When I was in my initial training, licensing, and education as a financial advisor, there was a requirement in the state of Colorado that you complete a specific licensing course for the sale of long term care insurance. The instructor, an insurance brokerage executive who had been in the long term care insurance game so long that he’d literally driven around the United States back in the 80s camping out of his car to educate people on the new long term care products that were coming out at the time, had a succinct way of discussing the core need of long term care insurance:
Mr. & Mrs. Client. Would you say that you’d like to live a long and happy life? Can we agree that if you live a long time, through no fault of your own, that you will at some point become old? Does it seem plausible that as you become older, some warranties may begin to expire? If that occurs, would you like to be responsible for paying for the necessary maintenance and repairs at the expense of your family or legacy, or would you prefer that someone else pays the bill if and when that time may come?
Now, it was a bit of a sales shtick, but he had a point. Through no fault of our own, in a universe of entropy, we do tend to break down over time. Yet, while the aforementioned shtick was pointed at the issue of long term care, and insurance designed to solve that problem specifically, the trick is that wear and tear doesn’t typically occur all at once. But for a sudden illness or accident, most people’s quality of life tends to deteriorate incrementally, both physically and mentally, and in such a manner as to leave them exposed to many years, if not decades, of steadily increasing need for support. So today, we’re talking about steps that you should take if you’re in your retiring phase of life, or steps you should discuss with your parents if they’re in the retiring phase of life, before wear and tear has a real chance to set in.
Setting Up Your Estate
Despite the plentiful books, films, and horror stories about estate administration going wrong, a good portion of the American population seems to live under the delusion that they are not going to die. Few things are certain, but death is one of them, I’m afraid. With that in mind, it generally goes that everyone should have some formal estate plan. The good news? If you don’t have one, the government will provide one. Did I say good news? My mistake: That was the bad news.
The good news is that you have the means and opportunity to solve that problem for yourself. While the construction of a will and/or trust could be the subject of several dozen back to back blogs, let me put a couple of simple benchmarks out there for your enjoyment:
- By the time you’re old enough to read this blog and understand it or at the very least, vote, you should have some sort of estate plan in place. It doesn’t have to be fancy or overwrought, but a basic will or trust should suffice at this stage to make it much easier for your family to administer your estate should something unfortunate befall you. There are plenty of online platforms for this (though the quality may vary), but I’m of the polite opinion that one of the kindest gifts a parent can give their children is an appointment with an estate attorney when they reach the age of majority.
- By the time you have a spouse or children, you should be updating your existing estate planning documents, or you should really be getting those formalized and in place if you’ve been procrastinating. It’s doubly important to do so if you have a blended family, whether that be from children preceding the marriage or a past marital relationship. Earlier, we mentioned the bad news of the government having an estate plan for you. This is to “die intestate” and let the state statutes govern what happens to your things. Spoilers: It’s not going to go as well as you’d think if you haven’t made your directions clear, and it’s going to be even worse if you have various generations within your family, whether past or present. These updates should occur every time there is a material change in your family situation, e.g., marriage, divorce, new children, fewer children, etc. Don’t overthink the meaning of “fewer,” you get the point.
- The real kicker: By the time you’re ready to retire, you have to start thinking about not just “what happens if I pass away” but even worse: What happens if I’m still alive, “but-.”
In Case of Warranty Expiration
Many people often think of the transition into retirement or their later years in life with some scenic imagery that invokes a front porch, rocking chair, and lemonade (or bourbon if you like, it’s your retirement!) However you envision it, the trick is that while these are supposed to be your “golden years,” there is an unnoticed ticking clock in the corner, steadily marking the seconds that chip away at your wellbeing. A physical or mental decline can be a sudden incident, the result of an accident such as a slip or trip, or a subtle decline. A few years ago, I worked with a newly retired school administrator in her early 60s. Less than a few years later, she was being placed in a conservatorship due to a rapid onset of white matter disease. What were supposed to be her golden years were over in the blink of an eye, and less than a year after the first symptoms were noticed, she was committed full-time to a mental healthcare support facility.
Not all declines are so rapid, but it’s important to set the stage for your care well in advance of the need for your care. Directives such as a durable power of attorney, healthcare directives, and getting more specific about bequests in your estate are very important to establish, because unfortunately, if you don’t have this already outlined before a need arises, it can be much more difficult to satisfy those needs after your capacity comes into question. Worse, such incapacity can become the precursor to infighting amongst your caring family members about your well-being and means.
One major landmine to step around is avoiding the joint titling of assets. Many people, out of an abundance of “doing things easily,” make the misstep of adding a child or family member to their bank accounts or other financial accounts. This is almost always a mistake for a variety of reasons. First, it complicates the taxes for both the parent and child (assuming it’s an adult child) because the asset is now jointly owned, and reporting of any taxable events flows through to them both. Second, unless the account is structured properly, there is no mechanism for preventing a less-than-scrupulous child from cashing out their parent’s savings. Third, as with the first item, the eventual inheritance has its tax advantages otherwise damaged by the joint ownership. Specifically triggered and particular powers of attorney, crafted with the assistance of a competent elder law and estate attorney, can prevent a large amount of heartache in this regard.
Warranty Expiration
When the time comes that some warranties have genuinely begun to expire, the question from the long term care educator in the intro comes into play: “…would you like to be responsible for paying for the necessary maintenance and repairs at the expense of your family or legacy, or would you prefer that someone else pays the bill if and when that time may come?” At this point, that decision was already made, likely years or decades prior. But with the coming of the need for care or assistance comes a few preventative measures that could make all the difference in your quality of life at the time.
If you purchase or have purchased long term care insurance, one of the most critical elements to understand is whether that policy defines its coverage based on “reimbursement” or “indemnification.” If the policy is a reimbursement policy, prepare for headaches. You will essentially need to send receipts and invoices to the insurance company for the rest of your life (or period of coverage), and be subject to claims approval on every single submission before your policy pays out. An often more expensive version of long term care insurance, but one well worth it, is indemnification coverage, which essentially triggers a new “annuity” that simply pays out the full potential benefit every month that the need is covered by the policy, whether the costs are equal to or greater than the degree of coverage.
Another element to consider is whether you utilized a reverse mortgage as part of your retirement plan. Often these products end up with a barbell utilization scheme: Either you annuitized your home equity as early as possible in your retirement so you could enjoy more retirement quality of life, or your equity is still 100% untapped in your home and is waiting to be used.
In the case that you took the annuitization option, a toll may come due. Reverse mortgages can be tied to the life of one or both spouses in a household; if it’s tied to both spouses, and one moves into long term care, that’s not a problem. But if it was tied to the life of only one spouse, and that spouse is going to a long term care facility, then it’s time to refinance the mortgage or sell the home. If you haven’t tapped into your equity, and one spouse but not both are going into assisted living, then a reverse mortgage in the form of a home equity conversion mortgage (HECM) can help you borrow money from the home equity to care for one spouse while the other remains in the home, not requiring repayment until the home is sold or the remaining spouse passes away.
Everyone Plays Nice Until You’re Gone
Finally, there is one more thing to think about, and unfortunately, it’s probably the least pleasant: Do you really trust everyone to play nice when you’re gone?
Be skeptical. Really skeptical. Because vague and generalized estate instructions often lead to conflict between parties. Otherwise well-intended instructions such as “my children inherit the family home equally when I pass” can become a huge problem if one of the children moved in at some point, and now suddenly they’re a 1/3rd owner with their two other siblings, who might be very interested in selling the home or renting it at fair market rates rather than letting the sibling live there for free.
It’s not to say that you need to ruthlessly command the liquidation of your assets for your children someday, but you need to contemplate whether equality or equity is more important to you in the division of assets, and whether your decision around that issue is likely to provoke conflict between your heirs. This is further complicated in the event that one of your children or other heirs has special needs, health conditions, or issues with money that can drive them to less-than-amicable behaviors. All of this to say, it behooves you to be both very clear in your estate instructions, but also to have a clear conversation with all interested parties well before you ever pass away. This helps ensure questions are answered in advance, your thoughts on “what ifs” are addressed, and to tamp down on future fighting (though no prevention is perfect in this regard.)
Need Help?
If all of this sparks some concern that your estate may not be quite squared away, that’s not a problem. Family, money, and the passing of wealth from generation to generation or the care for elders (or our own care!) are complex and fraught with both significance and complexity. We have several estate and elder law attorneys with whom we maintain good working relationships, and we’re happy to make a referral as needed. Just let us know, and we’ll be glad to help.