Like a wheel of fortune, some senior citizens will suffer an illness and no financial risk, whereas others will suffer both an illness and a financial exposure. And many senior citizens are completely unaware of the hidden financial risk they face.

Most medical expenses will fall under the umbrella of skilled care: medical care that can safely be provided only by a trained medical professional, such as a doctor, nurse, physical therapist, speech therapist, or occupational therapist. Congestive heart failure, a hip fracture, or pneumonia are examples of skilled illnesses. These expenses will be covered by Medicare and supplemental health insurance (Medi-Gap).

But certain illnesses—called custodial illnesses—are not covered. Custodial care can safely be provided by someone without an advanced medical degree. Examples include assistance with dressing, feeding, or bathing. Common custodial illnesses include Alzheimer’s disease, post-stroke, and Parkinson’s disease. The cost of custodial care can be staggering, and they are not covered by Medicare or supplemental health insurance because those programs cover only skilled care.

This is a distinction that takes many families by surprise and can have serious financial consequences, so it’s important to prepare clients for this risk. It’s helpful to start with a review of how senior citizens can pay for long-term custodial care: privately, with long-term care insurance, or through Medicaid.

Private Payment

This option can be very expensive. The cost of home health aide in the New York metropolitan area averages $25 per hour. For a patient who needs 24-hour care, that cost is $15,000 per month. Most of the care provided in a nursing home is custodial care, but that can cost as much or more than home care. However, such expenses may be deductible as an unreimbursed medical expense, according to the U.S. Tax Court.

In Estate of Baral v. Commissioner, Lillian Baral, who lived alone, was diagnosed with dementia in 2004. In 2006, her physician wrote an evaluation that recommended around-the-clock home health aides due to medical and safety concerns. Her brother, under a power of attorney, paid for the home health aide services but neglected to file her income tax return. The IRS became aware of this failure, and determined a deficiency of more than $17,000, plus penalties and interest. The Court analysis found that due to severe cognitive impairment, Lillian Baral required substantial supervision to protect her from threats to her health and safety; the physician’s evaluation supported this finding. As a result, she qualified as a chronically ill individual, which permitted the deduction as a medical expense of the amount paid to the home health aides.

The Court also identified two other tests that could be used to establish a person as chronically ill:

• A person could prove that they were unable to perform at least two of the following activities of daily living: eating, bathing, dressing, and using the toilet.
• A person could show that their deficits were similar to those activities of daily living.

When counseling clients claiming a medical deduction for home care costs, it would be prudent to document the order from a physician and the person’s functional limitations. This documentation can be established by a clinical assessment by a geriatric care manager (a private social worker who can be located through the Aging Life Care Association).

Another case, Estate of Olivio v. Commissioner, emphasizes the importance of having a written argeement. For nine years, tax attorney Anthony Olivio provided virtually around-the-clock care for his mother. He filed a tax return that claimed a deduction of $1,240,000 for his services. He argued that he had no written agreement to sustain his claim but alleged an oral agreement. The Court held that in the absence of a written agreement, it was presumed that the services were given without any expectation of being repaid.

A decision by the New York State Tax Appeals Tribunal, In the Matter of the Petition of John Gaied, is an example of the saying “No good deed goes unpunished.” Gaied’s parents were in declining health and he frequently provided assistance to them. He lived in New Jersey, but bought them a home in Staten Island and spent more than 183 days in the home. The Division of Taxation determined that he was a statutory resident of New York and owed state and city personal income tax. Gaied conceded that he spent 183 days in New York but argued that it was not his permanent place of abode. The Tax Appeal Tribunal ruling, however, found that he maintained a permanent place of abode in New York because he had a property right in the home, as evidenced by his unfettered access to the property, the utility bills in his name, a telephone at that address in his name, and his parents’ complete financial reliance upon him. A dissenting opinion, which was sympathetic to Gaied and pointed to the ill health of his parents, would have ruled that his presence was for medical reasons and not voluntary.

Long-Term Care Insurance

Long-term care insurance is available only before the diagnosis of a long-term custodial illness. Clients who are healthy and considering long-term care insurance must do careful research before purchasing such a policy. Families should be aware that, under certain circumstances, the premiums paid for the long-term care insurance policy may be deductible as an unreimbursed medical expense. Only premiums paid for a “qualified” policy will meet the requirements established by the National Association of Insurance Commissioners. The amount that an be deducted is limited by age. For example, in 2019 the range is $420 for a person age 40 or younger and $5,270 for a person aged 71 or older.             

Medicaid

For those who cannot pay privately and cannot qualify for long-term-care insurance, Medicaid may be an option. Medicaid does pay for long-term custodial care, but great care must be taken to comply strictly with the eligibility rules requiring that the applicant have very limited assets. Each state has its own Medicaid eligibility rules. New York State has two Medicaid programs, each with their own rules: home care Medicaid and nursing home Medicaid.

Home care Medicaid.

This program does not impose a penalty for gifts made within the last five years. Under the current Medicaid eligibility rules, an applicant would be permitted to keep the following resources:

• $15,450 (2019) in non-retirement accounts. Reaching the Medicaid level for a physically or mentally compromised senior may require the use of a power of attorney. Prior to 2009, this document was only three pages and simply required the notarized signature of the principal (the person granting authority to someone else to manage financial affairs). The appointed agent was not required to sign the document. The amendment to the General Obligations Law has resulted in a current power of attorney that can be 13 pages—longer than some people’s last will and testament. The power of attorney is now two separate forms: the general power of attorney and the separate gift rider. There are 30 places where a signature or initial is required. If this complexity prevents seniors from utilizing the form, they may end up requiring a guardianship proceeding. This legal procedure under Article 81 of the Mental Hygiene Law is time consuming, expensive, and intrusive. The popular press is filled with stories of celebrity guardianships involving Mickey Rooney, Glenn Campbell, Brooke Astor, and Sumner Redstone.
• An unlimited amount in retirement accounts that are in payout status. While the principal amount does not count against the $15,450 allowable amount, the required minimum distributions do count as available income.

• A homestead in New York with an equity value of less than $878,000 (2019).
• An irrevocable pre-paid funeral agreement in any amount.

Once a person is accepted onto the Medicaid home care program, they would be entitled to retain $879 (2019) of income per month, plus any fees needed to cover the cost of health insurance.  All amounts above this would have to be deposited into a pooled income trust to be protected: The Medicaid home care applicant would first sign a joinder agreement with an entity recognized by Medicaid as a pooled income trust. The entity would charge a fee for its service. Then, the individual would send their monthly surplus income to the entity, as well as their bills. The entity would use the surplus income to pay the bills. If the full surplus income was not spent each month, it would roll over and be available in the next month; however, upon the demise of the individual, the entity would keep any surplus.

Nursing home Medicaid.

This program looks back over the five-year period before application to determine whether the applicant made any unauthorized gifts. An applicant would be permitted to retain the following resources:

• $15,450 (2019) in non-retirement accounts.
• An unlimited amount in retirement accounts that are in payout status. While the principal amount does not count against the $15,450 allowable amount, the required minimum distributions do count as available income.
• A homestead with an equity value of no more than $878,000 (2019).
• An irrevocable pre-paid funeral agreement in any amount.

Planning Ahead       

The demographic trend in life expectancy means that people are living longer than ever. With longevity comes the increased risk of a long-term custodial illness. If a person is diagnosed with such an illness, it would be wise to meet with an elder law attorney who can give advice regarding the available options.