Inflation Indexed Annuities in Aging in Place Planning

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Rarely do articles on this blog deal with specific investment options.  Recently, however, while speaking with a client, she shared a feeling of helplessness following a meeting with her financial advisor.  A few phone calls sorted her options and planning.  This article is designed to educate readers regarding a planning option with which, apparently, some advisors and agents are unfamiliar.

Many who plan financially for aging in place focus on guaranteed income, rather than relying on large liquid amounts invested for further growth through investment risk. Aside from other arguments against risking principal, there is the simple fact that alternatives to institutional care (nursing homes and assisted living facilities) involve periodic costs, usually paid monthly or weekly.  In other words, if you have a healthy guaranteed income, within which you can easily meet additional expenses, the prospect of alternative care cost is not as disruptive as it might be otherwise. 

The issue that is increasingly on everyone's lips, however, is inflation.  Whether inflation is already built in to our economy, soon to arrive and/or well-in-hand by our Federal Reserve Bank, this article will leave to others to debate. A college economics professor once characterized inflation as not unlike water- a little bit is necessary and good, but a lot can kill you.  Regardless, even the long-term care industry is concerned.    

Sometimes called an inflation-protected annuity, an inflation-indexed immediate annuity is similar to a fixed annuity. You receive a guaranteed stream of income from the insurance company for the rest of your life. With an inflation-indexed annuity, however, payments increase (or sometimes decrease) each year, keeping pace with the rate of inflation.

An inflation-indexed annuity tracks standard measures of inflation, typically, the consumer price index (CPI)(one measure of the rate of change of the cost of a selected basket of goods, reflecting the rate of inflation). The monthly income from this form of annuity gradually changes with the CPI. Since money loses purchasing power with inflation, inflation index-tracking annuities theoretically allows your money to retain that power as inflation fluctuates.

Inflation-adjusted annuities have one obvious drawback: they initially begin with smaller payments than a traditional fixed payment plan. The effect of this is that it might take decades for the inflation-adjusted income to catch up to the fixed payment, which means there is a distinct possibility of reduced payouts for life if you die before they catch up.

Talk to you investment advisor, financial planner, or insurance agent.  This article doe not constitute financial advice, and is merely educational.  Your advisor can make specific recommendations after considering your circumstances, needs, goals, and objectives.    

COVID Propels Aging in Place; Institutionalization of Seniors Drops

In the wake of the pandemic, Americans are avoiding nursing homes and other rehabilitation homes for the elderly.  Increasingly, Americans are caring for their loved ones in their own homes. This is the assessment of investigative journalists writing for the Wall Street Journal (WSJ).

America has a long history of relying upon institutions to care for the at-risk elderly. "The U.S. has the largest number of nursing-home residents in the world. But families and some doctors have been reluctant to send patients to such facilities, fearing infection and isolation in places ravaged by Covid-19, which has caused more than 115,000 deaths linked to U.S. long-term-care institutions."

Since the spring, there has been a drop in the number of patients in nursing homes and similar facilities. According to the report, "[o]ccupancy in U.S. nursing homes is down by 15%, or more than 195,000 residents, since the end of 2019, driven both by deaths and by the fall in admissions." 

This has created financial problems for nursing-homes, with even the biggest U.S. nursing-home company stating that it may not have the money to fulfill its financial obligations. 

The shift away from institutions may be permanent.  Big insurers, home-health-care companies and some hospital systems are betting the new patterns of referral and care established amid the crisis will remain in place for the long term. They say doctors, hospital managers and families have seen how some older patients with significant care needs can be sent home. Just as the pandemic has spurred greater adoption of long-considered practices such as working from home, it has brought a re-evaluation of the role of nursing homes.

“We implemented a complete switch of mind-set to say home is the default” for patients leaving the hospital, even frail ones,  Peter Pronovost, chief clinical transformation officer at University Hospitals, an Ohio-based system told WSJ reporters.  “I don’t think we’re ever going to go back,” he said. “The drive to get every patient home who can be home is going to continue.”

Home-health-care companies and major hospital systems, including Iowa-based UnityPoint Health and South Carolina’s Prisma Health, are building new offerings to support sicker patients recovering at home, often using technology to allow close monitoring.  Also fueling these efforts are pandemic-related regulatory changes that allow Medicare to pay for digital doctor visits and intense, hospital-level care in patients’ homes.

Some nursing-home companies say they too are adjusting bulking up their own home-focused offerings and aiming to upgrade buildings and staff to capture a new group of sicker patients who might come to them for hospital-level care.  Eventually, nursing-home operators say, demographics will buoy their industry, as more baby boomers require institutional care. Well before that, they say, vaccines should stem the tide of Covid-19 in their facilities.

“Do I think that more patients will be moved to home? Absolutely. It’s the right thing to do for the patient, it’s the right thing to do for the system, and it’s the right thing to do for the cost,” said David Parker, president of ProMedica Senior Care, a major nursing-home operator that also owns a home-health-care provider and is part of ProMedica Health System.

Nursing-home use in the U.S. has been declining gradually for years. In 2019, occupancy was 80%, down from 84% a decade earlier, according to the Kaiser Family Foundation.

Reduction in disability rates is helping to reduce reliance on institutional care.  The non-disabled component of the Medicare-enrolled 65-and-over population has also been rising: in 1982, 74 percent of Medicare-enrolled 65-and-older individuals were “non-disabled.” That number rose to 81 percent in 2004–2005. This trend is reflected in the fact that the percentage of Medicare-enrolled 65-and-older individuals who reside in institutional settings (i.e., nursing homes) has decreased over time, to less than 5 percent in 2004–2005. 

Surveys have long shown many patients don’t want to go to nursing homes. The pandemic has made them even less popular, according to a September survey of adults 40 and older by AARP. Just 7% said they would prefer a nursing home for family members needing long-term care, and 6% said they would choose one for themselves. Nearly three in 10 respondents said the pandemic had made them less likely to choose institutional care.

For years, government policies have paradoxically both encouraged and discouraged intuitional care.  Certain government policies have encouraged alternatives to nursing homes. Medicaid programs, which cover long-term care for poorer adults, have increasingly paid for long-term services that help patients remain at home such as health-care aides, though funding has long fallen short of demand.

In Medicare, which typically encourages a limited nursing-home stay after a hospital visit, more people have been getting their benefits through insurance companies, which have held down costly nursing-home stays. The companies now provide coverage to around 36% of Medicare beneficiaries, according to the Kaiser Family Foundation. Medicare has also begun paying health-care providers in ways that reward them for bringing down overall costs, giving the providers an incentive to reduce referrals to nursing homes.

The Trump administration gave Medicare insurers more flexibility to spend money on things that improve patients’ home setups. It also made pandemic-related tweaks that allow Medicare coverage for more types of care in the home.  The options have been exploited by insurance companies and health care providers to help transform the industry.

Seema Verma, administrator of the Centers for Medicare and Medicaid Services (CMS) predicted the shift from istitional to home-based care: "[w]e should be able to provide more services in the home setting that can enable somebody to be independent."  She noted that "Covid is going to force a national conversation about how we take care of our elderly, and clearly there are issues in nursing homes that go beyond infection control."

During his campaign, President-elect Joe Biden promised to spend $450 billion to make sure people who need long-term care can get support in the home and community.  “There’s no daylight between the Trump administration and the Biden administration on the desire to see more folks cared for in the home,” said Robert Kocher, an Obama White House health adviser now at venture-capital firm Venrock.

The number of Medicare-financed residents of nursing homes fell 28% in April and 34% in May from a year earlier, as the pandemic turbocharged efforts to steer Medicare patients away from nursing homes and as hospitals referred fewer after surgeries, according to an analysis of billing records done for the WSJ by data firm CareSet Inc. The decline occurred even though, during the pandemic, the Trump administration waived a requirement that Medicare beneficiaries stay three days in a hospital before going to a nursing home.

In addition, some nursing homes shut off admissions in the spring,  Susan Craft, vice president of population health at Henry Ford Health System in Detroit told the WSJ.  "It was a forced period for us to work on home-care programs,” said Gloria Rey, the director of post-acute care at Henry Ford. “We’re continuing to work within our organization to make going home the priority.”

Major Medicare-plan providers Humana Inc. and UnitedHealth Group Inc. say they are working to develop programs that would allow sicker patients to be discharged from hospitals to their homes. The shift in nursing-home use “is probably one of the trends coming out of Covid, along with telemedicine, that is going to act as a real accelerant and be sustainable,” said Susan Diamond, who leads the home business of Humana, one of the biggest Medicare insurers and also a major home-health owner.

Nursing homes’ loss has been a gain for home-health companies, which provide services such as therapy and nursing visits, though typically not 24-hour care.

Data from CarePort Health, a unit of Allscripts Healthcare Solutions Inc. that helps manage post-hospital care, show that referrals from hospitals to nursing homes and home-health providers both plunged in April. By October, though, referrals to home-health providers were at 109% of their 2019 baseline level, while nursing-home referrals had flattened at 83% of their baseline.

The falloff has been a disaster for the nursing-home industry, because Medicare pays better than the long-term stays Medicaid covers. Despite billions in pandemic-related government aid, some nursing homes have closed or been sold in recent months.

A November a survey by the American Health Care Association, a nursing home industry group, found 65% of nursing homes were operating at a loss. Mark Parkinson, the association’s chief executive, said 10% to 20% might file for bankruptcy without additional government aid.

Genesis Healthcare Inc., the biggest U.S. nursing-home company, told investors in August it might not be able to continue as a going concern. Its loss in the third quarter deepened, and in November it said it would need ongoing government support to sustain its operations. Its shares have languished at less than $1.

On the other side, shares of Amedisys Inc., the largest publicly traded home-health-care company, are up nearly 75% in 2020. It saw strong volumes and higher profits in the third quarter.  “We want to take care of sicker and sicker patients, and show we can do it,” Amedisys CEO Paul Kusserow said.

Nursing-home officials said they worry that some frail patients could be left without enough supervision and support if sent home. A 2019 study published in JAMA Internal Medicine that compared Medicare hospital patients discharged to nursing homes with patients who got traditional home-health services found the latter were more likely to be readmitted to the hospital. Mortality and functionality of the groups, however, were similar.

To help patients who are sent home, some hospital systems and home-health firms, including Amedisys, are building new, often tech-heavy programs that layer on extra services and aim to reproduce aspects of nursing-home-level care in patients’ homes.

Prisma Health, an 18-hospital system in South Carolina, in May launched Home Recovery Care, a joint venture with a company called Contessa Health Inc. that provides operational support and technology for the service. Some hospital patients who might qualify for a nursing-home stay are instead sent home using the new program, which some insurers pay for, Prisma Health officials said. 

See Anna Wilde Mathews & Tom McGinty, "Covid Spurs Families to Shun Nursing Homes, a Shift That Appears Long Lasting," Wall Street Journal, December 21, 2020. 

Ohio Permits Owners to Revise Property Tax Valuations Where Impaired by Covid-19

Ohio Governor Mike DeWine signed Ohio Senate Bill 57 on April 27, 2021, which becomes effective July 26, 2021. The new law allows an owner of property impacted by COVID-19 or associated state orders to file a special board of revision valuation complaint with a tax valuation date of October 1, 2020 to allow for the consideration of COVID-19 associated impacts to the property. Under previous law, the tax year 2020 valuation date was January 1, 2020 – before many properties were impacted by COVID-19 and before any associated state orders were implemented.

Property owners will have until August 25, 2021 to file this special valuation complaint for tax year 2020. The existing deadline was March 31, 2021. In order to file this special valuation complaint, the claimed reduction in value cannot be a general claim based on market conditions, but must be related to specific circumstances that apply to the specific property.  The request for reduction must allege with particularity that the property value decreased between January 1, 2020 and October 1, 2020 specifically as a result of COVID-19 or associated state orders. Failure to comply with these requirements in the special valuation complaint will result in a dismissal of the complaint.

Trusts as Beneficiaries of IRAs Post Secure Act- The Song Remains the Same?

A common question this year is, "should I name my trust the beneficiary (or contingent beneficiary) of an IRA after passage of the Secure Act?" The Secure Act limits the ability to "stretch" the IRA over the life expectancies of beneficiaries.

The Secure Act, perhaps, reduces the incentive of creating an accumulation trust whereby the beneficiaries are required to keep and maintain the IRA in trust for weal building, taking, normally, only Required Minimum Distributions) RMD's.  An accumulation trust maximizes the power of tax deferral over the longest possible period of time.  

The Secure Act, however, does not change, fundamentally, the analysis whether a trust can or should be a beneficiary of a Trust.  Of course, there are exceptions, but our office regularly recommends naming a trust a beneficiary of IRA.  The remainder of this article will explore the costs and benefits of each strategy. 

An IRA is an investment account that you own in your individual name. In fact, during your life, only you (or a spouse) can own the IRA without it becoming taxable.  It is, therefore, almost never advisable to transfer your IRA to your trust while you are living (the rare exceptions being certain types of planning where incurring the tax is acceptable under the plan, such as Medicaid planning or tax conversion planning). 

Each year, you can contribute income that you earn, to an IRA subject to certain limits. For traditional IRAs, this contribution typically is deductible from your income, and then later withdrawals are subject to income tax. For Roth IRAs, the contribution generally is not tax deductible, and later withdrawals are tax-free. If you withdraw assets from either type of IRA before age 59 ½, you generally will incur an early-withdrawal penalty of 10%.

When you reach age 72, you must start taking required minimum distributions (RMDs) each year from a traditional IRA. The RMDs are based on your age and a life expectancy factor listed in tables published by the IRS. Roth IRAs are not subject to RMDs during your life.

If you withdraw only the RMDs from your IRA, there will normally be assets left in the IRA at your death. And, if the IRA has a high rate of investment return, it is possible your IRA will be more valuable at your death than it was when you started taking RMDs.

The IRA proceeds, normally, do not pass under the terms of your will or trust, but instead pass by way of the IRA beneficiary designation. The most common designations are to individuals – for example, all to a spouse or in equal shares to children. A trust, however,  can be named as an IRA beneficiary, and in many instances, a trust is a better option than naming an individual or group of individuals.

When a trust is named as the beneficiary of an IRA, the trust inherits the IRA when the IRA owner dies. The IRA then is maintained as a separate account that is an asset of the trust. Some good reasons to consider naming a trust as an IRA beneficiary, instead of an individual, include:

• Avoiding Probate.  Beneficiary designations, like all forms of Direct Transfer Designations work best when there is a tidy timing, order, and sequence to demise.  If, however, a beneficiary survives, but does not prosecute a claim form (perhaps due to illness, incapacity, or incompetency), the proceeds will be subject to probate in the estate of  the deceased beneficiary even if there is a contingent beneficiary. If a primary and contingent beneficiary both pass nefore the death of an account owner,  and there is no other beneficiary, beneficiary, the proceeds will ordinarily pass as part of the account owner's probate estate.  Each institution, however, will have its own rules, since beneficiary designations are governed by contract.  This can create uncertainty regarding matters such as how long must the beneficiary survive the owner in order to be considered a beneficiary.  Trusts remove these uncertainty, and do not involve probate since assets are distributed at the action of a Trustee, when the Trustee completes the administration, rather than being determined on an arbitrary dates such as when the account owner passes.  

• Beneficiary Ownership Limitations. Perhaps the intended beneficiary is a minor who is legally unable to own the IRA. Or, perhaps the IRA owner wants to support an individual with special needs who will lose access to government benefits if he or she owns assets in his or her own name. A solution in both cases could be to name a trust as the IRA beneficiary, which will then become the legal owner in place of the minor or individual with special needs.  More importantly, a trust can "spring" protection into place when needed.  In other words, the beneficiary is protected even if s/he was healthy and not receiving government benefits when the account owner created the plan, but later unexpectedly suffered some change in circumstance creating disability, challenge or disadvantage to distribution. 

• Second Marriage or Complicated Family Structures. An IRA owner may wish for RMDs to benefit his second spouse during the spouse’s lifetime, and then have the remainder of the IRA pass to his own children. If the IRA owner leaves the IRA outright to his spouse, he can be certain that his spouse will benefit, but he can’t guarantee that his children will receive anything. If he instead leaves the IRA to a properly structured trust, his desire to benefit both sets of beneficiaries can be carried out.

• Competent Management. We often hope IRA beneficiaries will take only the RMDs, but an individual who has inherited an IRA has the right to take larger distributions, or even withdraw the entire balance of the IRA. A beneficiary's access to an inherited IRA owned by a trust will be subject to the terms of the trust.

• Succession Control. When an individual IRA beneficiary inherits an IRA, s/he can name their own successor beneficiaries. If the IRA owner wishes to control succession beyond the initial beneficiary, the owner will need to set forth the succession terms in a trust and name the trust as the IRA beneficiary.  Do you want your grandchildren, for example, to inherit the proceeds instead of your daughter or son-in-law? 

• Creditor Protection. A person’s own IRA has some level of protection from creditors.  Inherited IRAs do not enjoy the same protection; the U.S. Supreme Court ruled  that inherited IRAs do not qualify under the Federal Bankruptcy Code as exempt from the claims of creditors as “retirement funds.” An inherited IRA held instead in a properly structured trust will not be an asset of the beneficiary and will have full or partial protection from creditors.

• Contingency Planning.  What if....?  What if a beneficiary becomes disabled, becomes incompetent, marries unwisely, becomes an addict, becomes a criminal, joins a cult, develops severe marital problems, finds bad luck and has numerous creditors, becomes a citizen of another nation that treats property differently, develops severe mental illness, becomes incarcerated or institutionalized?  Trusts can be flexible forward looking instruments that permit planning you might think unlikely or even impossible.  Beneficiary designations are only a name on a line, regardless of what happens after the name is written.   

• Avoiding Estate Taxes.  Most estate plans for wealthy individuals include trusts designed to minimize and postpone the payment of federal and state estate tax. For such estate plans to work as intended, the portion of these trusts that shelters an individual’s federal or state estate tax exemption amounts needs to be funded upon the individual’s death. Often, the only asset available to do this funding is an IRA.

• Minimizing Income/Capital Gains Taxes. Many estate plans  include trusts designed to minimize and/or postpone the payment of federal and state income or capital gains tax. For such estate plans to work as intended, the portion of these trusts that produces deferral or maximizes step-up in basis need to be controlled by the trust.  Beneficiary designations can, especially combined with other instruments, accomplish these, perhaps, but alone they are powerless to accomplish such objectives.   

Regardless, there is little doubt that the luster of stretching an IRA to minimize income taxes is limited by the Secure Act. The rules about distributing an inherited IRA after the owner dies have changed. The preferred payout has long been the “stretch IRA,” where the post-death RMDs are stretched out, with annual distributions, over the life expectancy of the new IRA beneficiary. In this case, the IRA could continue to grow tax-deferred, often for many decades after the owner’s death.

The SECURE Act, passed in December of 2019, has significantly reduced the ability to create a stretch IRA. The prior stretch rule has been replaced, for most beneficiaries, with a 10-year rule that requires the IRA to be distributed out completely by the end of the tenth year following the year of the IRA owner’s death. It was originally believed that the 10-year rule does not require annual distributions, so long as the full amount is distributed by end of the tenth year. Unfortunately, new rules seem to require RMD's, defying the predictions of many pundits.   

The new 10-year rule does not apply to the following beneficiaries (known as “eligible designated beneficiaries”): the IRA owner’s surviving spouse, the owner’s children while they are minors, certain individuals who are chronically ill or disabled, and any person who is not more than 10 years younger than the IRA owner. The stretch IRA is still available for these beneficiaries.

The post-death RMDs for a trust named as an IRA beneficiary will be calculated under either the stretch payout rule, the 10-year rule, or the 5-year rule, depending on certain attributes of the trust and the trust beneficiaries. It matters whether the trust qualifies as a see-through trust, whether it is a conduit trust or an accumulation trust, and whether the trust beneficiaries are non-individuals, “regular” beneficiaries, or part of the new class of “eligible designated beneficiaries.” 

The analysis of which RMD rule applies is not always clear, and there are aspects of the SECURE Act that will require clarification through IRS regulations. For these reasons, among others, it is important to involve your estate planning attorney and accountant in any decision to name a trust as an IRA beneficiary. You will want to confirm that your reasons for naming a trust as your IRA beneficiary are reflected in the trust terms and will not be negated by the RMD payout rules. It is also important to review beneficiary designations to be sure that any trust beneficiaries are appropriately named.

It is important to note that the RMD payout rules are different than the payout rules of the trust. Even if an IRA must pay out under the 5-year rule to a trust named as the IRA beneficiary, it does not necessarily mean that the IRA assets will distribute out to the trust beneficiaries within five years. Instead, the terms of the trust regarding distribution to trust beneficiaries will apply. For example, if the trust is completely discretionary, then once the IRA assets are distributed out of the IRA to the trust itself, the after-tax proceeds of the IRA will remain invested with other assets of the trust until the trustee exercises its discretion to make a distribution to one or more of the beneficiaries.

Florida Passes Legislation to Punish Elder Abuse

Florida Attorney General Ashley Moody has stated "([i]f you move here, if you retire here, if you come to Florida because you want to live out your golden years, we will make sure you can do that free from fraud and abuse."  The Department of Justice reports that 10% of seniors are exploited.  Florida is home to roughly 4.3 million seniors.  

Florida took a significant step backing Moody's pledge, passing landmark legislation against abuse and fraud perpetrated on senior and disabled citizens. The Protection of Elderly Persons and Disabled Adults Bill is headed to the governor for signature. The new law’s effective date would be July 1, 2021.

 The bill has a myriad of protections for seniors and disabled individuals. Key provisions include:

• A person who abuses, neglects, or exploits a senior or disabled individual cannot benefit from the victim’s estate.
• A person who has been convicted of certain crimes cannot serve as a senior or disabled person’s personal representative.
• The Office of Statewide Prosecution can prosecute crimes related to the exploitation of seniors and disabled folks.
• A senior or disabled individual cannot be unreasonably isolated from his or her family.
• A person cannot seek out a guardianship or fiduciary agency relationship for the purpose of their own benefit.
• A person cannot carry out intentional acts that would modify a victim’s estate plan.
• An Agent under a power of attorney can petition a court for an injunction against someone trying to exploit the senior or disabled Principal.

Hopefully, Florida will serve as motivation and model for other states to move to further protect seniors and those with disabilities, especially in light of the increase in abusive and fraudulent activities resulting from the pandemic.