IRS Issues Long-Term Care Premium Deductibility Limits for 2017

long-term care insuranceThe Internal Revenue Service (IRS) is increasing the amount taxpayers can deduct from their 2017 income as a result of buying long-term care insurance.

Premiums for “qualified” long-term care insurance policies (see explanation below) are tax deductible to the extent that they, along with other unreimbursed medical expenses (including Medicare premiums), exceed 10 percent of the insured’s adjusted gross income, or 7.5 percent for taxpayers 65 and older (for 2016; this rises to 10 percent in 2017).

These premiums — what the policyholder pays the insurance company to keep the policy in force — are deductible for the taxpayer, his or her spouse and other dependents. (If you are self-employed, the tax-deductibility rules are a little different: You can take the amount of the premium as a deduction as long as you made a net profit; your medical expenses do not have to exceed a certain percentage of your income.)

However, there is a limit on how large a premium can be deducted, depending on the age of the taxpayer at the end of the year. Following are the deductibility limits for 2017. Any premium amounts for the year above these limits are not considered to be a medical expense.

Attained age before the close of the taxable year Maximum deduction for year
40 or less $410
More than 40 but not more than 50 $770
More than 50 but not more than 60 $1,530
More than 60 but not more than 70 $4,090
More than 70 $5,110

Another change announced by the IRS involves benefits from per diem or indemnity policies, which pay a predetermined amount each day.  These benefits are not included in income except amounts that exceed the beneficiary’s total qualified long-term care expenses or $360 per day, whichever is greater.

For these and other inflation adjustments from the IRS, click here.  

What Is a “Qualified” Policy?

To be “qualified,” policies issued on or after January 1, 1997, must adhere to certain requirements, among them that the policy must offer the consumer the options of “inflation” and “nonforfeiture” protection, although the consumer can choose not to purchase these features. Policies purchased before January 1, 1997, will be grandfathered and treated as “qualified” as long as they have been approved by the insurance commissioner of the state in which they are sold.

When Can You Delay Taking Medicare?

MedicareWhile you are eligible to apply for Medicare when you are 65, there are circumstances where you might not want to, particularly if you are working full time for a larger employer or contributing to a health savings account. However, there can be penalties if you don’t sign up at the right time, so it is important to know when you can delay signing up for Medicare without facing a penalty.

You can first sign up for Medicare during your Initial Enrollment Period, which is the seven-month period that includes the three months before the month you become eligible (usually age 65), the month you are eligible and three months after the month you become eligible. If you do not sign up for Medicare Part B during this period, your Part B premium may go up 10 percent for each 12-month period that you could have had Part B, but did not take it. Your Medicare Part D premium will increase at least 1 percent for every month you wait. There is an exception to these penalties for some people who are still working.

If you work for an employer with 20 or more employees, you can usually delay signing up for Medicare Part B without penalty because your employer’s insurance will be considered the primary insurer. However, if your employer has fewer than 20 employees, you will probably need to sign up for Medicare Part B when you are first eligible or face penalties down the road.  Check with your employer to make sure your current insurer will expect Medicare to be your primary insurer.

If you are working or have other private insurance, you may be able to delay Medicare Part D without a penalty. Beneficiaries are exempt from the penalties if their insurance is at least as good as Medicare’s. This is called “creditable coverage. Your insurer should let you know if their coverage will be considered creditable.  You may also be able to avoid or delay getting Part D if you enroll in a Medicare Advantage plan that offers prescription drug coverage.

If you are working, you generally can enroll in Medicare Part A, which is free for most people, without consequences. However, if you are contributing to a health savings account (HSA) at work, you cannot sign up for Medicare. This is true even if your employer has fewer than 20 employees. Part A covers institutional care in hospitals and skilled nursing facilities, as well as certain care given by home health agencies and care provided in hospices, so you will need to analyze whether the HSA is worth losing out on the Medicare Part A coverage. If you are already receiving Social Security, you will be automatically enrolled in Part A, so you will have to stop contributing to the HSA.

How to Pass Your Home to Your Children Tax-Free

HouseGiving your house to your children can have tax consequences, but there are ways to accomplish it tax-free. The best method to use will depend on your individual circumstances and needs.

Leave the house in your will

The simplest way to give your house to your children is to leave it to them in your will. As long as the total amount of your estate is under $5.45 million (in 2016), your estate will not pay estate taxes. In addition, when your children inherit property, it reduces the amount of capital gains taxes they will have to pay if they sell the property. Capital gains taxes are taxes paid on the difference between the “basis” in property and its selling price. If children inherit property, the property’s tax basis is “stepped up,” which means the basis would be the value of the property at the time of death, not the original cost of the property.

There are some downsides to this plan. Some states have a smaller estate tax exemption than the federal exemption, so leaving the property in your estate may cause your estate to owe the state taxes. Also, if you were to need Medicaid at any time before you died, Medicaid might put a lien on the property and the property might need to be sold after your death to repay Medicaid.

Gift the house

When you give anyone other than your spouse property valued at more than $14,000 ($28,000 per couple) in any one year, you have to file a gift tax form.  But you can gift a total of $5.45 million (in 2016) over your lifetime without incurring a gift tax. If your residence is worth less than $5.45 million and you give it to your children, you probably won’t have to pay any gift taxes, but you will still have to file a gift tax form. 

The downside of gifting property is that it can have capital gains tax consequences for your children. If your children are planning to sell the home, they will likely face steep capital gains taxes. When property is gifted it does not receive a step up in basis, as it is when it is inherited. When you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient.

In addition, gifting a house to your children can have consequences if you apply for Medicaid within five years of the gift. Under federal Medicaid law, if you transfer assets within five years before applying for Medicaid, you will be ineligible for Medicaid for a period of time (called a transfer penalty), depending on how much the assets were worth.

Sell the house

You can also sell your house to your children. If you sell the house for less than fair market value, the difference in price between the full market value and the sale price will be considered a gift. As discussed above, you can use the $14,000 annual gift tax exclusion as well as the $5.45 million lifetime gift tax exemption on this gift. The same issues with gifts discussed above will apply to this gift.

Another option is to sell the house at full market value, but hold a note on the property. The note should be in writing and include interest. You can then use the annual $14,000 gift tax exclusion to gift your child $14,000 each year to help make the payments on the note. This can be tricky and you should consult with your attorney to make sure this won’t cause tax problems.

Put the house in a trust

Another method of transferring property is to put it into a trust.  If you put it in an irrevocable trust that names your children as beneficiaries, it will no longer be a part of your estate when you die, so your estate will not pay any estate taxes on the transfer. The house will also not be subject to Medicaid estate recovery.

The downside is that once the house is in the irrevocable trust, it cannot be taken out again. Although it can be sold, the proceeds must remain in the trust. Similar to making a gift, if you apply for Medicaid within five years of transferring the house, you may be subject to a Medicaid penalty period.

Figuring out the best way to pass property to your children will depend on your individual circumstances. Talk to your elder law attorney to decide what method will work best for your family.

Part B Premium Will Rise Slightly for Most Medicare Beneficiaries in 2017

Medicare providerThe Centers for Medicare and Medicaid has announced the Medicare premiums, deductibles, and coinsurances for 2017. After holding steady at $104.90 a month for four years, the standard Medicare Part B premium that most recipients pay will rise 4 percent to about $109 a month.  However, approximately 30 percent of beneficiaries will see their Part B premium rise from $121.80 to $134 a month, a 10 percent increase.  Meanwhile, all beneficiaries will face a higher Part B deductible, which will go from the current $166 to $183 in 2017.

The reason for the two different Part B premiums is that about 70 percent of beneficiaries are protected from any increase in premiums when Social Security benefits remain stagnant, as has been the case for the last several years. Medicare beneficiaries who are unprotected from a premium rise include those enrolled in Medicare but who are not yet receiving Social Security, new Medicare beneficiaries, seniors earning more than $85,000 a year, and “dual eligibles” who receive both Medicare and Medicaid benefits.

For beneficiaries receiving skilled care in a nursing home, Medicare’s coinsurance for days 21-100 will inch up from $161 to $164.50.  Medicare coverage ends after day 100. 

Here are all the new Medicare payment figures:

  • Basic Part B premium: $109/month (was $104.90)
  • Part B premium for those not protected: $134 (was $121.80)
  • Part B deductible: $183 (was $166)
  • Part A deductible: $1,316 (was $1,288)
  • Co-payment for hospital stay days 61-90: $329/day (was $322)
  • Co-payment for hospital stay days 91 and beyond: $658/day (was $644)
  • Skilled nursing facility co-payment, days 21-100: $164.50/day (was $161)

So-called “Medigap” policies can cover some of these costs. 

Higher-income beneficiaries will pay higher Part B premiums:

  • Individuals with annual incomes between $85,000 and $107,000 and married couples with annual incomes between $170,000 and $214,000 will pay a monthly premium of $187.50 (was $170.50).
  • Individuals with annual incomes between $107,000 and $160,000 and married couples with annual incomes between $214,000 and $320,000 will pay a monthly premium of $267.90 (was $243.60).
  • Individuals with annual incomes between $160,000 and $214,000 and married couples with annual incomes between $320,000 and $428,000 will pay a monthly premium of $348.30 (was $316.70).
  • Individuals with annual incomes of $214,000 or more and married couples with annual incomes of $428,000 or more will pay a monthly premium of $428.60 (was $389.80).

Rates differ for beneficiaries who are married but file a separate tax return from their spouse:

  • Those with incomes between $85,000 and $129,000 will pay a monthly premium of $348.30 (was $316.70).
  • Those with incomes greater than $129,000 will pay a monthly premium of $428.60 (was $389.80).

The Social Security Administration uses the income reported two years ago to determine a Part B beneficiary’s premiums. So the income reported on a beneficiary’s 2015 tax return is used to determine whether the beneficiary must pay a higher monthly Part B premium in 2017. Income is calculated by taking a beneficiary’s adjusted gross income and adding back in some normally excluded income, such as tax-exempt interest, U.S. savings bond interest used to pay tuition, and certain income from foreign sources. This is called modified adjusted gross income (MAGI). If a beneficiary’s MAGI decreased significantly in the past two years, she may request that information from more recent years be used to calculate the premium.

Those who enroll in Medicare Advantage plans may have different cost-sharing arrangements.  The average Medicare Advantage premium is expected to decrease slightly, from $32.60 on average in 2016 to $31.40 in 2017. 

For Medicare’s press release announcing the new premium and deductible amounts, click here

For Medicare’s “Medicare costs at a glance,” click here.

 

 

Life Insurance Can Still Play a Key Role As Part of an Estate Plan

Life InsuranceLife insurance can be beneficial in replacing lost income for young families, but as people get older, it can also serve a purpose as part of an estate plan.

Historically, one main reason to buy life insurance as part of an estate plan was to have cash available to pay estate taxes. Now that the estate tax exemption is so big (in 2016, estates can exempt $5.45 million per individual from taxation), most estates don’t pay federal estate taxes. However, life insurance can still be helpful in a number of other ways.

  • Immediate cash. Life insurance provides cash to use for the payment of debt, burial fees, or estate administration fees. In addition, life insurance can be used to pay state estate taxes, if the state requires it.
  • Wealth replacement. It can replace income or assets lost to pay for long-term care. It can also be used to fund a trust for a minor child or a child with special needs.
  • Buy out business interests. It can allow a partner or a family member to buy out the deceased partner’s interest in a closely held business to ensure the business can continue.
  • Fund a charity. Proceeds from a life insurance policy can be used to fund a charity. The policy can be donated directly to the charity, which also has the benefit of giving the donor a charitable income tax deduction. Alternatively, the charity can be named as the beneficiary of the policy. 
  • Treat family equally. A life insurance policy can be used to make sure children receive an equal inheritance. For example, if one child is inheriting a certificate of deposit, a life insurance policy can ensure that the other child receives the same amount.

To find out if you should include life insurance as part of your estate plan, talk to your attorney.

 

 

Nursing Home Residents Win Back Right to Sue

courthouseIn recent years, nursing homes have increasingly asked — or forced — patients and their families to sign arbitration agreements prior to admission. By signing these agreements, patients or family members give up their right to sue if they believe the nursing home was responsible for injuries or the patient’s death. 

Now, in an unexpected move, the federal Centers for Medicare and Medicaid Services (CMS) is forbidding nursing homes from entering into binding arbitration agreements with a resident or their representative before a dispute arises.  The agency has issued a final rule prohibiting so-called pre-dispute arbitration agreements in facilities that accept Medicare and Medicaid patients, affecting 1.5 million nursing home residents. After a dispute arises, the resident and the long-term care facility could still voluntarily enter into a binding arbitration agreement if both parties agree.

For years, patient advocates have contended that those seeking admission to a nursing home are in no position to make a determination about giving up their right to sue. Families are focused on the quality of care, and forcing them to choose between care quality and forgoing their legal rights is unjust, the advocates said.  Courts have sometimes struck down arbitration agreements as unfair, but others have upheld them. 

“Clauses embedded in the fine print of nursing home admissions contracts have pushed disputes about safety and the quality of care out of public view,” the New York Times wrote in its coverage. “With its decision, [CMS] has restored a fundamental right of millions of elderly Americans across the country: their day in court.”

The nursing home industry has countered that the new rule will trigger more lawsuits that could increase costs and force some homes to close.  Mark Parkinson, the president and chief executive of the American Health Care Association, said that the change “clearly exceeds” CMS’s statutory authority. 

Although the rule could be challenged in court, for now it is scheduled to take effect on November 28, 2016, and will affect only future nursing home admissions. Pre-existing arbitration agreements will still be enforceable.

To read the final rule, click here.

 

What Is a Life Estate?

HouseThe phrase “life estate” often comes up in discussions of estate and Medicaid planning, but what exactly does it mean? A life estate is a form of joint ownership that allows one person to remain in a house until his or her death, when it passes to the other owner. Life estates can be used to avoid probate and to give a house to children without giving up the ability to live in it.  They also can play an important role in Medicaid planning.

In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate — the life tenant — possesses the property during his or her life. The other owner — the remainderman — has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.

When the life tenant dies, the house will not go through probate, since at the life tenant’s death the ownership will pass automatically to the holders of the remainder interest. Because the property is not included in the life tenant’s probate estate, it can avoid Medicaid estate recovery in states that have not expanded the definition of estate recovery to include non-probate assets. Even if the state does place a lien on the property to recoup Medicaid costs, the lien will be for the value of the life estate, not the full value of the property.

Although the property will not be included in the probate estate, it will be included in the taxable estate. Depending on the size of the estate and the state’s estate tax threshold, the property may be subject to estate taxation.

The life tenant cannot sell or mortgage the property without the agreement of the remaindermen. If the property is sold, the proceeds are divided up between the life tenant and the remaindermen. The shares are determined based on the life tenant’s age at the time — the older the life tenant, the smaller his or her share and the larger the share of the remaindermen.

Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility period if you apply for Medicaid within five years of the transfer. Purchasing a life estate should not result in a transfer penalty if you buy a life estate in someone else’s home, pay an appropriate amount for the property and live in the house for more than a year. 

For example, an elderly man who can no longer live in his home might sell the home and use the proceeds to buy a home for himself and his son and daughter-in-law, with the father holding a life estate and the younger couple as the remaindermen. Alternatively, the father could purchase a life estate interest in the children’s existing home. Assuming the father lives in the home for more than a year and he paid a fair amount for the life estate, the purchase of the life estate should not be a disqualifying transfer for Medicaid.  Just be aware that there may be some local variations on how this is applied, so check with your attorney.

To find out if a life estate is the right plan for you, contact your attorney.