Payments for In-home Care of Elderly Escape Tax and Information Reporting

The IRS has privately ruled that payments by a state agency to help the elderly live at home as an alternative to care in a nursing home are tax-free even though they were made to the caregivers. Because they were tax-free, no information reporting of the payments was required.

In the case, the State agency making the payments was established to advise, assist, and serve the State's growing elderly population, and to create an environment that provides choices, promotes independence, health, and well-being, and enables elderly individuals to remain in their communities and avoid nursing home placement through its various programs.

The specific legislative purpose of the Program was to encourage low-income elders to be cared for in family-type living arrangements as an alternative to nursing homes or other institutional care settings. To be eligible to participate in the Program, the elderly individual must:

1. be at least 60 years old;
2. have income not exceeding Medicaid limits for institutional care;
3. be at risk for nursing home placement, which is measured by the total number of Activities of Daily Living (personal care tasks such as bathing and eating) and Instrumental Activities of Daily Living (normal, everyday tasks performed by an independent individual such as meal preparation and shopping) that the elderly individual requires help to accomplish; and
4. live with an adult caregiver who is present in the home and able to provide supervision and care for the elderly individual.

Only those elders who receive a high-risk evaluation in terms of risk of institutional placement are eligible for participation.

Currently, elders participating in the Program on average require assistance on more than 4 of the 6 Activities of Daily Living and almost all of the 8 Instrumental Activities of Daily Living. More than half of the elders participating in the Program have dementia. Commercial caregivers are not eligible to participate in the Program.

The Program provides for two types of subsidy payments, basic and special, to offset, in part, the costs of support and maintenance for elderly individuals living in the home of a capable adult caregiver, usually a spouse or other relative. The basic subsidy is a monthly payment to the caregiver to defray, in part, the basic living needs of the elderly individual, such as food, clothing, housing, medical needs, and other incidentals (not covered by Medicare, Medicaid, or other insurance). Special subsidy payments are made for additional goods and services that the case manager determines are necessary to maintain the health and well-being of the elderly person. Special subsidy payments can be made for items such as chore services, counseling, home-delivered meals, education and training for the caregiver, housing adaptations, medical therapeutic services, medical transportation, respite care, medical supplies and equipment (such as medication and wheelchairs).

The basic and special subsidies promote the health and well-being of elderly individuals by partially reimbursing the caregivers for some of the monthly living expenses of the elderly individuals, and are not a payment for caring for the elderly individuals or for any other services. Because of this subsidization of their home living costs, many elderly individuals are able to postpone nursing home care for longer periods than would otherwise be the case, or avoid institutional care altogether.

The State Department administers the Program through State's agency system for the aging, which consists of two systems. The first system (including the Taxpayer) consists of agencies that within a geographic area monitor service providers, write subsidy checks, and serve as the final appeal for client/applicant grievances. The other system consists of local agencies or community service providers that determine client eligibility and eligible subsidy amount, provide care planning and case management, annually reassess on-going eligibility, enter data to generate monthly payments, prepare reports, and maintain documentation.

Under the general welfare exclusion, payments to individuals by the government under legislatively provided social benefit programs for the promotion of the general welfare are not included in a recipient's gross income. The payments must (1) be made from a governmental fund, (2) be for the promotion of the general welfare (i.e., generally based on individual or family needs), and (3) not represent compensation for services. (See, e.g., Rev Rul 2003-12, 2003-1 CB 283 ).

Code Sec. 6041(a) provides generally that all persons engaged in a trade or business that pay another person $600 or more in any tax year of fixed or determinable income in the course of that trade or business must file an information return setting forth the amount of the payment and the recipient of the payment.

The recent ruling observes that the Taxpayer makes payments under the Program to defray a part of the costs necessary to maintain the health of frail, elderly individuals who need daily care. These payments are made from a governmental fund pursuant to a state statute, are based on economic need and health status of the elderly individuals, and are not for services rendered by the caregivers or the elderly individuals. Because the payments are intended to reimburse the caregivers' expenses of promoting the health and well-being of the elderly individuals, the interposition of the caregivers as the recipients does not bar application of the general welfare exclusion. Accordingly, the basic and special subsidy payments Taxpayer makes for the benefit of the elderly individuals under the Program are not includible in the incomes of the elderly individuals or their home caregivers. Thus, the Taxpayer is not required to file information returns for these payments for either the elderly individuals or their home caregivers.

Information is also available at the Estate Planning Information Center, from this office, or your local elder law attorney, local area agencies on aging or local county departments of job and family services.

If Your Mortgage Lender Goes Under: What To Do

On June 18th, 2008, Fremont General Corp., the Brea-based parent of the bank (and former subprime lender) Fremont Investment & Loan, filed for Chapter 11 bankruptcy. This action follows other major banks heading to the bankruptcy court, including Middletown, Conn.-based Mortgage Lenders Network USA, in February 2007, and American Home Mortgage Company in August 2007. Other mortgage lenders are also sending out distress signals. Here's what you need to know if your mortgage lender goes out of business.

Most Importantly, keep making your payments! Regardless of what kind of trouble the mortgage company may be in, you still need to send in your payments on time. You are legally obligated by a note and mortgage to make the payments. Remember, your payments are considered an asset to the company. If a lender declares bankruptcy, those assets will just be sold to another lender. The other lender will, no doubt, hold you to your obligation.
In most cases, government-sponsored enterprises like Fannie Mae, Freddie Mac or Ginnie Mae will handle the transfer. But rest assured, there will be someone who wants to get your monthly check.

But you should review your mortgage so that you know your rights. The terms of your loan should always stay the same, no matter who holds your loan. It's important that you thoroughly review the details of your mortgage agreement. The interest rate and the type of loan you get should not change. If your lender does sell your mortgage, you should receive a letter from the company within 15 days that outlines the new mailing address and payment deadline.

You should also be given a toll-free telephone number that you can call if you have any questions. You must get a grace period of 60 days to get your payments to the right place on time. If you have any complaints or issues, write a letter to your lender. The company is required to respond within two months of getting your letter.

If you have paid off your loan in full, and you want a mortgage satisfaction documents from the company when it's no longer in business, call your attorney or go to your State Attorney General's office. There you can find out the status of the company. You should be able to find out who you can contact.

You may find negotiation with the new lender more difficult. A servicer - the company you make your monthly check out to - may not think it's worth its while to negotiate with homeowners to lower monthly payments. Some servicers have to front money to the loan holders if this happens. Plus, in many other cases, there are limits to how much interest and principle can be forgiven.

In some cases servicers can negotiate payments on only 5 percent of loans. The bottom line here is - no matter who you make your monthly check out to - get on the phone if you're having trouble making payments. The sooner you bring attention to the problem, the better off you'll be.

Of course, if you have problems or questions, please see your attorney before legal action is taken against you.

A Dramatic Loss of Wealth

Seniors Scramble for Solutions

A recent study suggests that current economic woes affecting the value of real estate will strip most people of wealth, with the hardest hit being those currently poised to retire.

The Center for Economic and Policy Research extrapolated from data from the 2004 Survey of Consumer Finance to project household wealth under three alternative scenarios. The first scenario assumes that real house prices fall no further than their level as of March 2008. The second scenario assumes that real house prices fall an additional 10 percent as a 2009 average. The third scenario assumes that real house prices fall an additional 20 percent for a 2009 average.

The projections show that the vast majority of families between the ages 49-54 will have little or no wealth by 2009 in any of these scenarios and that those persons who just be approaching retirement will have very little to support them-selves in retire-ment other than their Social Security.

The projections also show that a large number of families will have little or no equity in their homes by the end of 2008. Finally, the projections show that the renters within the same wealth categories in 2004 will have more wealth in 2009 than homeowners in all three scenarios.

Seniors and their financial planners are scrambling to develop financial solutions and strategies. You should consider two obvious strategies. First, if you have debt on your home, you should eliminate it quickly. If you need a referral to an agent that will show you how you can within a few years eliminate your mortgage debt without bankruptcy, debt consolidation, or adversely affecting your credit rating, please call the office at 877-816-8670.

If your are likely to need a reverse mortgage in the future, you might consider obtaining a reverse mortgage line of credit now, before the value of your real property is further mpaired. A line of credit does not obligate that you access the funds, but the funds wll be available for the reminder of your life, if you later need them. Moreover, you ensure access to a greater amount, or at least some amount, whereas later, after the value of your home is further reduced by the market, you may not be eligible at all, or eligible for as much.

If you need a referral to a reputable reverse mortgage specialist or financial planner, please call the office at 877-816-8670.

Tax Rules Change Treatment of Gains on Sale of Vacation or Second Home

If you have a vacation or second home, there was a change in the federal income tax law as part of the 2008 Housing Act about which you should be aware.   Most homeowners are familiar with the homesale exclusion, a provision of the tax code which excludes from taxable gain as much as $500,000 of gain if they meet certain conditions. The $500,000 exemption is the maximum exclusion for a married couple filing jointly; taxpayers filing individually get an exemption of up to $250,000. To be eligible for the full exclusion, a taxpayer must have owned the home, and lived in it as his or her principal residence-for at least two of the five years prior to the sale. Because of the "principal residence" requirement, vacation or second homes normally don't qualify for the exclusion. However, in what some saw as a loophole, the law permitted taxpayers to convert their second home to their principal residence, live in it for two years, sell it, and take the full $250,000/$500,000 exclusion available for principal residences, even though portions of their gains were attributable to periods when the property was used as a vacation or second home, not a principal residence.   The new law closes that "loophole" by requiring homeowners to pay taxes on gains made from the sale of a second home to reflect the portion of time the home was not used as a principal residence (e.g, vacation or rental property). The amount taxed will be based on the portion of the time during which the taxpayer owned the home that the house was used as a vacation home or rented out. The rest of the gain remains eligible for the up-to-$500,000 exclusion, as long as the two-out-of-five year usage and ownership tests are met. The new law in effect reduces the exclusion based on the ratio of years of use as a principal residence to the total time of ownership. For example, if a taxpayer owned a vacation home for ten years, but lived in it as a principal residence only for the final two years prior to sale, the maximum available exclusion would be reduced by four-fifths. Accordingly, a $400,000 gain on the sale that would be eligible for the full exclusion under pre-Act law would be reduced by four-fifths, to $80,000. The good news for current owners of second homes is that the new law is not retroactive. The tightening applies only to sales after 2008. Plus, any periods of personal or rental use before 2009 are ignored for purposes of the provision. The new law also does not change the rule that allows homeowners to take advantage of the homesale exclusion every two years. Taxpayers can still move from one home to the other with full tax exclusion if they only own one home at a time. Moreover, the taxpayer still qualifies for capital gain treatment on the amount of gain that cannot be excluded. The tax planning opportunity available to you between now and December 31, 2008, is that if you convert your second residence into your primary residence before January 1, 2009, you will completely avoid the rule above.  You would then have up to three years to sell your old primary residence to claim the full home sale exclusion on the old primary residence. Then two years after the sale of the old primary residence you can sell the second home/ now primary residence and again claim the full home sale exclusion. The decision to move your primary residence involves more than just savings taxes on a later sale. Your primary residence has other income, property and estate tax implications, estate planning and asset protection planning implications, and financial implications that should be fully understood prior to making such an important decision.  Consult an elderlaw  attorney and accountant or tax professional as soon as possible, though; one cannot just "flip a switch" to covert a second home to a primary residence.

Ohio Partnership for Long-Term Care Insurance Offers Asset Protection

The new Ohio Partnership for Long-Term Care Insurance is an initiative between the State and private insurance com panies to encourage Ohioans to plan for their long-term care needs. The partnership established "partnership policies" which provide coverage for long-term care needs and also allows Ohioans the ability to obtain "Medicaid Asset Protection" - a benefit not available with traditional pre-existing policies sold in Ohio.

This benefit is only available to those who purchase "qualified partnership policies." Pre-existing policies, meaning those you may have now, do not qualify. Medicaid asset protection simply allows Medicaid applicants to keep more assets and still potentially qualify for Medicaid coverage. Upon application for Medicaid, the total assets a person may keep is the combined total of the Medicaid asset limit and the total amount paid by a partnership policy. In other words, the policy payments serve to protect other assets, such as your family home, even if the insurance benefits do not prove sufficient to pay the full cost of the nursing home care.

Partnership policyholders who need Medicaid to help pay for long-term care can apply at any time. Ohio's Medicaid program can help pay the difference between what the policy covers and what is owed, or provide assistance once the policy is exhausted. In both cases, the benefit of Medicaid asset protection will be provided. The more the partnership policy pays, the higher the asset protection.