 
 
The tax loss magnification is even greater when someone tries to cash out their perceived losses in an IRA.  My friend Rudy Beck, a St. Charles, Missouri elder law attorney, recently shared a horrifying story of how a 58-year-old client created a taxpayer’s nightmare because she cashed out her IRA due to her perceived losses.  The client’s “very knowledgeable” daughter had advised her to sell 100% of her IRA investments.  She liquidated $150,000 of mutual fund investments with the expectation that she had a “$55,000 loss.”  Attorney Beck had to tell her that she had created 2008 taxable ordinary income of $150,000 AND a 10% early withdrawal penalty of $15,000.  It’s critical that you remember that money in your IRA represents deferred wages.  No matter when or how the money comes out of your IRA, it will be treated as if you are now receiving those wages.  You pay the income tax rate to the federal and state government.  The government never allows you to treat IRA withdrawals as a tax loss.

The majority of people have better things to do in life than study either investments or taxes, so please seek the advice of tax professionals before you assume that your “investment losses” are also “tax losses.”

It is no secret that senior citizens are the wealthiest segment of the U.S. population. Much has been written and said about the trillions of dollars that will ‘change generational hands’ as the current seniors pass their wealth to their children/grandchildren. Unfortunately, seniors have to contend with a dirty little secret that was put in place by the current Republican administration when they passed the Deficit Reduction Act of 2005 (DRA).

The DRA made changes in the way that the government will punish seniors for acts of both charity and giving. The Medicaid rules presume when a senior makes a charitable or family gift, that the gift was an attempt to get rid of excess assets in order to qualify for Medicaid nursing home expenses. That’s right—seniors are guilty until proven innocent. The burden of proof is on the seniors to show that when they gave money to their church or child, that they had some other reason than to qualify for Medicaid.

This DRA rule creates a cruel penalty of ineligibility for Medicaid services if and when a senior who gave away money needs nursing home services at any time within 5 years after the gift. Our government has created a punishment for seniors who may suffer chronic long-term illness within 5 years after a gift.

As long as this law is in place, seniors must remember that the IRS gift tax rule allowing gifting up to $13,000 tax-free is only a tax rule. Giving away $13,000 may cause a senior to suffer a loss in nursing home coverage of 2 to 3 months if they need such assistance within 60 months after giving that money away. Thanks to our government, giving may now be hazardous to your health…care!

Artwork by Rhiannon Richardson of the Neighborhood Center of the Arts

What do you do if you’re an elderly parent still caring for a disabled child who can’t care for him or herself?  Last week I wrote about “empty nesters” who have never really had an empty nest. These are parents of children with disabilities such as autism, cerebral palsy, hearing loss, mental retardation, vision impairment, muscular dystrophy, genetic and chromosomal disorders, Down’s syndrome, and fetal alcohol syndrome, to name just a few.  Some disabilities are apparent at birth, and others are caused by accidents or manifest themselves as mental illness later in life, but the end result is the same:  The child is being cared for by a loving parent who worries about who will provide care for that child once the parent is gone.

The most common advice of the attorney who does not practice in the area of special needs trust planning (or what we prefer to call Tender Loving Care (TLC) Trusts) has been for the parent to disinherit the child.  Disinherit means to make sure you leave that disabled child with absolutely no allocation of money directly.  This gives the simplistic idea that one should just leave extra money to one of the other children who will provide care for the disabled child and money management.  Even in the best of families, this is usually a disastrous idea for the following reasons:

• It’s extremely difficult for an individual who receives extra money not to comingle that money with their own, and eventually treat it as their own.  That money would become available in the event that the healthy child becomes divorced or is otherwise subject to loss to a creditor.
• In many families the dynamic is such that the healthy children have some anger or resentment toward the disabled child because that sibling got more attention.  Thus, healthy children may not want the role of caregiver and banker for their disabled sibling.
• And most unfairly, leaving money to one child for disbursement to another child puts a target on the back of the healthy child, in that all complaints and concerns about money will be directed to that individual.

It is the job of the elder law and special needs attorney to assist families like this in developing proper planning so that we can help the parents to create a better way to manage both money and care after they are gone.

A TLC Trust is designed to work in partnership with any public benefits such as Supplemental Security Income and Medicaid.  It is a way for parents to leave money for the needs of their child beyond what public benefits would pay.  A TLC Trust can provide supplemental care for recreation, social activities, pets, special therapies, entertainment, and even vacation opportunities for a child by the use of trust money.  A TLC Trust can also purchase professional care management, which can enhance not only the dignity, but the quality of life of a disabled child. The TLC Trust is a far more loving and caring solution to the challenge of providing for a child with special needs.

Please don’t disinherit your child with a disability; contact an elder law attorney who can assist you in designing a custom plan to meet the very special needs of your child, so that he or she can be given tender loving care after you have passed away.

Alton Nichols and Betty Hall, Photo by David Lassman

Recently, the child of one of my clients told me about a wedding her parents had attended. The wedding was that of a giddy-in-love senior citizen couple. The groom was 82, the bride 87; both living at the same long-term care facility. The bride was heard to gush, “I wanted to marry a younger man this time.”

Love and marriage is wonderful (as is obvious from the photo of Alton Nichols and Betty Hall, pictured above) but for senior citizens it raises very different issues than it does for the young and newly married. One obvious issue is the fact that most seniors already have adult children, and many of those adult children are quite vocal in their concern about their mother or father becoming involved in a new love life. Before mom or dad get married, many children want to make sure that their inheritance is protected.  To that end, many seniors use wills or trusts which direct that assets go to “my kids and grand-kids,” or create pre-marriage-property-settlement agreements (pre-nuptial contracts) which require that the pending bride or groom give up any interest in their new spouse’s assets.

Despite these attempts to safeguard assets for the original families, there is another hidden danger to the family wealth whenever a senior chooses to wed. A trust or pre-nuptial agreement does not protect the assets of one spouse from being drained to pay for an ill spouse’s medical costs, including long-term care costs. The “Common Law of England” required long ago that husbands and wives be legally responsible to pay for each others’ necessaries, and our own government adopted that requirement. Included in those “necessaries” are food, housing, and yes: healthcare. This includes the cost of care when someone is diagnosed with Alzheimer’s, Parkinson’s or any other long-term illness.

To protect themselves from this hidden drain on a lifetime of earnings, healthy vigorous seniors who are considering getting “hitched” must consider the wisdom of purchasing long-term care insurance and perhaps engaging an elder law attorney to assist them with longevity planning. All this must take place before your marriage, so that you have some idea of what your real risks are. Elder law attorneys have many creative legal solutions that go beyond the traditional estate planner’s basic will and trust, which merely deal with the distribution of your assets at the time of your death, avoidance of probate, and minimization of estate taxes.

If you are over 65 and considering saying “I do,” please recognize that you are also promising to pay for your new spouse’s future long-term care medical expenses. “In sickness and in health” is a standard line in most wedding vows, and the state of Illinoise takes that vow and makes it law. In the Chigaco metropolitan area the monthly cost for assisted living expenses ranges from a low of $2,500/month to about $6,000/month, and the cost for skilled nursing home care ranges from $5,500 to $10,000/month, or more.

With these numbers in mind, it’s good to remember that when you say “I do” what you’re really saying is “I’ll pay.”