Reducing Estate Taxes with Q-Tip

A Q-TIP Trust is a method used to minimize estate taxes payable by a married couple.   It is designed to allow both spouses to utilize their federal and state estate tax exemptions under current tax laws.  Here is how the Q-TIP trust works.

When the first spouse dies, the estate is divided into three parts:

1. One part, an amount up to the Massachusetts estate tax exemption allowed by law, is placed in a “credit shelter” trust. In 2011, this amount is $1,000,000.  The assets placed in the credit shelter trust escapes estate taxation.

2. One part, an amount up to the difference between the state estate tax exemption and the federal estate tax exemption is placed in a “marital trust.”  For 2011 and 2012, the federal estate tax exemption is $5,000,000.  However, this amount is scheduled to drop significantly in 2013 if Congress does not address the federal estate tax laws.

There is no tax paid in the estate of the first spouse to die because of the unlimited marital deduction.  However, such property is includible in the surviving spouse’s subsequent estate for estate tax purposes.  On the death of the surviving spouse, any assets remaining in the marital trust is subject only to Massachusetts estate tax and not federal estate tax.

3. Any remaining assets in excess of the federal estate exemption amount may be passed directly to the surviving spouse or placed in another marital trust and held for the benefit of the spouse. In either case, because of the unlimited marital deduction, this portion also escapes estate taxation, regardless of its value, on the death of the first spouse.  Any assets remaining in the marital trust or includible in the surviving spouse’s subsequent estate will be subject to both Massachusetts and federal estate taxes.

CREDIT SHELTER TRUST

The surviving spouse may receive income for life from the credit shelter trust. The trust is usually established so that the principal that was deposited in the trust at the first death is retained for later passage to heirs when the surviving spouse dies. In addition to receiving income, the surviving spouse may be given liberal rights in the trust that allow her or him to:

• Serve as the sole trustee of the trust during his or her survivorship years.
• Withdraw principal for purposes of health, education, support and maintenance.
• Exercise a limited power of appointment over the trust principal, i.e., spouses may be able to appoint the principal to anyone except themselves, their estates, their creditors, or the creditors of their estates.
• Withdraw annually the greater of $5,000 or 5% of the principal.

The surviving spouse, however, need not be given any control over, or rights to, trust principal.  The fact that the trust can be drawn so as to give the surviving spouse literally no control or rights to the trust principal means that the decedent spouse may lock in his or her desired remainder beneficiaries under the terms of the trust.  Thus, the surviving spouse can be barred from diverting away the first decedent’s trust property to a spouse in a later marriage, children from a subsequent marriage, or the children of a later spouse.

The trustee or the surviving spouse may also have discretion to provide income and/or principal for persons in addition to the spouse, such as the children or others designated in the agreement.  There are also a wide variety of arrangements for disposition of the credit shelter trust upon the death of the surviving spouse.   When the second spouse dies, the credit shelter trust may terminate or continue. All assets remaining in the trust at the second death are either distributed outright to the heirs, or held in trust for the benefit of the heirs if the trust agreement so specifies. This latter arrangement is especially beneficial when the heirs are minor children or persons who have not demonstrated financial responsibility.

Despite the right to income and principal, the credit shelter trust is not included in the surviving spouse’s gross estate at death.  The assets remaining in the credit shelter trust pass estate tax free to the final beneficiaries.  This may provide a significant windfall to the final beneficiaries if the surviving spouse does not need to use the assets from the credit shelter trust and they continue to grow in value during the surviving spouse’s remaining lifetime.

MARITAL TRUST(S)

Upon the death of the first spouse, the surviving spouse is entitled to all income generated by the funds in the marital trust(s). The surviving spouse may withdraw principal for his or her health, education, maintenance and support.  He or she may also request the greater of $5,000 or 5% of the value of the principal annually.

The marital trust is less flexible than the credit shelter trust.  The assets in the marital trust cannot be distributed to anyone other than the surviving spouse during his or her life.  In addition, the surviving spouse is required to receive all the income of the marital trust.  Upon the death of the surviving spouse, any undistributed income passes to his or her estate, and the remaining principal is added to the credit shelter trust.

When the surviving spouse later dies, the assets remaining in the marital trust(s) will be taxed as part of the surviving spouse’s estate.  Thus, the estate tax on the marital trust(s) is merely deferred until after the surviving spouse dies. The balance of the marital trust(s) that remain after estate taxes are paid will pass to the final beneficiaries.

The surviving spouse will also still have his or her own estate tax exemptions.  The surviving spouse’s separate assets will pass estate tax free to the final beneficiaries up to the Massachusetts and Federal estate tax exemption amounts.  Anything over the applicable exemption amounts will be taxed.

To minimize estate taxes on the estate of the surviving spouse, the funds from the marital trust(s) should be used before using principal from the credit shelter trust.

Ensure you loved one receives care

When a parent ages and begins to need assistance with daily living, a child often voluntarily steps in to provide these services.  Typically, the child assumes the responsibility of taking care of the aging parent out of love or a sense of familial responsibility and without any promise of compensation.  However, some children may not be able to afford to stay at home and care for an aging parent.  Or the parent may insist on paying the child so as not to feel a burden to the child.  As such, a growing number of families are setting up caregiver contracts, in which family members are formally hired to take care of the aging parent.

A caregiver contract outlines the responsibilities of the caregiver and specifies the payment he or she will receive for their services.   Such a contract can both protect and benefit the parent and child.   It compensates the child for his or her time, money and effort spent on caring for the aging parent.  It can also help avoid any potential conflict between family members by making sure the work performed is fairly compensated.  A caregiver contract is often a better alternative than the parent deferring compensation for the child’s services until after death by leaving the caregiver child a disproportionately larger share of the parent’s estate.   There is a risk of unfairness with such a deferral, to the extent that the value of the child’s share may be significantly more or less than the value of the services performed.  Also, such a contract can alleviate claims by the other children that the caregiver took advantage of the parent.

For the parent, a caregiver contract can enable them to be cared for at home instead of in a facility. In addition, a caregiver agreement can be a key part of Medicaid planning.  A properly drafted caregiver agreement will protect assets from nursing home care costs and reduce the parent’s estate, which in turn will accelerate his or her eligibility for Medicaid long term care nursing home coverage.  Since the payments by definition are made in exchange for services rendered, they are not treated as gifts for Medicaid purposes in determining eligibility.  However, if the child provides services with no caregiver contract in place, Medicaid considers the services gratuitous.    If the parent compensates the caregiving child for services provided, Medicaid will impose a period of ineligibility.

Important Considerations for Caregiver Contracts

If the parent and child agree that the child will be compensated for services performed on behalf of the parent, the agreement must be in writing and executed by the parties before the services are rendered.    Informal, unwritten understandings between parent and child are common.  However, any monies passing from the parent to the child under such informal agreements are often viewed by Medicaid as gift from the parent to the child.  A gift disqualifies a person from receiving Medicaid benefits.   A properly drafted caregiver contract can prevent Medicaid from disregarding the value of the child’s services.

You should not attempt to write your own caregiver agreement.  It should be drafted by an attorney who specializes in elder law and who can tailor the contract terms to your unique situation.  These contracts are often scrutinized by Medicaid, Social Security and the IRS.  By working with an elder law attorney, you increase your chances of having the agreement approved by Medicaid without jeopardizing benefits.  An elder law attorney also will be able to help you comply with Social Security laws, income tax regulations and employment laws.

A good caregiver contract should clearly specify the rights and obligations of both parties, including what services are to be provided, the hours to be worked by the caregiver and the costs that will be incurred. The care that is provided may include driving to doctor’s appointments, grocery shopping, preparing meals, housecleaning, help paying bills and assisting with personal care.  Services can range from part time to round the clock care and supervision.   The contract should not state that services will be provided on an “as needed basis” because the fair market value of such services cannot be validated.  The length of time of the contract is usually for the parent’s lifetime.  In addition, the contract should define the duties of the caregiver during any period when the parent is residing in an assisted living or nursing care facility.

It is important that the terms of the contract are reasonable and fair.   A caregiver’s compensation rate should be comparable to what a third party would receive for the same services in your geographic area.  Excessive pay could be viewed as a gift for Medicaid eligibility purposes.   Any out of pocket expenses which will be reimbursed should be specified.  In order for Medicaid to confirm what services were provided, the caregiver should keep a daily log of the date services were provided, the actual services rendered and the amount of hours worked.

Payment to the caregiver can either be made with a lump-sum payment or in weekly or monthly installments.  If the caregiver contract is paid by lump sum in advance, the lump sum payment must be calculated by multiplying the caregiver’s hourly wage by the number of hours he is she is expected to work over the parent’s life expectancy.  The contract must also have a provision that provides for the return of any prepaid monies if the caregiver becomes unable to perform the specified duties.  Upon the death of the parent, any unearned amounts must be paid to Medicaid.

A caregiver contract may result in certain tax responsibilities to both parties. All income paid to the caregiver is subject to federal, state and employment taxes on the income earned.  In addition, the parent may need to withhold funds for federal and state employment-related benefits, such as worker’s compensation and unemployment. However, the parent may be allowed to deduct some of their caregiver expenses on their individual tax return as a medical expense. In some instances long-term care insurance may actually cover the costs of caregiver services.

Caregiver contracts are a valuable planning tool for aging parents who need help with their daily activities and have a child or other family member willing to provide the care.  They can ensure that the aging parent receives the care they need in the comfort of their home, compensate the child for providing the needed care to the parent, preserve family harmony, and minimize the aging parent’s estate without resulting in a penalty for Medicaid purposes.  In order for a caregiver contract to pass muster, it has to follow strict formalities.   The contract should be written as soon as possible and specify what duties the caretaker is expected to perform.  Compensation should be reasonable and the contract cannot be for past services already rendered.  Finally, the caregiver must comply with the contractual arrangement including paying appropriate taxes.

For assistance in drafting a caregiver agreement or for more information, please contact the Massachusetts Elder and Estate Planning professional Attorney Stephanie Konarski.

Long Term Care Insurance & Medicaid Planning

The cost of long term care can be devastating for many people.  In Massachusetts, nursing home care can cost as much as $10,000 a month, and receiving comparable care at home can be even more costly. Unfortunately, there are not very many options for covering long term care costs.

While many think that Medicare will help, the Medicare program only covers short-term rehabilitative services.  The result is that most people pay out of their own pockets until they become eligible for Medicaid.  To be eligible for Medicaid, you have to become “impoverished” under the program’s guidelines, which limit a beneficiary’s “countable” assets to $2,000. A Medicaid recipient’s home may be deemed exempt, but only during the applicant’s lifetime unless the home is sold.  After the death of a Medicaid recipient, an estate recovery claim for reimbursement can be made by the state Medicaid program.

Many seniors are concerned with preserving their home for eventual inheritance by their children. When applying for Medicaid benefits, however, there is a five year look-back period for individuals seeking nursing home care. Any assets gifted to children or other individuals within 5 years of the need for nursing home care will cause a period of ineligibility for benefits.  This generally means that a Medicaid beneficiary who has made a transfer will not be eligible for benefits until the expiration of 5 years from the date of the transfer.

Long term care insurance is often the best solution to the long-term care problem. Most policies now cover home care and assisted living care in addition to nursing home care.  A person may be exempt from Medicaid’s recovery rules if he or she purchases a long term care policy that meets certain specific minimum requirements at the time of nursing home placement.  However, many seniors cannot afford to maintain lifetime long term care insurance coverage.  Others wish to transfer assets but do not have enough funds to cover five years of private pay care if a medical crisis struck within the five year period after the transfer.

If long term care insurance cannot be afforded on a long-term basis, the only way to preserve the home from Medicaid is to transfer it subject to the look back period.  However, one option is to transfer the home and then purchase a long term care insurance policy on a short-term basis. The individual would purchase a policy with the smallest benefit necessary to cover nursing home care with a benefit period of five years.  The amount of insurance to be purchased would depend on the senior’s income and other assets. If the senior falls ill during the five year look back period, he or she would have the long term care insurance to cover the cost of the nursing home care or at home care. After the five years have passed, the Medicaid penalty for transferring assets will have expired and he or she can then decide whether to continue the policy.   If this same individual had not purchased the insurance but transferred the home, he or she would not be eligible for Medicaid benefits until the expiration of the 5 year look back period.  The individual would then either have to “cure” the transfer, subjecting the home to a MassHealth lien, or pay privately for his or her long term care needs.

It is no surprise that while long term care insurance premiums can be expensive, they are often more cost effective than paying out of pocket for care during a penalty period or subjecting your home to a Medicaid lien. When anticipating long term care needs, you should speak with a qualified elder law attorney to help determine the best way to plan for your future needs.

Alternative To Nursing Home

A nursing home is not the only solution for an elderly person in poor health or simply needing assistance with daily living. There are a lot more opportunities for care today than there were 20 years ago and not all of them cost as much as one might think they do.

The rise in supportive housing opportunities has made life easier on an every growing number of people in need of assisted daily living. Some examples of supportive housing are as follows:

• Board and Care Facilities- a group of residences than can range from two to 200 residents. Also called residential care facilities, board and care facilities provide room and board, 24 hour care, and security, without the loss of freedom or dignity. Board and Care facilities provide assistance with eating, dressing, bathing, moving around, remembering and taking medications, using the telephone and many other things a resident might require assistance with. Usually board and care facilities do not offer medical services. The cost of rent at a board and care facility ranges from as low as $300 a month to as much as $3,000 a month.
• Assisted Living Facilities- very similar to board and care facilities, but with more “home-like” facilities. Often utilizing small apartments for housing, assisted living facilities provide a more personal environment and usually offer more entertainment, recreation, and medical supervision than board and care facilities and because of this the cost of assisted living facilities tends to be more. Assisted living rent can Cost from $1800 a month to $6000 a month.
• Continuing Care Retirement Communities (CCRCs) – an all-in-one assisted care facility. CCRCs offer a vast array of care at varying levels, from assisted living to round-the clock nursing services. CCRCs offer the unique opportunity for residents to increase care as necessary while living in the community.  Meals, housekeeping, and maintenance are usually provided by CCRCs.  The living quarters of a CCRC can range from garden apartments and cottages to urban high-rises and single-family homes, giving the resident more of a chance to feel at home and making living at a retirement community more enjoyable. CCRCs can be very expensive. Often with large entrance fees that range from $20,000 to more than $50,000, followed by a monthly fee from $200 to $3,000.

Moving into an assisted community can be very stressful and takes a lot of thought and careful consideration, but finding the right solution can be the difference between happiness and regret.

Social Security Misconceptions

Social Security benefits are often confusing, vague, and based on the situation of the individual involved. This makes Social Security hard to understand and it makes it difficult to find accurate information about Social Security as well.

Since it is difficult to find accurate information about Social Security there are several misconceptions about these benefits that get passed along from person to person. Some of these include:

• Social Security gives less money to an individual than they paid into Social Security while they were employed- the current Social Security payroll tax is 12.4 percent on an income of up to $106,800 a year. Meaning someone receiving benefits today will have paid a substantially lower amount than they are receiving from Social Security.  Whether or not current workers will receive the amount they paid into Social Security depends on a few things; whether or not they are married, the amount of wages they earned, and how long they live are some examples.
• Social Security is going to collapse or run out of money- one day in the future, revenues from payroll taxes received from Social Security benefits may be surpassed by the amount paid to people receiving retirement benefits, but that does not mean the system will go bankrupt. At this point in time benefits may have to be suspended, postponed or differences will need to be made up from federal tax revenues.
• The less a person earned in their lifetime the lower the amount they will receive from Social Security- when a retired worker’s benefits are determined, the Social Security Administration decides on a primary insurance rate or PIA based on their earnings over 35 years; rating the average of the first few hundred dollars of average monthly income highest and any income over $4,483 a month lowest. This is done to give the lower income workers a higher benefit relative to the ones that had a higher income.
• The money paid into Social Security from payroll taxes could be better invested individually- it would be difficult for the sole or primary wage earner of a married couple to beat the extra 50 percent in Social Security Benefits that they could receive for their spouse with a personal investment done on their own.

Social Security benefits are a reliable form of support for someone disabled or unable to work and most retirees receive back a significantly larger amount than they contributed and are able to live with less stress knowing they are receiving benefits they deserve.

A plan that was proper a few years ago (or even yesterday) may no longer be appropriate today.  It is important to review your estate planning documents at least every 3-5 years to make sure that they are accurate, reflect your current wishes and are still effective.  An estate plan should be reviewed more frequently when changes in the law or life circumstances dictate such a review.  Below are some common situations when you should dust off your estate plan and make sure it still meets your objectives.

Marriage. A change in your marital status requires significant changes to your estate plan. Pre-marriage documents often do not reflect your post-marriage intentions.  Although Massachusetts provides that a surviving spouse receives some assets of the deceased spouse where there is no will, your spouse may receive less than what you intend him or her to inherit.  The amount the surviving spouse is entitled to differs depending on whether there are children of the marriage or the deceased spouse and, if there are no children, whether there are surviving parents or siblings of the deceased spouse

It is also important to recognize that, in Massachusetts, marriage is a revocation of any will made prior to such marriage, unless it appears from the will that it was made in contemplation of marriage.  This means that your old will won’t be of any use unless you inserted a “contemplation of marriage” clause at the time of execution.

Fiduciaries and beneficiaries named in your estate plan documents and beneficiary designations on bank accounts, retirement accounts, life insurance and other accounts should be reviewed.   You may also wish to consider a prenuptial or postnuptial agreement or trust to clarify rights upon divorce or death, especially if either spouse has children from a previous marriage or has family wealth set aside for future generations.

Divorce. When a marriage ends, most people’s objectives change.  They do not want their ex-spouse to be a beneficiary, executor, trustee etc. They also do not want the ex-spouse to have control over assets that are left to their children.  However, just because you’ve divorced does not mean that your spouse is automatically disinherited.

As part of the divorce process, your estate plan should be replaced or revised to remove your former spouse as beneficiary and/or fiduciary; beneficiary designations on your life insurance and retirement plans, including IRAs and 401(k)s, should be updated to remove the former spouse; and jointly owned assets with your former spouse should be retitled.

Change in Financial Status. A change in your financial status may require significant changes to your estate plan. For example, if you recently won the lottery or received a large inheritance, you will need to reevaluate your plan to determine whether your estate is taxable for both state and federal purposes.  If so, you will likely want to revise your plan to minimize these taxes. On the other hand, if your estate has declined in value, you should review your plan to insure that it still makes sense in light of your lower net worth.

Change in Assets. You should review your estate planning documents if your assets significantly change.  For example, if you acquire a new business, then you should revise your plan to reflect how your business assets will be disposed.  If you now own substantially different real estate or other illiquid assets, you will also want to consider revising your documents.  If you purchase real estate out of state, you may want to consider updating your documents to avoid probate in the other state.

Birth or Death of a Beneficiary or Fiduciary. If you or a beneficiary has had or adopted a child, you should review your plan to insure that the new child is included.  For example, if you have named children specifically and not as a class in your will, you will need to make sure after born children are included if you want those children to inherit.   You may also wish to name a guardian and set up a financial trust for the economic well being of your children should you pass away before they reach the age of maturity.  The birth of a beneficiary may lead to other significant changes in your estate plan, such as life-insurance coverage and a 529 plan or other higher-education funding vehicle.

On the other hand, if a beneficiary or fiduciary named in your estate plan has died or has become incapacitated, then you should considering updating your plan to remove that person’s name and/or insure that replacements are appointed.

Changes in Lives of Beneficiaries or Fiduciaries. While significant changes in your own life may require changes in your estate plan, so will changes in the lives of your beneficiaries or fiduciaries.  For example, when your children reach the age of maturity, you may wish to change the way in which money or property is provided to them.    You may also decide to name one or more of your adult children as your fiduciaries.

As time passes, the people you named as beneficiary or fiduciary may no longer be appropriate choices.  If a beneficiary or fiduciary moves away or you lose touch with them, you may want to reevaluate your plan to insure that your property is still going where you want it to go and that the fiduciaries you named are still the best choice.

Disability or Illness. If you or a beneficiary becomes seriously ill or disabled, you may wish to revise your estate plan to accommodate the increased need of that individual.  This is especially true if a beneficiary has special needs and receives government benefits.  You will want to consider a Special Needs Trust to protect assets for the disabled beneficiary without disqualifying him or her from receiving government benefits.

As you and your spouse age, you may also want to consider the financial ramifications in the event that you or your spouse may require long-term nursing home care.  You may want to update your estate plan to insure that some portion of your assets is protected from nursing home spending.

Change in Residence. Although estate planning documents are typically valid from one state to another, each state has different laws about what the documents need to include and how they need to be signed.  For example, some states require more witnesses to a will than others.  Other states do not recognize hand-written wills.  When you relocate to a new state, you ought to review your estate planning documents to ensure they are legal in your new state.

In addition, different states have different estate taxes and you may need to revise your documents to account for the different tax structure.  For example, if you move from a state that imposes an estate tax to one that doesn’t, or vice versa, then you may wish to update your plan to account for a change in the taxable status of your estate.

Change in Estate Tax Laws

Whenever there is a significant change in either federal or state estate tax laws you should review your will and determine if the change affected your tax liability.

Estate planning is not a lifelong process.  It is important to review your plan as your life, the lives of your beneficiaries and fiduciaries and the laws change.  If it has been awhile since you have reviewed your documents, you should contact a qualified estate planning attorney to review your plan to ensure that your assets, spouse and children are best protected.

The normal retirement age for receiving full Social Security retirement benefits varies, depending on when you were born.  If you were born before 1937, your full retirement age was 65.  For those born after 1937, the retirement age gradually increases until it reaches age 67 for people born in 1960 or later.

If you opt to receive benefits between age 62 and your full retirement age, your benefit amount will be reduced based on the number of months you receive benefits before you reach your full retirement age.   For example, if your full retirement age is 66, the reduction of your monthly benefits at age 62 is 25%; at age 63, the reduction is about 20%; at age 64, the reduction is about 13.3%; and at age 65, the reduction is about 6.7%.

If you delay receiving social security benefits until after full retirement age, your benefits will increase in the form of delayed retirement credits.  These annual increases apply for each year that you delay retirement, up until the age of 70.  Generally, your benefit will increase by 6% to 8% for every year that you delay.   For example, if your full retirement age is 66 and you delay taking benefits until age 70, your annual percentage increase in benefits will be about 8 %.  By delaying your benefits by 4 years, your Social Security check will be 32% higher than the amount you would have received at age 66.  If you want to get an idea of your projected benefits at age 62, full retirement age and age 70, you can review your annual Social Security statement which shows these estimated benefits.   The Social Security Administration also offers online calculators to help you estimate your retirement benefits at each age.  You can go to www.ssa.gov and under “Retirement,” click “Calculate Your Benefits.”

So when is the best time for you to claim Social Security benefits?  More than 2/3rds of people take their benefits early.  Some people may take early benefit because they need the money or they are skeptical of the future of Social Security or they are fearful of a short life span.  Whether early retirement is a good option for you depends on whether you plan to keep working, your health and life expectancy, your spouse’s needs and the availability of other retirement plans.

Below are some factors you should consider as you decide which retirement age is best for you:

• Whether you plan to keep working. If you plan to work until your full retirement age or beyond, you may not want to claim early retirement benefits.  If you are earning considerable income, you will miss the opportunity to boost your Social Security payment amount.  Your monthly payment amount is fixed based on the average of your top 35 earning years.  Once you elect to receive benefits, you cannot continue to increase your average based on later Social Security contributions.  In addition, if you continue working and elect to receive benefits before full retirement age, you will face a potential reduction in benefits.  For every two dollars you earn above the annual income limit ($14,160 in 2011), there is a $1 reduction in your Social Security benefit.   There are no such deductions if you work after reaching full retirement age.  However, any income you earn above Social Security income limit will be taxed.  Not only will you be receiving reduced benefits, but you will pay tax on the income as well.

• Health and life expectancy.  Taking Social Security early reduces your benefits but also means you will receive checks for a longer time.  Taking Social Security later results in fewer checks during your lifetime but the checks will be larger.  However, to get the full advantage of delaying benefits, you will need to live past the “break-even” age.  The break even age is the age you must live so that the value of benefits received before reach full retirement age (or later) offsets the benefits that are forfeited by waiting to claim.   If you die before the break-even age, you win by having taken early benefits.  If you live beyond the break-even age, you have lost by taking early benefits.

You cannot predict exactly how long you will live, but if you are healthy and think you will live longer than the average life expectancy, than you may receive more benefits if you delay taking benefits.  On the other hand, if you are in poor health or have reason to believe you will not beat the average life expectancy, you may decide to elect to take an early benefit.

• Spouse’s needs. Another important consideration is your spouse’s needs. A higher-earning spouse might want to delay benefits as long as possible so as to increase the surviving spouse’s survivor benefits and provide additional protection to the surviving spouse. A surviving spouse can receive Social Security based on his or her spouse’s work record if that benefit is higher than what he or she would receive based on his or her working years.  Any increase in the higher-earning spouse’s income for delayed retirement is passed on in the survivor benefit for his or her spouse after his or her death.

Even if you delay taking your benefits past your full retirement age, your spouse can still take his or her spousal benefits anytime after age 62.  While you are still alive, your spouse may receive one-half of your full benefit if it would be greater than what he or she would receive from his or her own earnings.

• Other Sources of Income.  Claiming early benefits makes sense if you need the money for necessities.  However, if you have sufficient income or other investments to live on you may want to defer the benefits until full retirement age or later.  If you planned to invest the money, your investments would need to earn more than 8% annually to equal what you would make by delaying benefits until full retirement age.

There are many factors to consider when deciding the best age to receive Social Security benefits.  It is a highly personal decision that depends upon your individual circumstances.  You should consult an estate planning attorney and/or other financial professional to assist you in making your decision.

An irrevocable life insurance trust (ILIT) is a useful estate planning tool because it can be structured to give your spouse and/or children use of the policy proceeds while preventing the proceeds from being subject to estate tax.   Section 2042 of the Internal Revenue Code provides that the proceeds on any life insurance policy under which you are insured will be included in your gross estate (and thus potentially subject to estate taxes) if either (i) the proceeds are paid to your estate, or (ii) you own the policy, or (iii) if you do not own the policy outright, you have retained certain “incidents of ownership” at the time of your death.  Incidents of ownership include the right to change or add beneficiaries, the right to borrow against the policy’s cash value, or to cancel or surrender the policy.  By establishing an irrevocable life insurance trust, the insurance will be excluded from your estate because you will not own the insurance at the time of your death; rather, the trust will own the insurance.

An irrevocable life insurance trust can be accomplished two ways: (i) by transferring existing life insurance policies to the trust; or (ii) by the trust itself purchasing a new policy on the insured’s life.  There is, however, at least one circumstance in which an irrevocable life insurance trust will not reduce estate tax.  Under section 2035 of the Internal Revenue Code, if you own or have “incidents of ownership” on an existing life insurance policy on your life and give away the policy or release the incidents of ownership within three years before your death, then the proceeds will still be included in your estate.  The purpose of this three year rule is to avoid last minute “deathbed” transfers to avoid estate taxes.   If the trust is properly drafted and the transaction of transferring an existing policy to an irrevocable life insurance trust is properly structured, it may be possible to avoid application of the three year rule.  However, it is usually preferable to have the trust purchase the life insurance policy in the beginning to avoid the three year rule altogether.

To save estate taxes, the trust must be named as both the owner and the beneficiary of the policies during your lifetime.   The trust must be irrevocable, meaning that you cannot retain any ability to revoke or amend the trust after it is established.  However, you can give a third party,  such as an independent trustee or Trust Protector, the ability to change the terms of the trust within the guidelines that you can set forth in the trust instrument.   You may also be able to retain the right to replace the trustee under certain circumstances, so long as the trust instrument prohibits you from naming yourself or a “related” or “subordinate” party as successor trustee.

You may not serve as trustee of an irrevocable life insurance trust holding policies on your life because the trustee powers given under the trust instrument and under state law are considered “incidents of ownership.”  It is also advisable that your spouse not serve as trustee.  If your spouse predeceases you, the value of the policy on your life may be included in your estate if you die during the course of administering the trust because you will be considered to hold the “incidents of ownership.”   The trustee of an irrevocable life insurance trust agrees to hold the insurance policies that you contribute to the trust, pay the premiums, collect the policy proceeds on your death, and administer them for the benefit of your spouse and/or children under the terms of the trust instrument.

In most irrevocable life insurance trusts, no income-producing property is transferred to the trust.  This creates an obvious problem in paying the premiums on the life insurance.    You cannot directly pay the premiums; rather, you should write a check to the trustee for the amount of the premium a couple of months before the premium is due. The trustee will then deposit the check into a trust bank account, send the required contribution notices to the trust beneficiaries, and then pay the premium when due from the trust bank account.

The policies and funds transferred to the trust are taxable gifts by you to the trust beneficiaries.  Gift tax can be reduced or eliminated, however, by drafting the trust so that the beneficiaries have a right for a limited period of time – generally 30 to 60 days – to withdraw property transferred to the trust.  This right is generally referred to as “Crummey” powers, which is a reference to the name of the court case which approved their use.  It is not intended that the beneficiaries exercise this right, but it allows the gifts to the trust to qualify for the annual $13,000 per-donee exclusion (2011 figure) from federal gift tax.  The withdrawal right is typically drafted to lapse if not exercised within the 30 or 60 days after notice of the contribution.

Each beneficiary’s right of withdrawal may be further limited to $5,000 in order to ensure that, under another provision of the gift tax law, the beneficiary is not treated as having made a gift by forfeiting his or her right of withdrawal.  As a result, the amount of annual premium that can be paid to the trust free of gift tax may be limited to $5,000, multiplied by the number of trust beneficiaries.  This restriction is not troublesome unless the annual insurance premium exceed $5,000 multiplied by the number of beneficiaries.  If the value of an existing policy transferred to the trust exceeds the annual gift tax exclusion, you can use a portion of your unified credit to shelter up to $1,000,000 from gift tax during your lifetime.

Each time a gift is made, whether it is a contribution of a policy or of cash for the premium payments, the right of withdrawal applies.   Each beneficiary must be given notice of his or her right of withdrawal.  Failure to inform the beneficiaries could result in the loss of the annual exclusion.  Notices should be given by the trustee on receipt of each gift for premium payments.  Because of this requirement and for convenience purposes, it is best to make one annual premium payment rather than monthly payments.

There are a number of reasons you should consider an ILIT:

No Loss of Control Over Income: An ILIT is an attractive alternative to other estate planning strategies that involve transferring substantial amounts of assets out of one’s estate.  Many people hesitate to transfer valuable income producing or business assets out of their control. They do not want to lose access to such assets and risk negatively impacting their financial situation.  Transferring a life insurance policy is easier.  While life insurance premiums must be paid, the proceeds are only payable to beneficiaries on death.  There is little fear that transferring the policy would deprive the owner of the benefit.

and it could negatively affect your financial situation.

Liquidity Creation: If an ILIT is structured properly, it can provide liquidity in an estate that is laden with illiquid real estate.  For example, let’s assume you own several pieces of real estate that are valuable but you have little cash when you die.  Because of this, it may be difficult for your beneficiaries to come up with enough money to pay the estate taxes that will be due when you die.  Your beneficiaries will be required to sell the property to pay the taxes.   An ILIT can pay a large estate tax bill without the need for selling assets.   It can create an instant source of cash for your beneficiaries.

Leveraging the Generation Skipping Transfer Tax Exemption: An ILIT can be used to leverage the insured’s Generation Skipping Transfer Tax (GSTT) Exemption.  In multiple-generation transfers (transfers to grandchildren or individuals removed by 2 or more generations), the IRS imposes a second layer of tax – the Generation Skipping Transfer (GST) tax.  However, there is a $1 million exemption amount. The GSTT exemption can be allocated to contributions of premiums.  This can make the entire trust exempt from the GST tax, allowing the trust to pass from generation to generation without triggering a federal transfer tax.   In addition, the GST may even be eliminated at final distribution if the amounts transferred to the trust appreciate and the trust receives considerable income over the years.  This means that if assets in an ILIT appreciate, grandchildren may take potentially significant amounts without incurring any additional GST or estate tax liability.

Protection from Creditors: By including a spendthrift provision in the trust document and granting discretion to the trustee in making distributions to the benefits, an ILIT can protect children and grandchildren from future creditors.  Moreover, if the ILIT is set up with investments or cash that the insurer doesn’t need to access, that amount can be protected from the insurer’s creditors.

Asset management mechanism: An ILIT can provide for ongoing management of assets under the terms of the trust.  The trustee may be given directions not to make distributions until the beneficiary reaches a certain age or unless they have demonstrated positive behavior.  The ILIT may instruct the trustee to withhold distributions in the event a beneficiary has a drug addiction, gambling problem, going through a divorce, filing a bankruptcy proceeding, receiving public benefits, etc.  The trustee can also be directed to pay for education, business planning, medical expense or other expenditures.

The ILIT is often a powerful and cost-effective estate planning strategy.  Often more attractive than strategies that require transfer of income-producing assets, an ILIT can provide for liquidity without requiring the sale of other assets, increase the size of the estate without increasing estate taxes, allow for transfers out of the estate with minimal or no gift tax consequences, and can provide for ongoing management of assets under the terms of the trust.

Before beginning your search, it is important to determine your parent’s needs and whether services such as meals, housekeeping, personal services and transportation are necessary.   Next, you need to determine how much your parent can afford each month and for how long.  Your parent’s service needs and financial situation will help you hone down the housing options available.

Below is a brief synopsis of some of the more common types of senior housing options available:

Independent Living Communities: Independent Living Communities, often referred to as Retirement Communities, Congregate Living or Senior Apartments, cater to seniors who are very independent and who wish to participate in recreational, social and wellness activities with other seniors.  Residents do not need a lot of help with activities for daily living (such as helping with getting dressed, bathing, transferring in and out of bed, and toileting). Residents often live in separate apartments.  These communities are designed for active seniors who desire the security and convenience of community living but want to maintain their independence. Some communities offer organized social and recreational programs as part of everyday activities while others provide housing with only a minimal amount of amenities or services.  Typical amenities include planned social activities, housekeeping and transportation.  Other activities may include swimming pools, exercise facilities, clubhouse, laundry facilities, and meals or access to meals.  Medical care is not provided, and if needed, residents will have to look outside the community.

Some Independent Living Communities have senior age-requirements (usually age 55 and older).  Residents typically pay privately for independent living, the cost of which is generally dependent upon the local market.  However, some senior apartments are subsidized and accept Section 8 vouchers.  Medicare and Medicaid do not cover payment because health care is not provided.

Assisted Living Facilities: Assisted Living Facilities are designed for seniors who cannot live on their own safely but do not require the high level of care that a nursing home provides.  These facilities aim to foster as much independence and freedom to the resident as possible in a private setting.  Assisted Living Facilities are a middle ground between independent living and nursing homes.  Most facilities offer 24-hour supervision and an array of support services.  Licensed nursing services are often provided.  Assistance with medications, activities of daily living and housekeeping are routinely provided.  Meals are provided in a main dining room.  Social activities, laundry, transportation and other amenities are also often included.

Although they offer limited nursing care, Assisted Living Facilities are not considered medical facilities. These facilities do not accept Medicare as payment.  There is a program to cover the costs of Assisted Living Facilities for very low-income disabled seniors who cannot safely live alone but do not need the level of care offered in a nursing home.  However, this program is not available in every facility.

Residential Care Homes: Residential Care Homes are also referred to as personal care homes, adult family homes, adult foster homes, or group homes.  These are private residences for three to six adults with fairly minimal needs.  Residential Care Homes are designed for seniors who do not want to live in a larger community setting but still require a level of assistance similar to that offered by an assisted living facility.   These homes often specialize in particular resident needs such as diabetes care, memory care, residents with special diets, residents who speak a particular language, residents of a particular religion or cultural background, as well as other needs.

Continuing Care Retirement Community (CCRC):  A CCRC combines the services of an independent living retirement community with an assisted-living facility and a nursing home at a single location.

Most CCRCs require a one-time entrance fee, which may or may not be refundable.  There are also monthly service fees.  These fees vary widely among CCRCs. In exchange for these fees, the resident receives the immediate benefit of independent living services, including social activities, dining services, housekeeping and health care.  This contractual agreement guarantees these services for a minimum of one year, but usually for the lifetime of the resident.

CCRCs also offer multiple levels of care, if the need should arise, for the rest of the resident’s life.   This continuum of care guarantees residents a life-long place to live. He or she will not need to move to another community if Assisted Living, Memory Care or Skilled Nursing Care is needed at some point in the future.   Assisted Living and Skilled Nursing Facilities make no such guarantees and may ask the resident to leave when they are unable to provide the care deemed appropriate for his or her medical condition.

Nursing Homes: Nursing homes provide around-the-clock skilled nursing care for seniors who required a high level of medical care and assistance.   Many nursing homes provide short-term rehabilitative stays for those recovering from an injury, illness or surgery.  Lo

ng-term care residents generally have a high care of needs and complex medical conditions that required 24 hour skilled nursing services.  Nursing home residents receive in-house medical care, rehabilitation, physical, occupational, speech and other types of therapies.  Personal care services are also provided along with social services, religious services and recreational activities.  Some facilities cater to those with Alzheimer’s Disease, cancer, dementia or other special health situations.

Payment options for nursing home care include private pay, Medicare (limited number of days), Medicaid and long term care insurance policies.

Home Care: Home care allows seniors to remain in their own homes while receiving the assistance they need to help them remain independent.  There is a wide range of home care services depending on the needs of the senior.  Professionals may visit the home on an agreed upon schedule or live in the home to assure that the senior is safe and his or her needs are met.  Home care typically involves providing assistance with activities of daily living, paying bills, making appointments and simply being there to provide companionship and emotional support.

In making the choice for the appropriate housing for your parent, you should gather as much information about his or her needs, preferences and finances as possible.  Many states have rating systems and licensure requirements for particular housing.  You may also want to consider an assessment by a geriatric care manager. Geriatric care managers can provide an assessment of your parent’s service needs, help guide you through the different types of senior housing, and ensure that an informed and responsible decision has been made.

The average cost of nursing home care nationwide is about $75,000 per year for a semi-private room (Massachusetts nursing home costs are above the national average).  This amount only pays for room and board.  Assisted living facilities can cost more than half the nursing home cost and home care can be less or more expensive, depending on the amount and level of care required.   Not surprisingly, paying for in-home care or nursing home care can exhaust a person’s resources leaving far fewer options when funds run out.  By obtaining long term care insurance, a person can often remain in their home far longer than without the insurance.  It may help ensure that a spouse or other family member does not become impoverished by the cost of care.  In addition, LTCI can protect all of the careful financial and estate planning that has been done by insuring that assets will not be depleted on long term care and can pass on to the next generation.

A person may be exempt from MassHealth’s recovery rules if he or she purchases a long term care policy that meets certain specific minimum requirements.  The minimum requirements for a policy to satisfy the MassHealth exemption rules include the following: (1) the policy must cover nursing  and custodial care in a nursing facility licensed by the Massachusetts Department of Public Health; (2) the policy must have available benefits of at least $125 per coverage day in a nursing facility; (3) the policy must have benefits sufficient to cover two years in a nursing facility; and (4) the elimination period may not be longer than one year.  For example, if you bought a three-year policy and use one-and-a-half years worth of benefits at home before going to a nursing home, the MassHealth Recovery Exemption will not be available, because you will not have two years’ worth of benefits in your policy when you enter the nursing home.

One of the most common questions people ask about LTCI is the cost.  The costs vary significantly, depending upon the applicant’s age and medical status at initial purchase, the amount of the nursing home benefit, the percent of home/community-based benefits, the duration of the policy, and the length of the elimination period (the deductible paid for by the policyholder before the policy starts to pay out).  If you purchase a “tax-qualified” policy, however, the premiums are tax-deductible to the extent that you spend in excess of 7.5% of your adjusted gross income on medical expenses.

Individuals age 50 or above should at least consider purchasing long term care insurance.  The younger an individual is, the lower the premiums will be and there is less of a chance that an individual will suffer from a health problem that could cause the premiums to be extremely high or prevent him or her from getting coverage altogether.  However, LTCI may not be appropriate for individuals that cannot pay premiums out of disposable income without changing his or her lifestyle significantly.

When evaluating a long-term care policy, the following factors should be considered:

Where can the care be provided? Many older LTCI policies restrict where the benefits will be triggered.  It is important to verify that the policy will cover a wide range of settings from care administered in your home by skilled professionals, to nursing homes, adult day care and assisted living facilities.

What types of caregivers can be paid by the policy? A policy should cover “skilled, intermediate and custodial care”, which would include someone who could assist with laundry and meal preparation.

What illnesses are covered? It is important to verify that illnesses such as Alzheimer’s are not excluded from coverage.

What is the trigger for qualifying for coverage? Most policies base qualification on cognitive impairment or the need for assistance in activities of daily living (dressing, toileting, eating, transferring, bathing and continence).  However, policies vary in the terms of how many ADL one must be unable to perform before coverage will start.

What is the daily benefit amount? The daily benefit is the amount that the LTCI policy will pay for home care, adult day care, assisted living or nursing home care.  The average private pay rate for a nursing home is $8,333 per month in Massachusetts.  This translates to roughly $274 per day.  The daily benefit amount should be $274 less the amount that can be paid from one’s income for care without significantly impacting one’s lifestyle or that of the spouse.   For example, if nursing home costs are $300 a day and one’s monthly income is $3,000, or $100 a day, then the daily benefit should be $200 a day.

What is the benefit period? The benefit period determines how long the LTCI policy will pay benefits.  This is often expressed in terms of a maximum dollar amount that the policy will pay. For example, a policy with a daily benefit of $150 per day and a lifetime maximum of $164,250 would provide three years of nursing home coverage at that level.   The shortest period of coverage available is two years.  Policies can be purchased for longer periods of time or for the insured’s lifetime.  The longer the policy’s coverage period, the more expensive the premium is.  However, most people do not need lifetime coverage.  The average nursing home stay is 2 – 3 years.  A good length of time is usually five years.  It is unusual someone to need care for more than five years.

What is the elimination period? The “elimination period” is the number of days that one must receive care that would otherwise be covered under his or her LTCI policy before the policy begins to pay benefits.  Long term care expenses must be paid privately during the elimination period.  Many policies have a 90 day elimination period for nursing facility benefits because this period of care may be covered by a Medicare supplement policy.  There is no coverage under a Medicare supplement policy for adult day care and assisted living care and very limited coverage under Medicare for home care.  Depending on one’s circumstances, a zero elimination period may be appropriate for home care, while a 90 day elimination period may be sufficient for skilled care.   Typically, the longer the elimination period, the lower the premium will be.

Does the policy provide inflation protection? This is an optional rider which helps to protect the insured from the rising costs associated with long term care.  An inflation rider increases the daily benefit amount by a fixed percentage annually.  What may seem like adequate coverage now may not be what one may need in 20 years if it does not keep up with inflation.  Purchasing a policy that fixes the daily benefit amount leaves the estate vulnerable to increasing costs of nursing care. On the other hand, inflation riders can significantly increase the annual premiums.

Does the policy notify a second person of any late premium payment? Many policies offer the option of naming a second person to receive notice of any late premium payment.  In the past, many policyholders stopped paying premiums due to the onset of cognitive impairment.  As a result, they lost the policies just when they needed them.  This option allows a second person, such as a child, to receive a 30 day notice before the policy can be terminated.  The policy allows the child to step in and save the policy before it is unintentionally terminated.

The above discussion is provided as general information only and does not constitute legal or investment advice. You should consult your attorney, financial advisor or qualified long term care insurance agent to evaluate any long-term care insurance product you are considering.