Asset Protection planning is not for everyone. But for the doctor, dentist, or other professional or business owner, it can save a whole lot of financial pain during a crisis.
If you are interested, check out the FAQ on Asset Protection planning.
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Contemplating Nursing Homes for Elders? The Rules are Changing
Note: This post is about Medi-Cal rules for nursing home care in California (it’s called Medicaid in other states, but it’s different in those places) as of May 2022. If you are in a jurisdiction outside of California or reading this much later, you may not be getting the most updated information.
I come to you with an unpleasant thought. The more we know about nursing homes, the worse they seem. There may well be “good” nursing homes, but we need to expand our conception of “good” out of necessity. Some families cannot take care of their elders. With a nursing home, you are talking about a place where people don’t want to work, where overmedicating elders is often the first option, and where lawsuits for neglect and abuse are commonplace.
Still, nursing homes are necessary.
The reasons are varied but can include:
- In some cases, having people with severe memory care issues can be dangerous for small children.
- Adult children have economic or space limitations that prevent them from caring for their elders, even if home-based care options are available from government sources.
- Some elders don’t have children or close family; the nearest family member may be a niece or nephew if they are lucky.
- In many middle-class and upper-middle-class families, it is common for children to go far away from home for college, get jobs in other cities, marry and start families far away, and lose connection with their parents and siblings. In American culture, there is no fundamental obligation to elder parents.
- Families can be complicated, with lots of love, pain, and trauma mixed with some incendiary family politics.
Paying for Nursing Homes
So, we have exhausted alternatives, and it is necessary to get an elder into a nursing home. What happens next?
Insurance does not pay for long-term care at all. There are insurance products that pay for long-term care, but most people do not purchase it, or by the time people are interested, it’s too expensive anyway.
You can also just pay for it in cash. If the elder is wealthy, it’s not a problem. But otherwise, you are looking at costs that range from $10,000 a month (if you are lucky) to $20,000 per month. Relatively few people have this kind of cash lying around.
The last option is, of course, going to government programs. Elderly Americans are eligible for Medicare, which for the most part, does not pay for nursing home care. The next option is Medi-Cal, which is healthcare for the poor.
Medi-Cal for the Poor, and You are not Poor
People want to pass on their assets and not have their hard-earned wealth go down some nursing home sinkhole. So historically, people got rid of assets putting themselves into a virtual state of destitution. They have done this even when they are not sure they will ever be going to a nursing home. Relatively healthy elders have done this even when they have years or even decades ahead of them, just to deal with this fear.
Unfortunately, working with this fear is the way things have been for some time: To get Medi-Cal, you need to go through “Medi-Cal qualification.” That means people purposefully impoverishing themselves. They can have no more than $2,000 in liquid assets; while certain things, like homes, don’t count towards qualifications, they are subject to “Medi-Cal estate recovery.” Essentially it means Medi-Cal is loaning the cost of care to the family, and they will get it back after death.
The family member in a nursing home figures they will pay for it one way or another, so they just start giving things away in anticipation of Medi-Cal. What makes this even more complicated is that if you start giving things away too soon before needing Medi-Cal to pay for a nursing home, the government will count this against you. Medi-Cal rules exclude people- why people had done Medi-Cal planning long before they needed it (and ultimately may never need it). In some cases, adult children may prod this kind of activity to take possession of the assets earlier. A typical strategy is to use the technical rules of Medi-Cal to purchase exempt assets and dispose of others creatively.
Purposefully impoverishing yourself is a horrible idea. Every person is entitled to autonomy, liberty, independence, and personal dignity. Do not voluntarily give away such things unless there are no other options. I would never recommend anyone start gifting away everything they have.
How Medi-Cal Planning Has Worked
For example, Abdullah, 81 years old, and his children expect him to go to a nursing home in the next few months because he believes he may be going through the early stages of dementia. Abdullah has a paid-off home worth 1.6 million, a car, investments worth 210,000, and his only income is social security. Medi-Cal has an income limitation (138% of poverty). Under Medi-Cal rules, he cannot have more than $2,000.
However, if he were married between himself and his wife (not going on Medi-Cal), both are allowed $139,400. For Medi-Cal purposes, his house is exempt from consideration. There is the prospect of Medi-Cal recovery, but the rules have relaxed in recent years; the government only goes after assets subject to probate. Assets in a living trust, including one done through an Islamic Estate Plan, would be exempt from the estate recovery process. So Abdullah should not give his house away just yet.
How Things Are Changing
Under a new California law (AB 133), starting July of 2022, Abdullah would be able to keep $130,000, which is up from $2,000. Combined with his wife, the number is $267,400. But more importantly, for purposes of planning over the long term, the asset limitations will be eliminated starting January 1, 2024. So, Abdullah can have millions of dollars and still qualify for Medi-Cal, so long as his income is low enough.
Medi-Cal asset recovery will still exist (a federal requirement California cannot get rid of entirely). Still, all you need to do to avoid this is do what you should be doing anyway, get an Islamic Estate Plan.
Don’t get rid of your wealth out of fear of losing your wealth. The government in California seemed to encourage this before, but no more.
To discuss getting your Islamic Inheritance planning done, schedule a mini consultation with Islamic Estate Planning Attorney Ahmed Shaikh by clicking here.
Trust Protectors: A Guide
I have a new article on Trust Protectors on the education section of my website. Trust Protectors are vital to Islamic Estate Planning in my view, yet are not especially well understood
Check it out here.
Islamic Inheritance for Fake Royalty
India has a fascinating and complicated history. There is no way I can do justice to the nuances of that history in this post. Like the history of most places, it involves powerful people exploiting their power to become rich, usually at the expense of others. Before the British Empire took over most the subcontinent, most of it was part of the Mughal Empire – a collection of “princely states.” Long after the Mughal Empire ended, these “rulers” continue to be important. Some even came to power after the British came to rule.
This history is important, not necessarily because they ruled anything, but because a legacy of accumulated wealth can also be a legacy of accumulated pain.
Primogeniture as a Muslim tradition
Say for example, you have acquired vast lands, collectors of art and other trappings of wealth because you are the head of the feudal system were you ruled as “Lord” over people less important than you. A sort of Scotland in South Asia.. The wealth that you have is not merely the money and land that can be subdivided, but all the combined is what gives your title worth. If you were to follow the Islamic rules of inheritance, which is a uniform system dividing up shares of inheritance, distribution will be fair and just. However, your title and the importance that you have in your society cannot be passed down to anybody because everything has been diluted.
Primogeniture is the historic European system for inheritance. The system is easy to understand. The eldest son gets everything.
This is also the system in India for feudal lords, including the Muslim ones. Is this is permissible in Islam? Of course not. Leave aside that the wealth of such families was not built through industry and hard work. It was taken by force from people who were being lorded over, not for the benefit of society, but for the benefit of a particular family, or a man, followed by the eldest son of that person. Of course that does not matter. The same rule would apply to a business owner who favors one child as heir of his business empire. Islamic inheritance is mandatory for Muslims.
The Fight in Rampur
Recently, we saw the end of the 49-year court battle between the various other beneficiaries of what was a contest between an inherently unjust to the point of absurdity inheritance tradition known as “primogeniture” and the Islamic rules of inheritance. Fortunately, for the various ancestors of the Nawab, the result was a win for the Islamic rules.
India is of course a majority non-Muslim country and for historical reasons, the Islamic system of inheritance tends to prevail over there for Muslims. There have been exceptions though. Luckily, this is not one of them.
Tendency for Injustice
Our tendency to do an injustice when it comes to inheritance often has to do with how we see our own legacy. It is true that rulers tend to have a more obvious path to injustice, in part because that is probably what they have been doing their entire lives and in part because this legacy of injustice would simply end if they follow the commands of Allah and distribute inheritance based on the rules of Islam.
There are other situations where such injustices can take place within families. The most likely place these days is in family businesses. I’ve seen it in other situations as well, including with real estate and brokerage accounts. Sometimes, one particular beneficiary figures he (it is pretty much always a he) is more deserving and more privilege than anyone else, so much so that there is no cause even feel badly if the other siblings get absolutely nothing.
Your Legacy Is Peace, or Power?
The larger your wealth becomes; it takes on greater meaning then merely sustenance for yourself and your family members. Your wealth may become political power, it may mean that you will have many wives and many children from those wives (which is what happened in Rampur). Those people have rights in Islam.
Your legacy of wealth must dissipate through the generations, not consolidate. This is a necessary part of our own devotion to the command of Allah. Surah Nisah (which contains the verses of inheritance, opens with the following:
Oh humanity! Be mindful of your Lord Who created you from a single soul, and from it He created its mate, and through both He spread countless men and women. And be mindful of Allah- in Whose Name you appeal to one another- and honor family ties. Surely Allah is ever Watchful over you.
Do your own Inheritance Planning
To discuss the process of Islamic Estate Planning, you can schedule a 15-minute mini-consultation over zoom by clicking here.
How to get a big tax deduction for a small donation this year (agree to donate later)
Welcome to the world of Charitable Planning
If you have money, a charity will tell you at the end of the year that this is an excellent time to donate since you will get a tax deduction. That is true, of course. It’s also somewhat inefficient in many cases unless it is a small donation (small means different things to different people).
In general, the value of a tax deduction is the highest marginal tax rate times whatever you are donating. So if you have a 30% tax rate and contribute $100, you saved $30 in taxes. Not bad.
However, charitable planning is significantly more powerful. Charitable planning results in tax savings and benefits for charity, but it can also be a powerful driver of increased wealth over time. I use charitable planning in many situations; the most obvious is when people have a capital asset to sell. Charitable planning can give tax benefits that go well beyond the deduction (that is outside the scope of my post today though).
Here I discuss a scenario where there is no capital asset, just cash. Let me give you two easy-to-understand examples.
Example 1: Abbas
Abbas is a salesman. He normally makes a comfortable living, but he does not have enough for his family’s future. 2021 was a banner year for him. He earned $1,000,000 more than he usually earns. He does not expect to earn anything quite like this for a while. He is looking at a massive tax bill; he figures the marginal tax rate in his high-tax state is 50.3% (both federal and state). He donates $300,000 at the end of the year. He gets a tax-deduction for $300,000.
Example 2: Haroon
Haroon is a computer engineer. Like Abbas, he makes a comfortable living but would like to save more for his family’s future. He had an unusual year where a company he worked for went public. He had a wonderful “liquidity event” (as they say in the Silicon Valley), but it also happened to be $1,000,000 more in income tax liability than he would otherwise get. He donates only $15,000 by the end of the year. He gets a tax-deduction for $285,000. He invests the rest but eventually donates $300,000 over 20 years while the investments grow to be worth several times this in 20 years.
Wait, what just happened?
Grantor Charitable Lead Annuity Trust (GCLAT)
Charitable trusts come in a variety of flavors. I am only going to discuss this specific one since it applies to many people who have those once in a while years, where people do well but are concerned about income taxes, but not estate taxes (married couples need $23.4 million in 2021 before they need to worry about that). They are also charitable. However, they are not so charitable that they will give away hundreds of thousands of dollars for a tax benefit that they can get for a more spread-out donation.
How a GCLAT Works
Haroon creates a grantor trust, which means he is the taxpayer- this is critical because he wants the tax deduction from his income taxes. Most charitable lead trusts are non-grantor trusts designed to save on gift and estate taxes.
Haroon, in his trust, decides to donate 5% of the trust corpus every year for 20 years. These numbers can be less or more, depending on his goals. If he earns income on it, he pays taxes. Because he already got his charitable deduction in year one, he won’t get a charitable deductions again for the same donation. His year one charitable deduction is based on calculating the “present value” of the gift he did not give yet.
A GCLAT is known as a “split-interest trust”- a present and a future interest. We calculate the deduction through what is known as the “7520 rate” (after the tax code section). In October, the rate was only 1%. In November, it is 1.4, which is still low (though it has been as low as .6% this year). The lower the rate, the more the potential charitable deduction. Some Muslims get a little concerned when they see an interest rate. There is no loan; we use the “interest rate” to calculate the value of the gift.
The trust can last five years, or, as I noted in the example, 20 years. It can, in the right situation, be a great way to give a lot in charity, save a bundle in taxes in the year it’s needed most, and build long-term wealth. It’s not for everyone. But for the right person, it’s worth considering.
To discuss charitable planning (or just your Islamic Estate Planning) you can schedule an appointment here.