The perils of outdated beneficiary designations

"But I just want a simple will!" "I'm not rich!" That's how some new clients respond when our attorneys ask to see a list of their assets and how they are owned (titled). We make the same request when we meet with clients for their periodic estate planning reviews. 

We are no more fond of  unnecessary paperwork than you are, so we understand resistance to filling out forms. Nonetheless, an accurate, complete and up-to-date asset list is essential if we are to ensure that your estate plan is, and remains, effective. Here's why: Assets for which you have named co-owners and/or death beneficiaries will not be distributed according to the provisions of your will. These assets will pass "outside" your will, by operation of law. This is not necessarily a bad thing; well-considered beneficiary designations may have a useful role in your estate plan. However, if your beneficiary designations do not reflect your true intent, or if you mistakenly believe your will supersedes the designations, you could be creating chaos for your family.

Here's a recent case that illustrates the point: Pennsylvania resident Gary Vassil worked for the federal government in 1997. At that time, he named his wife, Denise, as an 83% beneficiary of his Federal Employees Group Life Insurance Policy. The remaining 17% was to be divided among three other named beneficiaries: Megan Vassil, Melanie Vassil and Rhonda Ludwig. 

Gary and Denise divorced six years later. In April 2016, Gary died. Upon his death, the insurance proceeds were distributed as Vassil had requested back in 1997, with 83% earmarked for his ex-wife. As you can imagine, this did not sit well with Megan, Melanie and Rhonda. When they asked Denise to waive her rights to the policy and she refused, they took their case to court. But they did not get the outcome they wanted from the court, either: While Pennsylvania law denies an ex-spouse the benefit, federal law governing the policy prevailed in this case. Under the federal law covering the federal employees insurance policy, the death benefit must go to the named beneficiary (or beneficiaries) - unless the owner has changed the beneficiary, or the divorce decree indicates the ex-spouse is not entitled to it.

The court wrote:  "It may well be that Gary Vassil did not realize that if he wanted to change the distribution of his life insurance benefits following his divorce, he needed to submit a new beneficiary designation form or some other proof of his intent to alter his beneficiaries as required by §8705(e). If so, the payment of benefits to Denise Vassil would be contrary to the genuine wishes of Gary Vassil, and that is unfortunate. However under the applicable federal statute the Court does not have the power to remedy such a mistake." (You can read the text of the case here.)

Keep in mind that divorce is only one of life's many twists and turns that can impact on your beneficiary designations and therefore, on your estate plan. Our attorneys occasionally meet with people who have forgotten about an asset that names a now-deceased person as beneficiary. Sometimes we discover that a spouse who is in a nursing home and receiving Medicaid benefits is still listed as a death beneficiary for an asset and thus, if the well spouse were to die first, that inheritance could terminate the beneficiary's Medicaid benefits.

Insurance companies, brokerages and banks are bound by the law. They cannot ascertain what an asset owner's true intention might have been, or make moral judgments about which beneficiaries are really entitled to what. Therefore, it is up to you to make sure your beneficiary designations truly reflect your current situation and your current intent. Our Florida estate planning attorneys will review your asset list when we meet, and will help you determine if any of your beneficiary designations needs fine tuning. Note that if you want to change beneficiaries, it cannot be done through your will. You must notify your insurance company, banks, brokerages, etc., and submit the appropriate forms. It is always a good idea to request written confirmation of the change, and save the confirmation for your records.

Insurance companies doing business in Florida: Ignorance is no longer bliss

Life insurance can play a useful role in many people's estate plans. It can provide replacement dollars for pension and Social Security income for a surviving spouse, or provide a guaranteed inheritance amount to beneficiaries, such as a spouse or children. It can be an asset that grows tax-deferred if cashed in during your lifetime, or tax-exempt if it passes upon your death. It can be an asset that provides protection from creditors, both pre- and post-mortem. Lastly, if you have a taxable estate, it can, if properly titled, be a way to pay estate taxes without adding to the size of your taxable estate. 

But let's say that when you pass away, no one can find your insurance paperwork. Or no one even knows the policy exists. If you think the insurance company is going to go out of its way to figure out if you're still around, and to find your beneficiaries, think again. For insurance companies, ignorance is bliss - and profitable. Companies have been sitting on piles of money in unpaid benefits - estimated by some to be nearly a billion dollars - without any pressure to locate the rightful recipients. Investigations show that some companies, even when aware of an insured's death, do not pay out unless the beneficiary contacts them. 

Condemning this practice last January at a Florida Senate Banking and Insurance Committee meeting, the state's Chief Financial Office Jeff Atwater said: "For years insurance companies had no trouble sending their agents to their house for the weekly payment. They knew exactly where they lived for 20 years. But now that it may be time to pay up, it's a horrified hardship to find that individual."

Well, the era of blissful ignorance ends July 1. That is when Florida will require life insurance companies doing business in the state to actively seek out beneficiaries of insureds who have died. Companies must routinely consult the U.S. Social Security Master Death Index, retroactive to 1992, and pay the appropriate beneficiaries. If the company cannot locate the beneficiary, unpaid benefits must be turned over to the State of Florida's unclaimed property fund, so that the search for beneficiaries can continue.

Score one for the consumer!

Getting remarried? Be sure to protect your children from your prior marriage

If you're remarrying later in life, you may gain more than a new spouse. You may also gain a new, bigger family: your spouse's children. You may have your own grown children, too. Hopefully, everyone will get along beautifully. But even under the best of circumstances, remarriage almost always presents unique estate planning concerns. Addressing those concerns wisely and proactively is essential to ensure that your new, bigger family continues to get along after you're gone.

If you're like most of my clients in these circumstances, you probably want to provide some security for your new spouse in the event you predecease him/her. At the same time, you probably want your own children - not your spouse's children -  to ultimately inherit your hard-earned assets. To achieve those goals and avoid family disputes, you must make thoughtful and precise legal plans. You can't be casual about this issue, because Florida certainly isn't casual about it: In the absence of a valid pre- or post-nuptial agreement, Florida law entitles your spouse to (1) a minimum of 30% of your assets (the "elective share"), and (2) a life estate in the homestead property, or a 50% ownership share in it.

As you look forward to this promising new chapter of life, you may be tempted to just leave everything to your new spouse. Perhaps he/she has promised to leave all the assets that originated with you, to your kids, you know your spouse is trustworthy, and you have complete confidence that the promise will be kept. But guess what: circumstances beyond your spouse's control may arise that may make it impossible for your spouse to fulfill that promise, notwithstanding his/her good intentions. Consider these possible scenarios that could arise if your new spouse outlives you:

• Your spouse may come under pressure from his/her children to keep your assets instead of pass them on to your children. Trust me when I say it happens, and frequently. I recently heard this story from one family: "Mrs. K" spent six years caring for her second husband who had Alzheimer's. After he passed away, her children told her she was "morally entitled" to keep everything he'd left her, given how selflessly she'd cared for him. They took it one step further, too:  Since they were caring for their mother in her own declining years, they felt the house should be left to them. After several years of resisting their pressure, she relented and modified her estate plan to pass her second husband's money, and house, to her own children.   

• Your new spouse is only human and presumably, a loving parent. Suppose one of his/her own children falls on hard times or becomes ill and needs money?  Your spouse might be hard-pressed to deny funds to that child - even if that includes funds that were promised to your kids. It doesn't matter if your spouse has a will saying certain assets go to your kids, because a will can be changed at any time, so long as the will-maker is competent. Besides, a will is a death instrument; it has no control over what your spouse can do with the money during his/her lifetime. This also goes for any assets on which you've made your spouse co-owner. There's nothing to prevent a surviving spouse from naming his/her own kids as co-owners or death beneficiaries. 

• Don't assume that if your new spouse outlives you, the balance of his/her years will be healthy ones. Your spouse could become mentally incompetent, and then any "promises" that have been made could become meaningless. Conceivably, your savings could be squandered with bad financial decision-making. And if your spouse's children get control of his/her assets through a durable power of attorney, they will be able to manage the assets, even spending assets that are payable on death to your children.

So, with all these possible twists and turns, what can you do to ensure your kids get their inheritance? There are several possible approaches:

• Create a trust that gives your spouse access to the interest from your estate, and to a portion of the principal under certain circumstances. Once your spouse dies, the principal then gets distributed to your own children. I caution against making your spouse and your own children co-trustees. An arrangement like that can be a tinderbox, providing fertile ground for serious friction between the parties. Instead, I recommend selecting an independent, third-party trustee.

• Enter into a pre-nuptial agreement, or if you've already married, a post-nuptial agreement in which both of you waive your right to an elective share and/or homestead rights. You can agree on what you must leave to each other, if anything. Otherwise, under Florida law, your spouse has the right to the homestead for the balance of his/her life (either to live in it or to rent it out), or to force the sale of the property and take one-half of the proceeds. If you want your children to inherit the house, this issue requires careful consideration.

• Depending on your financial condition and health, consider purchasing life insurance on your life, naming as beneficiary your spouse and/or your children from your first marriage, and leaving some of the proceeds to each. Another possibility if you purchase life insurance is to set up a trust for the insurance that will distribute a specific amount of your choice to your spouse for the balance of his/her life, with the remainder going to your children upon your spouse's death.

The takeaway: Enjoy your new relationship. You are fortunate to find companionship and love again. But please, take the necessary steps to ensure that your money ends up in the right hands.

Long-Term Care Insurers want to know your family health history

If you apply for long-term care insurance, can the carrier ask about your family's medical history? You bet it can. Unlike health insurance companies,  long-term care carriers are not prohibited by the Affordable Care Act from asking about your family's health history. And you can count on them asking more and more of those questions.

According to a September 12 report in Financial Advisor, long-term care insurance carriers are placing increasing importance on your family medical history to determine if, and at what premium, you will be insured. Of particular interest to the carriers, according to Genworth, is whether a parent had early onset coronary artery disease before age 60, or dementia prior to age 70, because of the potential genetic links in both conditions. 

If you find yourself disqualified from a traditional long-term care policy for this or any other reason, you might want to look into the new "hybrid" policies that have come to market in recent years. These  hybrids are basically riders that can be added to life insurance policies and annuities. Hybrids often have lower underwriting standards than traditional policies. In some cases you may not even have to pay anything to add the rider. Also, if you end up not filing a claim, you or your family may be entitled to the funds. Check out my overview of hybrid policies.

While my law firm can often help you preserve assets by securing Medicaid benefits and/or Veterans Aid and Attendance benefits if you require long-term care in the future, I advise all my clients to look into buying long-term care insurance. The cost of a nursing home in South Florida has now ticked up to about $9,000 per month! Obviously it is better for your peace of mind - and your family's, too - to be prepared in advance and to know that you are insured.  The younger you are when you apply, the more likely you are to be insured, and the lower your premiums will be.

New hybrid policies may be good alternative to traditional long-term care insurance

In March I gave tips for preventing or resolving the difficulties that may arise when trying to collect benefits from older, traditional long-term care insurance policies. In this post I describe the new "hybrid" long-term care policies that have come to the market as the industry has matured. These new policies overcome many of the issues that beset holders of the older policies.

Among the attractive features of the new policies is their greater affordability. In fact, if you have an existing annuity or life insurance policy, you may be able to convert it to a new policy with a long-term care rider without any additional expense.

Why do you need long-term care protection?

The 2014 Genworth Cost of Care survey reveals that the median annual cost for a private room in a nursing home in Florida is now a staggering $91,615.00; a semi-private room, $83,950.00. If you have worked hard to build a nest egg and want to make sure your family isn't wiped out by long-term care costs, long-term care insurance may be the answer.

While there is no way to know if any one individual will need long-term care, statistics show that it is a significant risk. According to the U.S. Department of Health and Human Services, someone turning 65 today has an almost 70% chance of needing some type of long-term care services and supports in their remaining years. Women need care longer (3.7 years) than men (2.3 years). One-third of today's 65-year-olds may never need long-term care support, but one fifth will need it for longer than five years. 

Features of the traditional policies

Before discussing the new hybrid policies, let's list the main features of the older policies, so we have a basis for comparison. With the traditional policy:

• You pay an annual premium, either in a lump sum or in installments.

• You continue to pay the premiums to keep the policy in force until you either file a claim (assuming you have a waiver of premium clause in the policy), or until you pass away.

• If you fail to pay premiums, the policy is forfeited. There are no refunds. You derive no benefit from the premiums you  paid to date.

• The insurance company has the right to raise premiums at any time by seeking approval from the State Insurance Commissioner.

Features of  hybrid policies

The new hybrid policies fall into two types: annuity-type policies, and life insurance policies with a long-term care rider.

All of the annuity-type policies, and most of the life insurance-type policies, provide for a single lump sum payment at the inception of the policy. You do not have to pay anything beyond that, ever. The premium and benefits are fixed and can never be altered by the insurance company. 

If you never file a claim, depending on the policy, you may be entitled to a return of most of the premium on an annuity-type policy, or a death benefit greater than the premium on a life insurance-type policy.

If you wish to cancel a policy of either type, you may be entitled to a substantial return. 

Also, if you have an existing life insurance policy or annuity, you may be able to exchange it for a hybrid policy tax-free, without having to pay anything for an additional benefit. You will, of course, have to pass a physical exam. The life insurance policy may offer a lower death benefit than the existing policy, but a substantial long-term care benefit.

Traditional Long-Term Care Policy vs. Hybrid Policy

	Traditional Policy	Hybrid Policy
Premiums	You pay the premium annually or in periodic installments.	Annuities and most life insurance policies: you pay a lump sum at the inception of the policy. No additional premiums thereafter. Some life insurance policies may offer annual premiums.
Policy Lapse	Policy will lapse if you fail to keep up with the premiums. No refunds. No benefits from premiums paid to date.	Policy remains in force after initial payment, except life insurance policies with annual premiums, which must be paid.
Premium Increases	Premium increases may occur if company gets approval for increase from State Insurance Commissioner.	No increases.
Filing a Claim	When you file a claim and if your policy has a waiver of premium clause, you will not have to continue to pay premiums.	With a lump sum annuity or life insurance policy, you may owe no additional premiums. With the life insurance policies that have additional premiums, you will have to make payments even after you have filed a claim, unless you have a waiver of premium clause in your policy.
If You Never File a Claim	No return on what you’ve paid in.	On an annuity type policy, you will be entitled to a lump-sum payment when you cash in the policy, or upon your death. With a life insurance policy, you will be entitled to a death benefit as scheduled.

 

Older long-term care policies: tips on collecting the benefits your loved one deserves

Stay healthy: That's the best way to protect your assets, your family and your independence. Except for one  problem: we live in the real world. Even for those who diligently take care of their health, time marches on. There's a good chance that at some point we - or our parents or other loved ones - will require long-term care, whether at home, in an assisted living arrangement, or in a nursing home. Long-term care considerations must be part of any conversation I have with clients about asset preservation, because the costs are so great and can quickly devastate a middle class family's finances. According to a 2013 Genworth survey, the average national cost of a private room in a nursing home is now upwards of $83,000 annually.

Securing long-term care insurance is always a good idea. However, not everyone can pass the physical. And although tax deductions are available for premiums on qualified policies, long-term care insurance doesn't come cheap. So if you've been paying all along and the time arrives to file a claim, you shouldn't have to go into battle to collect benefits. But sadly, with some older policies, that can happen. Some policies were written ambiguously when the industry was in its infancy, when carriers really didn't know what to expect. Now, it's coming back to haunt some policyholders.

A recent Forbes article by Richard Eisenberg pinpoints problems families may face when trying to collect benefits, and offers tips to deal with insurers who may be reluctant to pay up. Below are some of his main recommendations, and mine, if you are filing a claim now for a loved one, or just want to be in the best position possible if and when you do:

• Read the policy VERY carefully, to make sure that you document the claim in a manner that is consistent with the policy's criteria. If you don't have a copy of the policy, ask the carrier for it and read it thoroughly before submitting the claim. Even if you are currently in good health and not in need of benefits, I recommend that you review your policy immediately and meet with a qualified insurance agent familiar with long-term care insurance, to see if the policy meets all your needs, and if additional long-term care options exist. (In my next post I will tell you about other types of policies, known as "hybrid policies," that may be available to you.) 

• Some insurance companies have specific requirements for the type of care provider they will cover. For example, some older policies will not pay a spouse for caregiving services. Others will only pay benefits if the caregiving facility has a certain type of license. Again, read the policy carefully to make sure the caregiver meets the stated coverage criteria. And of possible, research this before your loved one enters a  facility. Contact the insurance carrier and verify that your understanding is correct, because the wording on older policies can be vague. It's vital that you and the carrier are on the same page. 

• If a policy has lapsed because your parent or other loved one failed to pay the premiums due to cognitive impairment, you may be able to get the policy reinstated within a limited time frame, assuming you can provide the proper medical documentation. In Florida, the grace period is five months. Here is an excerpt of the Florida Statute 627.94073 that deals with reinstatement due to cognitive impairment:

If a policy is canceled due to nonpayment of premium, the policyholder is entitled to have the policy reinstated if, within a period of not less than 5 months after the date of cancellation, the policyholder or any secondary addressee designated pursuant to subsection (2) demonstrates that the failure to pay the premium when due was unintentional and due to the policyholder’s cognitive impairment, loss of functional capacity, or continuous confinement in a hospital, skilled nursing facility, or assisted living facility for a period in excess of 60 days. Policy reinstatement shall be subject to payment of overdue premiums. The standard of proof of cognitive impairment or loss of functional capacity shall not be more stringent than the benefit eligibility criteria for cognitive impairment or the loss of functional capacity, if any, contained in the policy and certificate. The insurer may require payment of an interest charge not in excess of 8 percent per year for the number of days elapsing before the payment of the premium, during which period the policy shall continue in force if the demonstration of cognitive impairment is made. If the policy becomes a claim during the 180-day period before the overdue premium is paid, the amount of the premium or premiums with interest not in excess of 8 percent per year may be deducted in any settlement under the policy.

• If a policy has lapsed and you have a dispute with the insurance company, contact the Florida State Insurance Commissioner to investigate your claim at 1-877-693-5236. To prevent this kind of situation from occurring in the first place, it's a good idea for one or more adult children to be copied on any lapse notices and other communications from the carrier.

• Think ahead: If you are healthy now, create a durable property power of attorney to authorize an adult child or another trusted individual to handle your financial affairs, so that he/she can deal with the insurance company on your behalf. At a minimum, the policyholder should have a signed statement authorizing another party to handle insurance-related claims. To avoid future problems, submit your power of attorney or the signed statement to the insurance company to make sure it will be honored. Don't wait. Once you are incapacitated, it's too late to give someone else the authorization to handle these matters for you.

• If you hire a home health aide for mom or dad, make sure the employee maintains a daily log, referred to as "daily care notes." Many insurance companies require this documentation. Contact the insurance company before you hire an aide, or as soon after as is practical, to determine what type of information the carrier requires, and if there is a specific form that needs to be completed.

• When you file a claim for your loved one, the insurance carrier will send a representative to asses the health of the insured. It is possible that mom or dad will be too embarrassed, too proud or just too forgetful to accurately report his/her limitations. An adult child or someone else familiar with the insured should be present at the assessment, to make sure the representative gets a true picture of the situation.

 You can read the original Forbes article here.

In my next post, I will tell you about several new types of "hybrid" policies that the insurance industry is offering. Whether you currently have no insurance or have a traditional long-term care insurance policy, these new products are worth a look.

IRS increases deductions for long-term care insurance premiums in 2014

Today's seniors can expect to live longer than their counterparts a generation before. But there is no guarantee that all those extra years will be healthy ones. Many seniors worry about being wiped out financially if they ever need long-term nursing care, which is staggeringly expensive. One way to eliminate the worry is to purchase long-term care insurance. It, too, can be expensive, and not always easy to obtain. But the good news is that if you have a qualified policy, Uncle Sam permits you to take a deduction for the premiums when you file your income tax. 

Starting in 2014, taxpayers will be able to increase the amount they deduct on their federal taxes for long-term care premiums. To qualify for the deduction, certain conditions must be met: 

First, the policy must be "qualified." If issued after Jan. 1, 1997, the policy must be in compliance with the regulations established by the National Association of Insurance Commissioners, and offer inflation and nonforfeiture protection (whether or not the insured party chooses those options).  Additionally, the policy must contain certain 'triggers' under which benefits can be paid. The insured individual may be able to collect benefits only when he/she requires assistance with two of six "activities of daily living" for at least 90 days; or when a physician certifies that there is cognitive impairment to warrant supervision for safety purposes. Any policy purchased before Jan. 1, 1997 will be grandfathered in and treated as qualified so long as it has been approved by the insurance commissioner of the state in which it was sold.

Second, premiums, plus unreimbursed medical expenses, may not exceed 10% of gross income for those under age 65; for those over 65, the threshold will remain at 7.5% through the year 2016. (The rules are slightly different if you're self-employed; check with your accountant.)Here are the IRS' deductibility guidelines for 2014. The figures are based on the attained age of the taxpayer before the end of the taxable year:

40 years or younger: $370 (was $360)
41 - 50: $700 (was $680)
51 - 60: $1400(was $1360)
61 - 70: $3720 (was $3640)
71 and older: $4660 (was $4550)

Women and long-term care insurance

Ladies, this is a good time to get serious about buying long-term care insurance. You'll soon have to pay more than your male counterparts.

Long-term care insurance pays for assistance with activities of daily living, such as bathing and dressing. Now Genworth Financial, one of the biggest players in the long-term care insurance industry, is raising premiums for women. The rate increases will begin rolling out in various states this spring, and could go as high as 40%. Experts predict other companies will follow suit.

Why? Economics. Women live longer, so they cost the insurance companies more. Genworth says two thirds of every dollar it pays out goes to women. Consider these statistics from The New York Times  (Feb. 6, 2013):

• On average, women outlive men by 5 years. Among those born in 1960, the average man will live to age 67 and the average woman to age 73. And women who reach age 65 can expect to live an average of 20 more years.  
• By age 75, 7 in 10 women are widowed, divorced or have never been married. Some 40 percent of them live alone, compared to 22 percent of men. Two-thirds of those past the age of 85 are women, as are 80% of centenarians.  
• Women who live to age 65 experience on average two years of disability requiring assistance before death. Those who reach age 80 will require three years of assistance.
• In nursing homes, the most expensive form of long-term care, 7 in 10 residents are women. They represent 76 percent of the residents in assisted living facilities and two-thirds of the recipients of home care.

The average premium in 2011 for a 55-year-old who qualified for preferred health discounts and bought between $165,000 and $200,000 of coverage was $1,720 (Source: American Association for Long-Term Care Insurance).  A 40% percent increase adds $688 in premium - and that's on top of the big price hikes we've already seen in the past years.

Genworth's new gender-based rates will apply only to women who buy new policies, not to women with existing policies or those who apply with their husbands. Companies generally provide discounts to couples who apply jointly for a policy.  

What should you do now? I advise that you look into purchasing long-term care insurance BEFORE the new rates roll out. In addition to the traditional long-term care policy, you may also want to look into alternatives like annuities and life insurance policies with long-term care riders, which allow you to pass to your beneficiaries any monies left over when you pass on. You may even be able to convert your current annuity or life insurance policy tax-free, and without any additional out-of-pocket expenses. You may contact our office if you need a referral to a financial professional who is familiar with these new products.