By James W. Mallonee
As persons get older there is the fear that they may be placed in a nursing facility and whatever assets they have will be absorbed by such facility leaving nothing for their children. But this does not necessarily have to happen provided you spend some time with the attorney of your choice and devise a plan to avoid losing everything. More importantly, allowing you to stay with family and avoid a nursing facility altogether. One of those plans that can be executed is called an “In-kind Support and Maintenance” (ISM) plan. An ISM plan consists of a contract primarily designed to allow an elder adult or child to live at home with another as opposed to being relegated to a nursing home.
An ISM plan is different from a plan involving both a personal services contract and a Qualified Income Trust, because the ISM plan can involve a person who is not relegated to a nursing facility to receive Social Security support. An ISM recipient can live in the comfort of a sibling or child’s home.
An example might be where Sister1 transfers to Sister2 $58,000.00 based on a written contract where Sister2 agrees to provide food and shelter to Sister1 for a period of 7 years. Sister2 places a value on the amount of additional expense for shelter and food to be $700.00 per month. The amount of the contract comes to $58,000.00 which coincidently is equal to the amount transferred. Sister1 moves in with Sister2 and begins paying $700 per month. At the end of the 7 years, another agreement can be prepared to continue the services being received.
Thus, Sister1 can avoid losing a portion of her Social Security Benefits and not be placed into a nursing facility. To complete this transaction, Sister2 will need to complete SSA’s Statement of Household Expenses and Contributions.
Sister1 could also arrange for the agreement to be for life. To accomplish this Sister2 will need to use Social Security’s years of life remaining chart to determine if the amount being received will be fully amortized. Suppose Sister1 needs to stay with Sister2 for her life. In that case, Sister1 could transfer to Sister2 almost all of her savings in exchange for a lifetime of room and board in Sister2’s residence. Once again, the statistical remaining years of life is calculated against the current market value of expected expenses to come to a value being received by Sister1. The statistical number of years Sister1 has remaining times the fair market value of what she will receive results in a compensable value to be paid to Sister2. The downside here is that Sister2 may have to claim the amount of funds received as income.
Is it possible when multiplying the statistical number of years remaining in life multiplied by the amount being paid to stay with Sister2 not be equal in value? Yes, and when that occurs, Sister1 may be ineligible to receive benefits for a period of years. The period of ineligibility normally is calculated by taking the balance of funds transferred to Sister2 and dividing it by the amount dollars Social Security determines to be the fair market value of the services received. But that amount will be capped at 36 months. Therefore, in this example Sister1 is penalized for only for 36 months.
Are there other options? Yes, one option is to simply give the money to Sister2 with no agreement. However, the penalty would be to divide the amount of the gift by $794 and the number would be the number of months of ineligibility to receive benefits. Fortunately, the number of months of ineligibility would be capped at 36 months should this example be used.
Another alternative of the ISM is to prepare a contract where Sister1 and Sister2 are going to “share” food and shelter costs with no requirement to maintain an account for such services. Thus, accounting fees are eliminated. More importantly, since the room and board agreement to “share” food and shelter expenses is the basis of the agreement no federal income tax consequences would be incurred by Sister2.
Remember that this type of program gives the recipient (Sister1) the ability to avoid going into a nursing facility. This type plan only works provided that the makers of the plan are willing to cohabitate. If that possibility is off the table, then a direct personal services contract and possibly qualified income trust may the best way to preserve your assets should you have to be placed into a nursing facility. In essence an ISM contract may not be feasible.
If you are not sure what plan is best for you (as you approach a period of time where you may need more health care services) seek out the attorney of your choice and let them lay out various plans to help you decide. It might be a means of leaving a legacy to your loved ones.
This article is intended for informational use only and is not for purposes of providing legal advice or association of a lawyer – client relationship
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