Long Term Care, Irrevocable Life Insurance Trusts, and Reverse Mortgages

January 21st, 2010 | by Jim Veale Published in Commentary, News, Reverse Mortgage | 37 Comments

Late last month Mr. Bob Greene stated: “I have often wondered why there is such an uproar … against using a portion of reverse mortgage proceeds to fund LTCi or an ILIT. These … can be valuable tools to assist in protecting ones estate and legacy.…. I was always under the impression that the goal of a reverse mortgage is to assist seniors who want to age in place … and to assist them to protect themselves, their estate, and their legacy.” Mr. Greene asked for a response to his comment. This article is that response.

While I generally agree with the assessment that LTCi can be a valuable tool in protecting most estates and legacies, Irrevocable Life Insurance Trusts (ILITs) can be nothing more than a loss of control and a potentially huge loss of money for the vast majority of taxpayers and their estates. For readers who are not familiar with estate planning, ILITs are trusts recognized both under state law and tax law as legal entities to hold life insurance for heirs outside of the estate of the trustor.

LTCi Specifically

Throughout 2009, many opined on this website about paying for LTCi with reverse mortgage proceeds. Because LTCi varies substantially by benefits, cost structure, and the financial stability of insurers, buyers should carefully compare policies and should not be pressured by other considerations including originating a reverse mortgage to pay for LTCi. Thus not only should cross selling be condemned but so should all other reverse mortgage origination transactions during the period of LTCi consideration. Once selected there is no reason why reverse mortgage proceeds should not be used to acquire LTCi.

LTCi can be beneficial for individuals with smaller estates as well as those with large ones; however, LTCi is not a good option for everyone but should be investigated by everyone. What benefits might be deemed necessary as younger adults may not necessarily be the same as one ages; thus one should review the policies periodically. Too little LTCi could be nothing more than a waste of money; too much is wasteful as to the excess. Competent, knowledgeable, and experienced fee based LTCi advisors who do not sell LTCi will provide guidance which many times results in cost savings many times the fees incurred. They can also provide better matching of benefits and help compare the financial stability of insurers along with providing information on the reputations of companies for honoring policies and paying benefits.

With Rare Exception, ILITs Are For the Wealthy

ILITs are very different. The primary use of ILITs is to provide more life insurance proceeds to heirs than can be achieved through inheriting them directly through the estate. ILITs are rarely used in smaller estates unless unusual circumstances exist such as when a spouse is a nonresident alien. At times they are used in divorce property settlements and in child support cases to hedge against lost support in the event of death of the provider. Some charitable remainder trusts may be set up very similar to ILITs but that goes beyond the scope of this article.

ILITs are designed to hold life insurance so that proceeds are not subject to the estate tax assessed on the net taxable assets of the estate as a result of the death of the ILIT trustor. Normally cash is contributed to an irrevocable trust and life insurance is then purchased by the trust on the life of the trustor. Costs incurred for creating, funding, operating, and terminating an ILIT can include income taxes, gift taxes, life insurance premiums, and fees for administration, accounting, legal services, tax consulting and tax return preparation. The beneficiaries of an ILIT normally cannot be changed.

In the last decade we have seen some of the most radical and sweeping changes in estate tax law than at any time in the prior 60 years. In some cases, ILITs that seemed quite necessary when created proved to be little more than wasted costs and unnecessary restrictions on the trustor.

The Bush Administration sponsored legislation in 2001 that reduced estate tax rates and increased the unified estate tax credit between 2002 and 2009. The result is that for estates whose decedents passed away in 2002 the first $1,000,000 in net assets passed to heirs with no estate tax. Eventually for estates whose decedents passed away in 2009, the first $3,500,000 of net taxable assets were free of any estate tax. With a little estate tax planning up to $7 million in net assets of a married couple can pass to heirs with no estate tax but only if the estate tax remains the way it was at the end of 2009.

As the estate tax law currently stands starting on January 1, 2010, the estate tax terminates for one year. Then on January 1, 2011, the estate tax returns to the way it was in 2002. President Obama campaigned to repeal the termination of the estate for 2010; however, he never explained his vision for the estate tax after 2009. The House has passed a bill that essentially would leave the estate tax structure the same way it was as the end of 2009 for all years thereafter including 2010. Until the Senate begins considering the House bill, no one is sure how the estate tax will change if at all.

With the reduction in many asset values over the last half of the last decade, the estate tax impacts even fewer estates. This means ILITs have become less and less beneficial, sometimes incurring needless but substantial gift tax liabilities.

In late 2008 an attempt was made to present to originators and lenders the use of reverse mortgages in funding ILITs. The presenter was right on point when she stated that with the loss of proprietary reverse mortgages, it was doubtful if ILIT funding using a HECM would be practical. HECMs simply do not provide the kind of funding needed, although they might provide a part.

In evaluating whether an ILIT is an effective vehicle or a loss of time, money, and control, it is important to project any gift tax liability and to determine the deductibility of the accrued interest. In many cases, using assets earning taxable income may be wiser than using a reverse mortgage to fund ILITs. To evaluate the net benefits of an ILIT and also the different ways of funding them, it is important to use time value of money concepts.

It is estimated that less than 0.34% (less than one-half of one percent, less than one in 300) of the estates of decedents who passed away in 2009 will be required to file estate tax returns. Many of those will pay only minimal estate taxes. Thus ILITs are very beneficial for large estates whose decedents passed away in 2009 and a very minute percentage of smaller estates. There is much more to say about the desirability of ILITs over direct gifting to heirs and having them purchase the life insurance but the purpose of this article is to focus on funding ILITs through the use of reverse mortgages.

Today ILITs are not as popular as an estate planning vehicle as they were in the first half of the last decade. The situation could change depending on the action Congress takes this calendar year. Until proprietary reverse mortgages return and provide substantial proceeds, using reverse mortgages as a means of funding ILITs will be little more than an interesting curiosity of the last decade.

James E. Veale, CPA, MBT
SVP of Tax and Government Affairs & Director of Originator Recruiting for Security One Lending

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James_E_Veale_CPA_MBT

I apologize that I did not add a caveat at the end of the article. While the article presents my opinion on the issues presented, estate tax planning should be done with a competent, knowledgeable and experienced estate tax planner. Because the article includes tax matters, readers are hereby advised that using it for tax planning purposes will not mitigate any tax penalties that may result from relying on its contents.

Now that all of the IRS obligatory statements are complete, I hope you enjoy its contents.
A beginner trying to learn

Thank you for your work! thanks for sharing!

Very educational. Your effort is appreciated.
dduck12

Thanks for giving a primer to the folks in your industry. As you pointed out, LTCI and ILITs are potential tools for some. Your remarks on ILITs are not too bad, although I would not like to be the home owner that bought his dream house for, say, $100,000 and dies today with his house valued at a million. Absent IRS clarification, the $900,000 less the exemption (say $500,000) would mean a $400,000 capital gain. You are better at this than me, so correct me if I am wrong, but an ILIT would have provided $400,000 in insurance proceeds for potential CG taxes. (Remember, potential state estate taxes still have to be considered). Of course, for now, non-ILIT insurance would also work if there are no federal estate tax liabilities. Your remarks on LTCI would be equivalent to me arguing tax planning or RMs with you (I would lose badly). In other words, not as accurate as your ILIT comments. The trick, is not to seek out a fee only adviser, but one that is proficient with LTCI. There is nothing wrong with commission sales people I believe you people earn your living that way.
All that being said, RM proceeds can and should be used for tax and estate planning for some more affluent clients, but of course in a ethical way. An ideal team would be an accountant, a elder care lawyer and a financial adviser. Short of that, I would start with a competent elder care attorney.
jamesanelson

Thank you, Mr. Veale, for your very illuminating and lucid remarks.
billwenner

I have a different slant on this subject. I suggest a hybrid annuity with a LTC rider that allows for home care. This plan is a win win for both the client and family members. Mom and Dad don't want to go to a home and family members who don't want to face the spend down problem.

The tax problems don't concern my clients as there assets are well below a million dollars .
dduck12

Good idea, they have been around for over a year.
James_E_Veale_CPA_MBT

Mr. Wenner,

As dduck12 points out, LTCi is not my strength only its financial impact.
James_E_Veale_CPA_MBT

Mr. Nelson,

You are welcome. I am glad you found it helpful.
James_E_Veale_CPA_MBT

Beginner,

You are a welcome.
James_E_Veale_CPA_MBT

dduck12,

In the years when the federal estate tax is active, the income tax adjusted basis of inherited property is exactly equal to its value on the date of death of the decedent. Even under the existing 2010 elimination of the estate tax, there is a limited positive adjustment for inherited assets where the adjusted income tax basis in the hands of the decedent is less than its value on the date of death of the decedent. During this year of elimination and assuming the elimination stays in place, there would be no federal estate tax on life insurance whether owned by the trustor or an ILIT.

Your point about state estate taxes is correct; however, that is beyond the scope of the article. Normally such laws piggyback and look to federal estate tax laws. Usually their magnitude is not significiant to any but the most wealthy estates.

Some believe you get what you pay for and not always then. The problem with using commissioned LTCi salespeople is that the purchaser will not generally be given an unbiased opinion about policies the salesperson cannot provide. But you are right, the fee based only advisor needs to know LTCi or why use that person? Thanks for bringing that out.
dduck12

The problem with using commissioned LTCi salespeople is that the purchaser will not generally be given an unbiased opinion about policies the salesperson cannot provide”

Sorry, not correct, there are commissioned people (like your industry) that will not give an “unbiased” opinion. Think, those selling HECMs that don't offer tenure. Fee only doesn't mean squat. Expertise and integrity is what counts.
Are there fee only advisers in your industry, please advise with info.
jsmaldone

James,

You did a great job as usual. However, I take the position we should not be advising either way except on the non use of an irrevocable trust. We are not Attorney's or CPA's, excluding present company of course.

To many LO's get themselves and our seniors in trouble by over advising on issues they need to stay away from.

Your article covers the long term health care advantages and disadvantages very well. You also explain the irrevocable trusts very well and the risks involved.

Again, I repeat myself for those loan officers who venture into territories they do not belong in. Let a qualified Attorney or CPA like James Veale give the answers to many of our seniors questions.

Thanks again James for your professional presentation, you are well appreciated.

Best regards,

John A. Smaldone
The_Cynic

Mr. Smaldone,

As stated at the begiining of the artilce it was a response to issues raised by Bob Greene last month. I certainly do not advocate it being used for any other purpose.
James_E_Veale_CPA_MBT

Mr. Smaldone,

As noted in the first of the article, its purpose was to answer issues raised by Mr. Greene. I certainly do not advocate its use beyone that purpose.
jsmaldone

James and Cynic,

I know James was responding to the issues raised by Bob Green. I understood
that James does not advocate it being used for any other purpose. I was
merely trying to point out or re-enforcing James position to others reading
my comment. I do apologies if my comment was taken the wrong way.

James did an outstanding job with his response to the issues raised by Bob
Green. Please forgive me if the way I presented my comment was taken
offensively. Thank you clinic for your response to me as well as yours
James. Have a great weekend, the both of you.

My best,

John A. Smaldone
Bob Greene

Jim,

Thank you for your insight it is always appreciated.

Like you said LTCi is not for everyone but they should be investigated by everyone…the same is true about a reverse mortgages.

As far as commissioned salespeople and “fee only” all I can say is that there are good and bad on both sides, and both sides are always concerned with their paycheck.

The bottom line is that as an LO, first you must earn the respect of your clients and the community you serve, (serve being the key word) once that is done (which takes TIME) the doors will open to working with Atty's, CPA's, Estate Planners, that are well respected in your community that the LO can fall back on for their expertise.
James_E_Veale_CPA_MBT

Mr. Smaldone,

I hope my response gave you no offense. You are right. This article was designed to answer the comment by Mr. Greene and specifically add some meat to the ILIT skeleton. LTCi was the least thing addressed but as anticipated, the issue producing the greatest response.

Your participation on this website is valuable and greatly appreciated.

Have a great weekend.
James_E_Veale_CPA_MBT

Mr. Greene,

Thank you for this and your prior comment. I appreciate your participation on this website.

When writing the article, I realized bringing up fee based only LTCi advisors would bring ire from those who are commissioned based LTCi salespeople but the fact is, it is difficult to be selling a product and not be biased; otherwise, everyone would be selling the same products.

By the way there is absolutely nothing wrong with bias if the purchaser is aware of how that bias may impact the recommendation. Fee based only LTCi advisors will have biases as well; however, it is their job to limit such bias.

Because many have never used fee based only advisors, it is important to understand that the client should be encouraged to meet with commission based individuals as well. Fee based only advisors are prepared to gather, analyze, and present options in a manner that most clients find less confusing than if the clients attempted the same exercise on their own. Most fee based advisors know more about competing products than commission based salespeople since they should be evaluating them and any changes in the products frequently. Even though fee based only advisors may be biased, their bias is not based on the commission they will make as the result of the sale.

LTC insurance is not cheap and purchasers should consider their selection with all prudence and care. Fee based only LTCi advisors can help in that regard.

For sake of clarity, I am not a fee based only LTCi advisor nor do I sell LTCi.

Have a great weekend.
jsmaldone

James,

Thank you for the E-mail. I was worried I offended you and I sure did not
mean it that way. I think a lot of you and have a lot of respect for you.
You know what you are talking about and have facts to back up your
statements. Not all people these days do or know how to back up their
statements. You have a good weekend as well James.

Best regards,

John Smaldone
James_E_Veale_CPA_MBT

Mr. Smaldone,

As I have said several times, we may not always agree, but I know that your heart is in the right place. Your opinions and correspondence are always welcome.
jsmaldone

Thanks James, you are a good man.

John
dduck12

As far as commissioned salespeople and “fee only” all I can say is that there are good and bad on both sides, and both sides are always concerned with their paycheck.”

I have no problem with that statement as long as you are including all in your industry.
We are all selling financial products and lawyers and accountants are selling their expertise; most have bills to pay.
dduck12

LTC insurance is not cheap and purchasers should consider their selection with all prudence and care. Fee based only LTCi advisors can help in that regard.”
A commission sales person specializing in LTCI will usually know more and make better recommendations than a fee-only generalist.
Don't you guys know more about RMs than a general mortgage broker?
prescottcole

Low wealth, long-term care nursing homes, and reverse mortgage
Since reverse mortgage are mostly designed for low wealth seniors (who are asset /cash poor), most reverse mortgage borrowers should never get involved with long-term care insurance. When you are dealing with seniors, it is imperative to know that, when they are low wealth, they will immediately qualify for long-term Medicaid benefits – as soon as they go into a nursing home. Consequently, they don’t need LTCi. It isn’t suitable. If it isn’t suitable to sell a LTCi, then using a reverse mortgage to fund it would be unconscionable.
Where long-term care insurance policies are financially detrimental:
LTCi pay out a certain amount per day to the facility. This goes to cover the facility’s private pay requirement. Where LTCi policies do not pay 100% of the facility’s required private pay rate (and few do), once in a nursing home the resident will be responsible for paying the difference between that which the policy pays and the facility’s total private pay requirements. The payment difference will be made up from either income or any assets the resident has access to. If they can’t come up with the money, they will be discharged (the facility’s version of default and foreclosure).
Single low wealth individuals
Assets: Individuals having no non-exempt assets will qualify for Medicaid immediately upon filling out an application. For these people, there is no need for the LTCi and it would make no sense for them to carry a long-term care insurance policy, under any circumstance. While using a LTCi insurance policy the low wealth single individual will have to use his or her income to pay the shortfall between what the policy pays and what the facility requires. In some instances, a low wealth individual may not have enough income to cover the shortfall. In these instances, the individual would be better off applying for and getting onto Medicaid and not wasting time with a LTCi policy.
Married low wealth couples
Assets: Married couples with non-exempt assets would qualify for Medicaid immediately upon filling out an application, there would be no need for a LTCi, and it would make no sense for them to carry a long-term care insurance policy under any circumstance.
Income:
While using a LTCi policy, the married resident will have to use their income to pay the shortfall. Nothing in the LTCi policy protects the married couple’s income from being used to service shortfalls. Since the individual doesn’t retain any of his or her income while using policy the individual would receive no benefit from having a policy. Once on Medicaid there are no shortfalls. Shortfall only occur if an individual has a LTCi.
LTCi should never be sold to low wealth individuals or married couples and low wealth seniors should never be use reverse mortgages fund LTCi.
dduck12

LTCi should never be sold to low wealth individuals or married couples and low wealth seniors should never be use reverse mortgages fund LTCi.”

Once again (since you have not answered previous request), what is your area of expertise? Since it ain't LTCI.
Why do you persist in rehashing this subject?
And, finally, please refer your clients to a CFP, a CLU or ChFC, or a CPA with a financial planning designation. An elder care lawyer is also good. Stick to your own knitting.
prescottcole

Attorney – Financial Abuse Litigation – Financial Abuse Legislation
BarbaraHanson

I have sold LTCi for 15 yrs and I have seen the “low wealth” elderly woman who said she bought LTCi because,”Peace of mind–not dependent on children. I can choose the quality of my care. As an ex CNA I've seen the difference in the care of welfare patients vs paying guests. In some cases it's drastic.”
Let's not be cavalier with who should and who should not be covered. After 10 years of paying premiums, she is now in a lovely assisted living facility off the Pacific coast and is very happy about her purchase.
An expert LTCi agent asks the client why they want insurance and lets the client know all the possibilities. Most specialists in this very limited field have had personal experience w/ LTC issues and are there for the client. Ask how many clients they have–if it is over several hundred, you have an expert w/ a proven track record.
So far, I have had only one person who wanted LTCi after a reverse mortgage–she ran an assisted living facility.
With the current budget concerns and the coming Baby Boom, I would not want to depend on the welfare system for quality care–now or later.
dduck12

Thank you Barbara. (I didn't want to go into those details you provided.)
And, as I have, I'm am sure you have smelled the difference in a facility that is primarily Medicaid and one that is not.
(Meantime keep them at home.)
prescottcole

If your low wealth client is in California (you mentioned the Pacific Coast) and in assisted living, Medicaid (Medi-Cal) would not be a factor since Medi-Cal doesn’t cover assisted living facilities. My concerns are over nursing home long-term care insurance, not assisted living. Also, note that Aging Services (the assisted living trade organization) have their concerns about reverse mortgages and their are impact on their industry. Aging Services was a the co-sponsor of the reverse mortgage bill, AB 329. Their concerns come from their members reporting that seniors with reverse mortgages are having to be removed from their waiting lists. They calculate that those seniors will not have enough money to buy their way in when their time came to move out of their homes. Did your low wealth senior fund her assisted LTCi through the proceeds of a reverse mortgage?
James_E_Veale_CPA_MBT

dduck12,

Please see my reply to Mr. Cole below.
James_E_Veale_CPA_MBT

Mr. Cole,

While I believe that LTCi can be a very effective product when acquired through a judicious, deliberate, and prudent evaluation of various products and features, I also believe that it can be wasteful. There have been stellar presentations of its glories even for low income purchasers but they were anecdotal.

Many of us who are not familiar with its implications especially for the low income senior need your insight. We would greatly appreciate a compelling presentation on why low income seniors should be skeptical about using their home to finance LTCi acquisitions. Be prepared for a strong reaction.

I am no expert on anything other than the financial consequences of LTCi decisions. Well matched LTCi does provide a plethora of benefits to many beneficiaries so I do not want anyone to be misled that this is a request for a biased and overly opinionated presentation against LTCi. Just like some seniors should never get a HECM, some seniors could be wasting significant assets by purchasing inappropriate LTCi.

If you look at the size of my article, the least amount of space was dedicated to LTCi, while the greatest to ILITs. The volume of reactions was just the opposite. This industry is loaded with those who promote LTCi yet there are some very rational reasons not to acquire or acquire limited benefits. The latter reasons need a voice. You, sir, seemed most equipped to voice them.
James_E_Veale_CPA_MBT

Elimination of duplicate.
James_E_Veale_CPA_MBT

Mr. Cole,

While I believe that LTCi can be a very effective product when acquired through a judicious, deliberate, and prudent evaluation of various products and features, I also believe that it can be wasteful. There have been stellar presentations of its glories even for low income purchasers but they were anecdotal.

Many of us who are not familiar with its implications especially for the low income senior need your insight. We would greatly appreciate a compelling presentation on why low income seniors should be skeptical about using their home to finance LTCi acquisitions. Be prepared for a strong reaction.

For those who sell LTCi, I am no expert on anything other than the financial consequences of such decisions. Well matched LTCi does provide a plethora of benefits to many beneficiaries so I do not want anyone to be misled that this is a request for a biased and overly opinionated presentation against LTCi. Just like some seniors should never get a HECM, some seniors could be wasting significant assets by purchasing inappropriate LTCi.

If you look at the size of my article, the least amount of space was dedicated to LTCi, while the greatest to ILITs. The volume of reactions was just the opposite. This industry is loaded with those who promote LTCi yet there are some very rational reasons not to acquire or acquire limited benefits. The latter reasons need a voice. You, sir, seemed most equipped to voice them.
dduck12

Please see my reply to Mr. Cole below.”

Please read Ms. Hanson's reply, above.
Why would you want a biased article (Cole is a Financial Abuse Litigation attorney), on this subject? You can do better, or just drop it.
prescottcole

I'll get on it.
James_E_Veale_CPA_MBT

dduck12,

Our industry is loaded with positive literature on LTCi which is deserved. However, legislation has been formulating especially here in California on the need for the lender to enter into the suitability issue. If we have to be a party to such issues, it is important to hear the other side.

I apologize if you find this exercise offensive; that is not intended. Personally I find it somewhat irrational that the provider of a HECM would be required to enter into a discussion in which there is little if any expertise or even competence. So we in California need to become familiar with not only the pros but also the cons regarding senior acquistions of LTCi with HECM proceeds. Mr. Cole will be helpful in filling in the latter. Obviously, I am not representing RMD in this request; Mr. Cole is aware of that.
prescottcole

Reverse Mortgages and Unsuitable Long-Term Care Insurance:
Is it “Buyer beware” or Civil Financial Elder Abuse?

Most consumers think of long term care insurance (LTCi) only in terms of insurance against future nursing home care. However, comprehensive long term care insurance will include benefits for home care, assisted living and nursing home care. According to Neil Granger, a life agent with two decades of experience in LTCi sales and plaintiffs' expert witness (http://ngrangerconsulting.com/about.html), the typical policy premiums are between $3,000 and $5,000 per year and, when used pays $100 per day for two to three years of in-home or assisted living care ($36,500 per year). Long term care insurance policies can be a life-saver for those who would otherwise have no options but nursing home care.

Great caution should be taken against using a reverse mortgage to fund LTCi policies. Due the high costs of a reverse mortgage’s compounding interest, origination fees, service fees, insurance, etc., the longer an individual pays for LTCi premiums through a reverse mortgage, the less likely the transaction would be suitable. Brokers should be prepared to show potential borrowers illustrations of the compounding costs of the reverse mortgage alongside of the LTCi policy’s projected policy payouts (minus the annual LTCi premium costs).

This article addresses the suitability of long term care insurance – specifically nursing home insurance – for those with limited income and assets. It also addresses the suitability of using a reverse mortgage as a means to pay for long term care insurance – a strategy that can often have costly consequences for seniors and, for those who do end up in out-of-home care, a strategy that can cause them to lose their homes.

Contrary to the statistics included in typical long term care insurance marketing material, the average length of stay in nursing homes is much shorter than the two and a half years usually quoted. According to U.S. Department of Health Services’ Centers for Disease Control and Prevention and California’s Office of Statewide Health Planning and Development (OSHPD)], between 40 – 45% of seniors will go into a nursing home at some stage of their lives. Of those who enter a nursing home, 70% will be discharged within ninety days, i.e., go home, go to an assisted living facility, or die. At 120 days, 80% will be discharged. Less than 12% of those entering a nursing home will be there for one year, and less than 6% for two or more years.

The primary questions for anyone considering long-term care insurance are do they need it and if they have it, what will be covered if they end up in a nursing home? Long-term care insurance is expensive, and any individual interested in obtaining a long-term care policy should be certain that they need to purchase this type of insurance before making that financial commitment. Not everyone needs long-term care insurance. In some instances, individuals will automatically qualify for the government’s long-term care benefits program, Medicaid (Medi-Cal in California) and therefore never need LTCi.

In a case that is currently under review at our office, a woman called because her mother went into a nursing home with a long-term care insurance policy that pays $108 per day, but the facility required $185. The mother’s income was $800 per month. In order for the mother to stay in the nursing home, the daughter had to make up for the shortfall. Because the mother was low wealth and didn’t have any non-exempt assets, she applied for and immediately qualified for long-term care Medi-Cal (Medicaid) benefits. This raises the issue as to whether or not the long-term care policy was a suitable product for the mother and, if it wasn’t suitable, can she sue for damages?

In this instance, there was no reverse mortgage involved. Had a reverse mortgage had been used to finance the purchase, the out of pocket cost for any plaintiff would be substantially higher due to the high cost of the loan being used to finance the purchase. Whether or not the reverse mortgage broker would share in the liability, should a purchase prove unsuitable, remains to be seen.

Who qualifies for LTC Medi-Cal (Medicaid)? Between 60 and 65% of the individuals currently in California nursing homes are on the Medi-Cal program. Medi-Cal is a needs based program. In California, an individual can qualify for Medi-Cal so long as he or she doesn’t have any non-exempt assets. Currently, exempt assets are such things as houses (regardless of value), cars of any value, IRAs, Pensions, 401ks, all personal property and $2,000 cash. If the individual is married, the at-home spouse can retain up to $109,560 in cash. For purposes of this discussion, those who qualify for Medi-Cal should be considered non-candidates for long-term care insurance. These individuals have no need for long term care insurance.

Who needs long-term care insurance? Individuals who do not qualify for Medi-Cal are required to pay privately for their nursing home care. Long-term care insurance is a way to help an individual who does not qualify for government benefits to offset the expenses due to the facility. Currently, between 22 to 27% of individuals in facilities are self pay or self pay plus insurance. The Medicare program, which maxes out after 100 days in a facility, is covering the costs for 6 to 8% of the residents in the facilities.

Generally speaking, an insurance policy pays an amount to the facility that is below the rate that the facility requires. Most long-term care insurance policies are paying approximately 70% of the monthly nursing home’s required rate. Nursing home care is considered “custodial care”. By law, Medi-Cal cannot pay a facility a rate that is higher then the private pay rate. Consequently, nursing homes prefer accepting private pay residents to those who are use the Medicaid program. In certain states (such as California) family members may pay the facility the difference between its private pay rate and what Medicaid pays and get a private room or other amenities their relative.

It is generally a bad idea for low-wealth seniors who qualify for Medi-Cal to use a reverse mortgage to finance long-term care insurance (nursing home) policies. Medi-Cal rule of thumb: The home is exempt and cash is counted. Seniors with houses qualify for Medi-Cal. Cash received from a house that has been sold will not be exempt for purposes of qualifying for Medi-Cal. If all that a low-wealth senior has is a home, then he or she (more likely than not) will qualify for Medi-Cal, which covers the cost of their nursing home care. If the senior qualifies for Medi-Cal without needing a LTC insurance policy, then there is an argument about suitability. Seniors with reverse mortgages who would otherwise qualify for Medi-Cal without having long-term care policies can actually end up disqualifying themselves from Medi-Cal twelve months down the road. After being out of the home for twelve months, the RM is due. Once the RM comes due the house will be sold to pay back the loan. Although a house is exempt, cash isn’t and with the remaining proceeds after the house is sold to pay off the RM, the individual will likely be over the allowable asset limit and will not qualify for Medi-Cal.

The ethical dilemma for the broker is this, what do you do when a friend, who is an insurance agent, brings in an eager elder who wants a reverse mortgage in order to pay for a long-term care insurance policy when you know that the elder’s only asset is a house and would qualify for Medi-Cal (Medicaid), e.g., the insurance policy is unsuitable? In California, since the passage of AB 260, reverse mortgage brokers are considered to have a fiduciary duty towards a borrower. With the passage of AB 329, California brokers have to furnish borrowers with a suitability checklist. Within the suitability checklist is the following admonition: “Whether the prospective borrower intends to use the proceeds of the reverse mortgage to purchase an annuity or other insurance products and the consequences of doing so.”

These are new laws haven’t been tested therefore. Therefore it is not clear whether or not a broker can be held liable for the actions or activity of an insurance agent who sells an insurance product that turns out to be unsuitable. Brokers should seek a legal opinion from their counsel to be certain of the extent of their duties to their clients. Counsel should also be asked to give their opinions on the meaning of CA.WIC § 15610.30(a)(2) that creates liability under the civil financial elder abuse statute for individuals who “assist” in any wrongful taking of the property of an elder and whether or not providing a loan could be considered “assisting” in instances where, but for the existence of the loan, the elder would not have been able to purchase the product. Brokers who operate in other states should seek counsel from lawyers who are familiar with their state’s elder statues.

Long-term care insurance is not for everyone and would most likely not be suitable for low-wealth seniors who would otherwise qualify for Medi-Cal. Low-wealth seniors who qualify for Medi-Cal and who purchase long-term care insurance and use reverse mortgages to finance long-term care insurance are unnecessarily diminishing their estates. Brokers who know that their clients intend to purchase long-term care need to investigate the extent of their fiduciary obligations towards their clients, to make sure that no attributable or vicarious liability attaches to them. If their client is using a reverse mortgage to finance an insurance product that is found to be unsuitable, trouble may lie ahead.

Long Term Care, Irrevocable Life Insurance Trusts, and Reverse Mortgages

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