Lynn Brenner's Family Finance

Are Mom's Assisted Living Expenses Tax Deductible?

Q: My mother lives in a assisted living facility, where she gets 24/7 care. My brother, my sister and I each pay about $1,800 a month towards her upkeep. Are we entitled to any tax deduction? JJ via email

 

A: Maybe.

If your mother's 2011 income (not including her Social Security benefit) is under $3,700, another taxpayer who pays more than half of her total living expenses can claim her as a dependent and take an itemized deduction for her medical expenses.

You’re splitting those expenses among the three of you; so no one is paying more than 50% of her support. But each of you is paying more than 10%. If you file a Multiple Support Declaration with the Internal Revenue Service,  you can take turns claiming her as a dependent.

A couple of caveats:

You’ll have to ask the assisted living facility how much of your mother’s monthly bill qualifies as a medical expense. (The entire cost is only deductible if her doctor certifies that she must live there because she can't perform “activities of daily living” – like washing or getting dressed – without help.)

And bear in mind that medical expenses are deductible only to the extent that they are a) unreimbursed;  and b) exceed 7.5% of your income.

For example, let’s say it’s Joe’s turn to claim Mom as a dependent this year, and he writes a $5,400 monthly check to the nursing home. If his two sisters reimburse him for their respective $1,800 shares, Joe can only claim a medical deduction for his own $1,800 share. And he can’t actually take the deduction unless his total unreimbursed medical expenses exceed 7.5% of his income.

For more information about potential tax breaks for adult children who are giving financial help to their parents, see my Reuters article, 'Caring for Mom and Dad Can Activate Tax Breaks'.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved.

Heads Up: Medicare Open Enrollment Starts and Ends Early This Year

Medicare open enrollment -- the period when people with Medicare can make unrestricted changes to their coverage -- will run from October 15 to December 7 this year.

It’s a sensible change.

Medicare is an annual topic of conversation at Thanksgiving gatherings, as adult children help their parents decipher increasingly complex choices. Previously, open enrollment ran from mid-November until December 31 -- a frenetic time of year for most families. The new dates allow time to gather information about current coverage and research the new options online well advance of stuffing the turkey and mashing the potatoes -- and to change coverage before becoming engulfed in holiday shopping and festivities.

For readers new to this daunting task, a quick review of Medicare basics:

Part A is hospital and inpatient coverage.

Part B covers doctors and outpatient services.

Part D covers prescription drugs.

Part C is universally known as Medicare Advantage, which combines A, B, and D coverage in a single plan administered by insurance company. Medicare Advantage typically restricts you to the insurer’s network of doctors and hospitals.

Alternatively, you can opt for Original Medicare, which consists of Parts A and B, is administered by the government, and lets you go to any doctor or hospital that participates in Medicare. (By definition, this includes all the doctors and hospitals who participate in Medicare Advantage networks, although costs vary with each plan.)

If you choose Original Medicare, you must buy a standalone Part D prescription drug plan. You may also decide to buy a supplemental private insurance policy (called Medigap) to cover expenses not picked up by Original Medicare – such as co-pays, deductibles, and vision and dental services. (Medigap policies only work with Original Medicare. You can’t combine them with a Medicare Advantage plan.)   

Okay – so what should you pay attention to during open enrollment?

Everyone who has Medicare should review all their coverage options, says the Medicare Rights Center, a consumer-advocacy organization. Even if you like your current plan, it may not be the best option for you in 2012. The reason:  Many Medicare Advantage plans change their costs and benefits every year. And Part D prescription drug plans often change their formularies – the lists of the drugs they cover. If you don’t pay attention, you could find that come January 1, 2012, your plan no longer covers one or more of your regular prescriptions.  

Your insurer must alert you to upcoming changes in an Annual Notice of Change (ANOC) letter, which you should receive by September 30. But the ANOC letter doesn’t provide any personalized information. “It won’t say, ‘Joe, you take these three drugs, this one isn’t going to be on the formulary anymore, and this one is going to be priced differently,’” says Joe Baker, president of the Medicare Rights Center. “It will just be general information --‘We’re changing the formulary, the pharmacy network, the premium.’”  To find out how the changes affect you specifically, you must call the plan for a complete copy of the new formulary, which should also be posted on the plan’s website.

Don’t just look for your drugs. Also check for any new Part D coverage restrictions, such as a prior authorization requirement; a quantity limit, which could increase your cost by forcing you to buy your medicine more frequently; or ‘step therapy’  on certain drugs, which requires you to try another drug before the plan will cover your prescribed drug. Baker says there’s also a growing trend for Part D plans to differentiate between ‘preferred’ and ‘non-preferred’ pharmacies within their network. You pay the least when you use ‘preferred’ pharmacies – so make sure that your own pharmacies are on the preferred list.

If you are considering (or reviewing) a Medicare Advantage plan, make sure you understand how it works. Your check list should include questions like:

• Will I be able to use my doctors or other providers I want to see?  Are they in the plan’s network, and are they taking new patients who have this plan?
• Which specialists, hospitals, home health agencies and skilled nursing facilities are in the plan’s network?
• How much will it cost to see my primary care physician? A specialist?

For more questions about Medicare Advantage plans, see this invaluable guide from the Medicare Rights Center.  For questions to ask about Part D plans, either as part of a Medicare Advantage plan or as a stand-alone prescription drug plan, see 'How do I compare Medicare Private Drug Plans?'

Use Medicare's Plan Finder tool to select the best plan for your needs -- but don’t enroll until you have called the plan and confirmed the information you’ve gathered with a plan representative. Plan Finder and 800-MEDICARE may not have the most up-to-date information, explains a Medicare Rights Center spokeswoman. Keep a record of your conversation with the plan representative, she adds. Misinformation from a plan representative, if documented properly, in some situations can give someone a Special Enrollment Period to switch plans or go back to Original Medicare. 

Once you’ve confirmed the information, Baker recommends that you enroll in the new plan by calling 1-800-MEDICARE rather than the plan itself. This reduces the chance of administrative error, which happens sometimes when a plan sends the enrollment information to Medicare. Take notes of your conversation with the government representative, too.

When dealing with any bureaucracy, it's essential to keep records. People should document all calls (with name of representative, date and time of the call, and the information they were given) regarding health insurance decisions to protect themselves if they were given bad information, says the Medicare Rights Center. 

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved.

Can I Give to My Son, But not to My Daughter-in-Law?

Q: I make yearly gifts to my adult sons, and they are also my heirs. They’re both married. But what if they get divorced? Does New York law let me protect what I give them from their spouses? -- RO, via email

 

A: Lawyers and tax accountants say they get this question all the time. Many people want to make gifts to their children without wondering whether they'll wake up one day to find they've inadvertently enriched a former in-law.

In legal jargon, you'd like your gifts to remain your children's `separate property.'

In a divorce, marital assets are divided regardless of whose name they’re in. But your son-in-law or daughter-in-law has no legal claim on your child’s separate property. 

In other words, marital assets are owned by both spouses. `Separate property' belongs only to one spouse.

In New York State, almost everything accumulated during a marriage is a marital asset.  Both spouses' earnings are marital assets, for example. Even an educational degree or a professional license is considered a marital asset if it was earned during the marriage. (The degree or license is called `enhanced earning capacity', since it can be expected to boost the recipient's future salary.)

However, four categories of assets are considered separate property even if they were acquired during a marriage.

They are:

• Assets the two spouses have agreed in writing -- before or after the marriage -- to treat as separate property. (In other words, anything that is spelled out as separate property in a prenuptial or postnuptial agreement.)

• A recovery in a personal injury lawsuit. If your son was awarded $1 million for injuries sustained in an accident caused by a grossly negligent defendant, that money is his alone.

• The value of a gift or bequest to one spouse at the time it was received.

• Any increase in value of separate property, to the extent that it didn't result from the efforts of either spouse.

Let's say Jane's Mom and Dad give her 100 shares of Google, worth $10,000 on the day she gets married, for example. On the day of her divorce, the shares are worth $60,000. The $10,000 value at the time of the gift is Jane's separate property. The $50,000 increase in value is also Jane's separate property, because the increase wasn't due to the efforts of either spouse.

"But let's say my parents give me a vacant lot worth $10,000, and my wife and I create the best potato farm in Suffolk County on it," says Stephen W. Schlissel, a Garden City, New York matrimonial lawyer. "We're tilling the lot every day and selling potatoes from the best potato stand in America. Although the land around it hasn't increased in value, this lot is worth $1 million when we get divorced. That $990,000 increase in value was due to our efforts during the marriage. It goes into the marital pot."

What if your gift is money rather than shares of stock or real estate? Money, too, is separate property at the time of the gift – but it won’t stay separate property if it’s commingled with money that is a marital asset. If you give your son $50,000 and he deposits it in his bank account where it's commingled with his paychecks, your gift becomes a marital asset, too.

“If you're giving money to your kids," says Schlissel, "my advice is to tell them, `Put this in your own name, and don't add anything to it unless it's also a gift.'"

Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.

 

The Pros and Cons of a Joint Account With Your Child

Q: I’m considering adding my oldest daughter’s name to my checking account. With a joint account, she could pay my bills if necessary. Are there any other advantages of doing this? Are there any drawbacks? ER via email

 

A: There are both advantages and drawbacks to adding an adult child to your bank account.

On the plus side, a joint account can serve as both a current convenience and a long-range estate plan. Your child can do your financial paperwork while you're alive. And as the surviving joint owner she'll inherit the account without going through probate -- the legal process in which a court validates your will. (It's important to add, however, that whether or not avoiding probate is important depends on where you live. In some states, probate is time-consuming or expensive. In others, it's fast and cheap.)

The downside is that joint accounts have hidden pitfalls. When they don't work as you planned, the result can be disastrous for you and for your survivors.

Let's take it for granted that your child is totally trustworthy and will never use the account except for your benefit.  The main potential problem during your lifetime is that joint accounts are subject to partition. This is a fancy legal way of saying that once your daughter’s name is on the account, her creditors can claim half of it. As a result, if she gets divorced, or becomes the defendant in a lawsuit, your money could be at risk.

The potential problem for your survivors is that a joint account could inadvertently disinherit some of them.  A hypothetical example:

If you put your daughter Emma's name on your account, she'll automatically inherit 100% of the account when you die. This is true even if your will says the account is to be equally divided between Emma and her brothers, Gregory and Pete. Your will has no legal control over jointly-owned assets. They pass automatically to the surviving joint owner.

In addition to unintentionally disinheriting two of your children, this may precipitate a permanent rift in the family. (If your kids don't get along, one can imagine a very nasty scene in which Gregory and Pete accuse Emma of grabbing their inheritance, and she replies that they're more interested in your money than they were in helping take care of you while you were alive. Not the way you want to be remembered!)

Here are two alternative ways of accomplishing your goal:

Find out if your state has a law permitting "convenience-only" joint bank accounts. With this type of account, your daughter can use your money only for your convenience. She won’t have any ownership rights in the account during your lifetime or after your death.

(A big caveat: Even if these accounts exist in your state, you may have trouble finding one. In New York State, for example, convenience-only accounts have been a legal reality since 1991; but they've never been well-publicized and few banks offer or have even heard of them. Make certain that you're getting a true convenience-only account. I'd ask the bank for a written statement that the other person named on the account won't have any ownership rights in it.)

The second alternative is to keep your accounts in your sole name and give your daughter a financial power-of-attorney. That power lets her manage the accounts for you, but it confers no ownership rights, and it ends at your death.

If avoiding probate is important to you, you can make the accounts ‘in-trust-for’ or ‘pay on death’ accounts, which automatically go to the named beneficiaries. 

Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.