The Medicare prescription drug debate dominated media reports about health care costs in 2003, but there were many other critical developments that will significantly affect clients' planning opportunities in the coming years.

Health care costs, including government programs that finance long-term care such as Medicaid, have been and continue to be the single fastest-growing component of the federal government's and most states' budgets. The feds still are considering alternative approaches to help finance and defray the cost of long-term care. State legislatures are simply seeking aggressive reductions in services. State courts, meanwhile, have been taking a narrow view of seniors' rights to control their destinies.

THE FEDS

One of the federal government's priorities is to increase the use of reverse mortgages as a means of private-sector financing of long-term care expenses for the elderly, according to the Center for Medicare and Medicaid Services, the federal agency administering the Medicare and Medicaid Program. To that end, CMS has awarded a $295,000 grant (good from Sept. 30, 2003 through May 30, 2004) entitled “A Public-Private Partnership to Promote Reverse Mortgages for Long-Term Care” to the National Council on Aging, a nonprofit association based in Washington, D.C. with significant experience defining and developing long-term care issues. By encouraging greater use of private funds, the CMS hopes to reduce reliance on government-financed programs. But of course, if elders use reverse mortgages — which suck money out of their home values — there will be less money for them to pass on to their children. Increased reliance on reverse mortgages therefore means that, rather than the government paying elder-care expenses out of current tax revenues, the next generation is footing the bill.

In another effort to privatize the nation's elder care, the federal government is taking steps to encourage individuals to purchase long-term care insurance. Federal employees are able to purchase long-term care insurance at favorable rates. For some time, Congress also has offered tax incentives to some other citizens when they purchased long-term care insurance. But very few taxpayers are able to deduct all, or even a portion, of such insurance premiums under the current regime.

The Long-Term Care and Retirement Security Act, pending in both the House of Representatives (HR2096) and the Senate (S1335) at press time, would greatly expand the deductibility of long-term care insurance premiums. These bills would provide an above-the-line deduction for qualified long-term care insurance premiums. Under current law, such premiums are considered medical expenses and therefore their deductibility is limited by the applicable floor of 7.5 percent of adjusted gross income, and further restricted according to the age of the taxpayer. Pursuant to Internal Revenue Code Section 213(d)(10), the annual limitations are: $250 for individuals 40 years of age or less; $470 for those age 41 to 50; $940 for those age 51 to 60; $2,510 for those age 61 to 70; and $3,130 for those over age 70. By allowing for an above-the-line deduction, all taxpayers will be able to deduct the cost of long-term care insurance premiums.

THE STATES

State efforts to offload health care costs onto the taxpayer do nothing to help individuals ease their growing burdens. Connecticut, Massachusetts and Minnesota, for example, have filed requests for waivers under Section 1115 of the Social Security Act seeking federal approval for a reduction in long-term-care services. Such waivers originally were intended as mechanisms for states to provide additional — not fewer — services to its residents, while still maintaining partial federal funding for those services. (Such waivers are necessary because state Medicaid regulations must be consistent with their federal counterparts.)

The waiver requests filed by Connecticut, Massachusetts and Minnesota are perverse. These states seek waivers so they can essentially circumvent federal law, which strictly limits individuals' ability to transfer assets in order to qualify for government benefits. The proposed waivers go beyond the federal rules to even more severely restrict people's ability to transfer assets to qualify for benefits. In determining a person's eligibility for government-financed health care, all asset transfers during the 36-month period prior to the time of application for benefits must be disclosed.1 Uncompensated transfers are assessed a penalty period based on the value of the assets transferred and the state (or region) where the individual is seeking nursing home benefits. Pursuant to federal law, the penalty period commences either in the month the asset was transferred or in the following month, whichever the state prefers.2

However, a common thread of all three states' waiver proposals is that the penalty period would not commence until the person resided in a nursing home and applied for government benefits.

If approved by CMS, this delay would significantly hamper a person's ability to get much-needed health care and certainly would generate a court challenge. Of course, traditional planning strategies would need to be modified to account for these limitations.

The three states' waivers were each submitted as self-described demonstration projects to CMS, where they are pending. In other words, they're just the first foray of the states' campaign to reduce their expenditures on health care.

THE COURTS

While the federal and state governments seek to tighten purse strings, state courts have been cutting back on other rights. This past year, state courts limited the ability of incapacitated persons to engage in elder law planning. In Keri,3 a New Jersey appeals court blocked a son who is his mother's guardian from transferring part of her assets so that she would qualify for government benefits. If Mildred Keri had the capacity, she would have been able to make these transfers. But her dementia led her son to apply for guardianship and court permission to conduct her elder law planning. For some time, the laws of most states have recognized the right of an incapacitated person to engage in elder law and estate planning through a guardian.4 The Keri case has been appealed to the New Jersey Supreme Court and oral arguments were heard in the fall. If the New Jersey Supreme Court affirms, it will represent a significant reduction in the rights of those with disabilities and place an even greater emphasis on advance planning.

This multi-front attack on seniors' ability to access government-financed health care and control their lives can be expected to continue in 2004. It's imperative for advisors to keep abreast of these trends to ensure clients are presented with all available planning options.

Endnotes

  1. 42 U.S.C.A Section 1396p(c).
  2. Ibid.
  3. In the Matter of Keri (N.J. Super. Ct., App. Div., No. A-5349-01T5).
  4. See In re Shah, 694 N.Y.S. 2d 82, 86-87 (App. Div. 1999); aff'd, 733 N.E. 2d 1093 (2000).

Collectors' Spotlight

This clock made of red tortoise, gilt bronze and white enamel by H. Sarton a Liege circa 1775 sold for $14,485 at auction in October 2003 by Antiquorum.