Many people often confuse Estate Planning and Long Term Care Planning. Although Long Term Care Planning may involve the same planning documents (Will, Trust, Durable Powers, etc.) as found in an Estate Plan, the powers and authorities provided and/or retained in those documents can be quite different.
For example, a Trust may be very effective in eliminating or reducing the need for a probate but that same Trust offers little or no protection of assets should the Settlor (owner of the Trust) require Medi-Cal assistance. Another common example of where an instrument created for Estate Planning purposes is insufficient when used as a Long Term Care Planning tool is the traditional Durable Power of Attorney. The usual Durable Power of Attorney for Financial Management used in an Estate Plan normally provides the agent with sufficient authority with which to conduct business on behalf of the principal. The agent is often authorized to deposit into and/or withdraw from the principal’s accounts, pay bills on behalf of the principal, sell or purchase assets on behalf of the principal and, in some cases, file and pay the principal’s taxes. The agent is the principal’s fiduciary and must act in the best interest of that principal. If, however, the principal winds up receiving Medi-Cal or Veteran’s assistance, the agent cannot, without the express consent of the principal, transfer assets out of the principal’s name. Such inaction could result in the loss of the principal’s residence at the principal’s death.
In this article, we will explore some of the basic tools used in Long Term Care Planning. Many of the instruments discussed may be familiar but we will examine particular uses and shortcomings of that instrument where long term care and/or Medi-Cal is involved.
Long Term Care Planning
A primary purpose in designing a good Estate Plan is to insure that a person’s directions and instructions are carried out subsequent to that person’s death. A good Long Term Care Plan should, in addition to that same objective, insure that the person’s directions and instructions are carried out subsequent to that person’s incapacity but prior to his/her death.
Medical Decision Planning
Perhaps the most common tool used in Long Term Care Planning is a current and valid Advance Health Care Directive (formerly referred to as a Durable Power of Attorney for Health Care (DPAHC)). Advance Directives enable you to express and insure that your wishes concerning medical treatment and care are enforced should you become unable to act on your own. Under California’s Health Care Decisions Law, you can express your medical treatment instructions (referred to as an Individual Health Care Instruction) in writing or make those statements orally to your treating physician. In addition, you can use a written Durable Power of Attorney for Health Care to appoint an agent to make or enforce your health care decisions should you later become unable to act on your own.
As should be obvious, the use of an Advance Health Care Directive, whether in the form of a written Individual Health Care Instruction and/or a Durable Power of Attorney for Health Care is a must for any good Long Term Care Plan and for anyone over the age of majority.
Durable General Powers of Attorney
While many people are familiar with Durable Powers of Attorney for Health Care, most people do not know about or are unwilling to use a Durable General Power of Attorney.
A Durable General Power of Attorney (DPA) allows a person (the “Principal”) to appoint another (an “Agent” or “Attorney-in-Fact”) to act on behalf of the principal in matters related to finances and assets. Care must be exercised when creating and using a DPA.
First, not all Powers of Attorney are durable. Unless your Power of Attorney provides that the instrument shall not be affected by your incapacity, your agent’s authority is not durable and ends upon your inability to act. Simply stated, if your Power of Attorney does not expressly provide that the instrument is not affected by your incapacity, your agent cannot act if you become incapacitated.
Second, not all Powers of Attorney are general. A Power of Attorney can be used for nearly anything that a principal can do his/herself. The Power of Attorney can be restricted to one specific act or limited in time. Unless restricted, however, a Power of Attorney is considered general and the agent is authorized to perform all acts allowed under current law. There are, as we will examine later, limits to the authority of the agent.
Third, not all Powers of Attorney are immediately effective. Unless otherwise provided in your Durable Power of Attorney, your agent’s authority to act begins upon your signing of the document. If, however, you
want your agent to act on your behalf but only when you become unable to act yourself, you should consider a Springing Durable General Power of Attorney.
Springing Durable Power of Attorney
A Springing Durable Power of Attorney only “springs” into effect upon the occurrence of a predesignated event. In creating the Springing Durable, the principal defines the “springing” mechanism. The “spring” can be a date or event. For example, many people only want their Durable General Power of Attorney to become effective if and when they become incapacitated. In that case, the principal should include a provision in the Durable that the instrument shall only become effective upon the principal’s incapacity and remove the provision that the Power of Attorney shall not be affected by the principal’s incapacity.
While establishing a Springing Durable Power of Attorney is not difficult, documenting that the “spring” has been sprung is more problematic. Since the purpose of all Durable Powers is to enable your agent to act on your behalf, it is critical that third persons know when your Durable is in effect. For that reason, most people use a “spring” that is easy to document. If you want your agent to act only when you are unable to act yourself, the “spring” can be a declaration from your physician stating that you are not able to manage your own financial affairs. That declaration must be attached to your Durable in order to be in effect. Some people use the statements of loved ones attached to the Durable to demonstrate that the “spring” has been sprung.
In determining whether to use a Durable General Power of Attorney that is immediately in effect or one that “springs” to life upon the occurrence of a stated event, you should consider your health, independence and reliance on others. If your health (physical or mental) is quickly failing, an immediately effective Durable Power of Attorney may be more practical. If you are still healthy and independent, the use of a Springing Durable Power of Attorney may give you future assistance and present peace of mind.
And finally, not all Powers of Attorney are the same. Many clients ask if a stationary store or online Durable Power of Attorney is adequate. The simple answer is, “it depends on what you want your agent to do.” If you expect your agent to pay your bills and conduct simple business on your behalf, a simple Durable General Power of Attorney may be sufficient. If you are concerned about protecting your Estate should you become incapacitated and require long term care, a simple Durable General Power of Attorney isn’t worth much.
Durable General Powers of Attorney can contain pages upon pages of granted authorities or merely provide all powers allowed by law. Neither guarantees that your agent will have sufficient authority with which to preserve your Estate if you need Medi-Cal or other public benefits such as Veteran’s benefits.
Under California law, an agent is not automatically granted certain powers under a Power of Attorney. In order to act in those areas, the principal must provide written authorization within the Durable itself. Examples of actions that must be expressly provided for in a Durable Power of Attorney include, but are not
limited to: (1) Creating, modifying or revoking the principal’s trust; (2) Gifting or transferring the principal’s assets; (3) Disclaiming or refusing an inheritance of the principal; (4) Creating or changing a survivorship interest in the principal’s property; (5) Designating or changing a beneficiary to receive the principal’s property at the principal’s death; and, (6) Making a loan to the agent.
While these powers are not normally included in a typical Durable Power of Attorney, they are often necessary in cases where the principal is incapacitated and on Medi-Cal or Veteran’s benefits. Let’s explore how some of the above powers can be used in a Long Term Care Plan. Before beginning that discussion, however, the following information is important to know and understand.
First, if the Principal is competent and capable, s/he should be personally involved in the planning process. The Agent should only become the decision maker if and when the Principal is unable to participate.
Second, a DPA designed for use in Long-Term Care planning is usually an extremely powerful document and often authorizes the Agent to make decisions on behalf of the Principal that may have the effect of impoverishing the Principal. For that reason, the creation of a DPA with Long-Term Care planning provisions must not be taken lightly and should only be used where the Principal is comfortable with the possible transfer of all of the Principal’s assets to another person(s).
Third, the use of a DPA does not in any way alter existing Medi-Cal and VA law and, in fact, may even restrict certain actions available to the Principal acting alone. Simply stated, if the Principal is prohibited from acting in a certain manner, the Agent will be similarly restricted.
And finally, allowing the Agent to perform certain acts may be disadvantageous to the Agent. Where a Principal authorizes an Agent to act in the same manner as the Principal, that authorization may result in adverse tax consequences to the Agent should the Agent predecease the Principal. This issue will be discussed in greater detail under the gifting section below.
With the above said, we will explore some of the common uses of a DPA in Long-Term Care Planning including: (1) Gifting or Transferring the Principal’s Assets; and (2) Creating, modifying or revoking the Principal’s Trust. Due to space limits, I will not discuss in great detail various Medi-Cal restrictions concerning each of the above actions but it should be noted that Medi-Cal will penalize the transfer of a Medi-Cal non-exempt asset made within thirty (30) months of application.
Transferring/Gifting Principal’s Assets
In creating a Durable General Power of Attorney, most Principals expect their Agent to pay the Principal’s bills, deposit funds in the Principal’s accounts and, in general, conduct the Principal’s business. Unfortunately, if the Principal requires long-term care in a skilled nursing facility and/or requires Medi-Cal or VA assistance, conducting the Principal’s business will not protect or preserve the Principal’s assets. Simply put, in order to protect or preserve a Medi-Cal recipient’s assets, the
Medi-Cal recipient cannot own the assets. This applies to all assets of the Medi-Cal recipient including those classified as Medi-Cal exempt. For this reason, the Agent’s ability to gift or transfer the Principal’s assets should the Principal require Medi-Cal assistance and be unable to complete the transfers him/herself is critical.
Since an Agent cannot transfer or gift on behalf of the Principal unless expressly authorized in the DPA, the Principal, if s/he wishes to protect his/her assets once on Medi-Cal, must provide such authorization in the document. Such authorization, however, may expose both the Principal and Agent to potential problems.
If the Principal unrestrictedly allows the transfer of his/her assets by the Agent, the Agent may impoverish the Principal prematurely or unnecessarily, the Agent’s creditors could seek satisfaction from the Principal’s assets once in the hands of the Agent, the Agent may use the Principal’s assets to