Should Your Children Pay for Your Health Care?

It’s not news that nursing-care is costing an arm and a leg for Americans and a crisis is looming. Costs can run, on average, over $10,000.00 per month in California. Hundreds of thousands of people presently need that kind of care and the numbers are rising. Ten thousand “baby boomers” a day turn 65, and it’s projected that seven of ten of those people will need long-term care.

By astute Long-Term Care estate planning, Botti & Morison Estate Planning Attorneys, Ltd., reduces or eliminates the impact of such phenomenal costs on many families’ life savings. But many others who are not our clients pay and pay until they simply run out of money. The Medi-Cal program is available to step in and pay.

Some states require adult children to pay for the cost of their parents’ care. This obligation can be imposed through “filial responsibility” laws. Around thirty states have enacted these laws, some of which even impose criminal fines and imprisonment if an adult child is able, but fails, to pay. For which states have such laws, see the table in this article.

In Pennsylvania in 2012, a son whose mother owed $93,000 to a nursing home was held liable for her bill under that state’s filial responsibility law. The case is Health Care & Retirement Corp. v. Pittas, available here.

The rationale for such laws is that parents supported children for many years and the children owe a debt of gratitude: they should return the favor when parents grow old and become unable to provide for themselves. Such laws are supposed to motivate children to exert pressure on parents, to ensure that long-term care planning is done before the children are called on to pay.

There are numerous objections to this kind of law. Children may resent being forced to pay and treatment of the elderly may suffer as a result. The laws differ widely across the states and produce inconsistent results. Courts may not have the power to enforce these laws against children who live in disparate states. Filial-responsibility laws provide no protection for seniors who have no children.

Further, federal law currently prohibits nursing homes from demanding payment from funds other than those belonging to the resident – like a child’s money.

Other alternatives are more-wisely designed to care for elderly people at home, to delay the need for institutional care for as long as possible. In-home care is estimated to cost one-third the amount of institutional care. Further, personal care can be more suited to the individual if it is given by family and community caregivers. The emotional benefit to the elder can be incalculable.

The need for such programs has been recognized by the Affordable Care Act, which greatly expanded options for states to increase funding for home- and community-based services. Additionally, there are HUD funds available for projects like ECHOs (elder cottage housing opportunity units) – “granny cottages,” small houses for the elderly on a child’s property, to keep family help close by. A 2003 study on the results of that program is available here.

Additional tax deductions and exemptions, like those already allowed in the Medicaid rules, could provide more incentives for at-home improvements like wheelchair ramps and grab-bars. Easing qualifications for long-term care insurance deductions could be encouraged. Family and medical leave from employment could become more available, to relieve the caregiving burden that currently rests disproportionately on women and low-income workers. Subsidies to community elder-care services could be beefed up.

The problem of paying for elder care is multi-faceted and should be tackled on numerous fronts. The options other than filial-responsibility laws seem better-advised to relieve the Medi-Cal program from the stresses it faces now and into the future.

In the meantime, experienced elder-law attorneys are here to help you protect your finances from the burgeoning costs of aging. Give us a call to discuss your particular needs and how we can help. If you’re relying on a 401(k) or and IRA plan for your retirement, is suggesting it is time to rethink your financial retirement portfolio. You may have built up a significant nest egg with these plans, but it does come with serious baggage during your golden years. It is impossible to argue against the early stages of a 401(k) when employers match your contribution to the plan. You can take advantage of the tax breaks because contribution money comes out of your paycheck before calculating taxes and that money compounds every year. When you retire, however, the tax impact of a 401(k), 403(b), or traditional IRA can become significant.

You have probably been told at retirement time that you will be in a lower tax bracket however; it is more likely that the opposite will be true. Your tax rate is expected to increase. If you maintain the same standard of living, it will require the same amount of income, which translates to the same tax rate. Additionally, your children will be grown, the house paid off, and those substantial tax deductions are gone which may push you into a higher tax bracket. You will pay taxes on withdrawals from your contribution plan(s) annually irrespective of if the money comes from dividends, capital gains, or your contributions. That money will be taxed at your income tax rate at the time of withdrawal. Currently, the top marginal income tax rate is 37 percent, and taking into account the US deficit that tax rate could increase in time.

Double taxation can eat away at your retirement savings and is often the norm because you can pay more taxes on your Social Security benefits. Unless you have a Roth IRA, distributions from your retirement plans count against your tax situation when calculating what percentage of your Social Security is subject to tax. The result is you are paying more taxes on your retirement plan distributions and Social Security income. You are also paying more taxes from capital gains, dividends, and interest from your investments.

Required minimum distributions (RMDs) can be frustrating and expensive if you neglect to take them. You have to withdraw funds from your retirement fund accounts when the IRS deems it necessary. Even if you want to leave the money in the account, the IRS will schedule your withdrawals when you reach 70 ½ years old. There are stiff penalties for not taking out the required minimum distribution. You may pay as high as an additional 50 percent tax.

If you are married a 401(k) or IRA is the worst account to leave to your surviving spouse. No one wants to die without leaving their spouse financially secure, but these two financial vehicles are fully taxable accounts. Upon your passing, your spouse is about to change tax filing status from married filing jointly to single. That takes your spouse’s tax obligation from the lowest to the highest bracket. Probably not exactly what you had in mind.

Both your 401(k) and IRA plans are subject to tax law changes. Every time Congress convenes a session, there is the possibility that increases in taxes on your retirement plans can occur. It is highly unlikely that your taxes won’t increase. The US debt continues to grow at an alarming rate. The US government will tax its citizens more than ever to gain some level of financial control. Privatize the gains, socialize the losses is the federal government’s rule of thumb, particularly when considering how massive the US debt is.

Get together with a tax planner to identify ways to move your retirement funds into better financial retirement vehicles. Sometimes conversion can cost a bit of money upfront, but in the long run, you will be far better off with regards to your retirement tax obligations. If you have questions or would like to discuss your personal situation, please don’t hesitate to reach out. Please contact us today at 877-585-1885  or schedule a free consultation to discuss your legal matters.

Thanks for reading.

Christopher E. Botti, Esq., Certified Specialist in Estate Planning, Trust and Probate Law