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For Financial Planners |
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SYNOPSIS: No reasonable financial planner doubts that clients are expected to live a long life after retirement: calculations routinely take into consideration a life expectancy into the early 90s. Less often considered is the need for long-term care and the serious impact it has on the best-thought-out retirement plan. Failure to talk about these consequences may subject financial planners to a claim of breach of due diligence. |
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LTC Bullet: LTCi Professional Liability for Financial Advisors Wednesday, March 10, 2004
Seattle-- LTC Comment: What are the professional liabilities for financial advisors who fail to advise clients about long-term care risk, cost and solutions? Much more after the ***news.*** In fact, this Bullet is so much longer than most, you may wish to save, print, and read it at your leisure.
LTC BULLET: LTCI PROFESSIONAL LIABILITY FOR FINANCIAL ADVISORS LTC Comment: Our thanks to attorney Harley Gordon, Founder and President of the Corporation for Long-Term Care Certification, for permission to publish the following article. Despite its length--three times the average LTC Bullet--we decided this subject is too important to abridge. You may also wish to review an article by Center President Steve Moses on the same topic titled "Long-Term Care Due Diligence for Professional Financial Advisors," which was published in the September 2001 issue of the Journal of Financial Planning. An online version of Steve's article is available at http://www.centerltc.org/speakers/due_diligence.htm . If you advise seniors on financial planning, these two articles may save you a tremendous amount of grief, embarrassment, and money. ------------------
"The Coming Wave: Professional Liability Lawsuits for Failure to Recommend a Plan for Long-Term Care"
A REAL STORY Sheila Adams (not her real name) is a seasoned financial planner with a major mid-west insurance company. She is also one of its top producers. Like a growing number of professionals she takes the subject of long-term care seriously and talks about its consequences with clients. Apparently talking about it may not be enough. Ms. Adams received a call from a good client's son, a local attorney. He told tell her that his dad was in a nursing home and paying for it with his life savings. He then told her: "You have 15 minutes to produce evidence that you recommended a long-term care plan in general and long-term care insurance in particular." Fortunately, she had discussed the matter and had a letter recommending the sale of long-term care insurance. Without it, she believes she would have been sued.
LIVING A LONG LIFE IS A NEAR CERTAINTY, PLANNING FOR IT, A NECESSITY A July 14th, 2003 article in USA Today, "Insurers Adjust to Aging US Population." sums up why financial planners are talking to their clients about the need to adjust the payout of retirement portfolios. The article reported: * Life insurance rates for 70+ Americans have dropped between 5% and 20% in the past few years; Advances in medicine are now taken for granted. Every day brings new treatments for illnesses once considered deadly. A June 6, 2003 story in the Boston Globe only confirmed what many believe: Cancer will be cured in their lifetime. "Advances Begin to Tame Cancer" reported: * Rapid advances in diagnosing and treating cancer have dramatically increased life expectancy; A reasonable corollary is that an increased life expectancy creates a need for more services as the aging process takes its tool in the form of chronic debilitating diseases such as dementia, chronic obstructive pulmonary disease, crippling arthritis and congestive heart failure. Rarely however do financial planners discuss with clients the impact providing care will have on the family and their retirement plan. The reason is a lack of confidence based on a lack of knowledge of the profession of long-term care.
THE NEED FOR LONG-TERM CARE MUST BE DISCUSSED No financial planner will risk his or her credibility talking about a subject they do not understand. It's basic to their identity as professionals. Few financial planners discuss the subject of long-term care because they don’t fundamentally understand long-term care. Long-term care is a continuum of care, housing and services needed when the aging process begins to exact a toll on our cognitive and physical capacity. It requires almost exclusively custodial, not skilled care. Custodial care is defined as assistance with one's activities of daily living (toileting, bathing, dressing, eating, transferring and continence) or supervision necessitated by a severe cognitive impairment. Skilled care is medical in nature requiring a plan of care created by a doctor for the treatment of complex medical issues and executed by a skilled nursing staff. Ironically it is not necessarily the afflicted who suffers most, but rather the caregivers: He or she will be taken care of by their family which struggles to provide the care necessary to keep their loved one in the community. This effort exacts a terrible price on the caregiver's health (typically a daughter) and relationships with other family members, most notably those siblings who do not share the burden. Anyone doubting this assessment need only ask someone who have been through it. Understanding this essential fact is the first step in creating the confidence to bring the subject matter up in the ordinary course of creating a retirement plan. It allows the financial planner to ask the right questions, the most basic being "Have you thought about the consequences living a long life will have on your family?"
FINANCING LONG-TERM CARE IS A CRITICAL PART OF ANY RETIREMENT PLAN. Long-term care is financed primarily by the family in the form of unpaid labor referred to as informal care. Formal care, that provided by trained professionals including home health aids and facility care such as assisted living and skilled nursing home care is expensive. Since few financial planners set aside funds or recommend long-term care insurance (LTCi), the client is forced to rely on either a government program such as Medicare, Medicaid or the VA or must ultimately reallocate retirement income and assets. A brief analysis of these programs indicates they are not the answer clients wish to hear. Medicare is the primary health care system for those 65 or older. It pays for skilled and or rehabilitative care. Although never intended to do so, the program routinely paid for custodial care prior to 1998. Businesses such as home health care providers figured how to bill for services by making a custodial care patient look like he or she needed skilled or rehabilitative care. Medicare put an end to it with the passage of the Balanced Budget Act of 1997 by replacing fee for service (which encouraged abuses) with a flat fee. Medicare was essentially returned to its roots paying for medical not custodial care. Medicaid is a federal and state partnership based on financial need. Originally designed for the poor and near poor it was appropriated by middle-class families looking for a way to avoid bankruptcy caused by the high cost of nursing home care. So called Medicaid planning practiced by elder law attorneys grew into an immensely popular field. Its impact on federal and state Medicaid programs has been such that in recent years there has been a concerted effort to shut down loopholes. Even when the attorney qualifies the client for benefits, Medicaid is far from free, a fact not often discussed by unskilled practitioners. Most families have qualified or low cost-based assets. Transferring them creates serious tax issues. Medicaid planning protects assets not income. If a spouse has a large pension or retirement payout, it is lost to the nursing home thus causing serious repercussions to the spouse at home. Then there is the issue of where the client wants care. No one wants to go to a nursing home. Yet Medicaid planning accomplishes only one thing, qualifying the individual for payment in a nursing home. Medicaid pays little or nothing for home care, adult day care and assisted living. Veterans often site the Veterans Administration as source of funding for custodial care. It is not. The VA may pay for care but in only limited situations and usually requiring a financial contribution. In point of fact the federal government has stated as much by encouraging active and retired military personnel to purchase LTCi through the Federal Long-Term Care Insurance programs created by MetLife and John Hancock. That leaves cash or long-term care insurance.
LONG-TERM CARE INSURANCE IS SEEN BY MANY FINANCIAL PLANNERS AS A PROBLEM NOT A SOLUTION Put bluntly financial planners have a problem with long-term care insurance. Historically the long-term care insurance industry has focused on selling product rather then selling a plan for long-term care. This puts it squarely at odds with financial planners who make their living selling a plan to protect the client's family and assets. Those plans range from estate preservation and business succession to basic wealth creation for young couples. Every professional designation from CFP to CLU reinforces this basic principle of professional conduct by teaching how to ask the right questions and work with other professionals such as estate planning attorneys and CPAs to draft the right plan. Although financial planners are certainly subject to malpractice claims, it is less likely they revolve around failure to establish and fund a plan. If a financial planner does not understand the subject of long-term care, he or she cannot ask the right questions, which leads to a discussion of the consequences on not having a plan. In turn this leads to the establishment of a plan for providing care. All plans must be protected with insurance. It's just like selling life insurance. If the subject is brought up, it is usually in the context of suggesting LTCi as a way of protecting assets not protecting a plan for long-term care. This creates the potential liability.
PROFESSIONAL LIABILITY FOR BREACH OF DUE DILIGENCE Due diligence: "The care that a reasonable person exercises under the circumstances to avoid harm to other persons or their property." Merriam-Webster's Collegiate Dictionary
There are four areas where financial planners face potential liability: 1. Failure to talk about a plan for long-term care as part of a financial retirement plan;
"I talked with the prospect about LTCi and he didn't purchase it. I even had him sign a waiver. How can I be held liable?" The initial review of a case for an attorney specializing in professional liability focuses on determining what, if any, responsibility a financial planner has to a client and then deciding whether it was breached. It is reasonable to assume that if producers are talking about the risks of needing long-term care as part of their presentation on selling LTCi, they are holding themselves out as a specialist. That would appear to establish a threshold responsibility to use due diligence in protecting the interests of the prospect. The liability arises when the producer focuses only on making the sale and doing so through scaring the prospect into submission with numbers and charts that talk about impending doom. If a policy is not sold and the individual needs care, the family (read: children) can argue that the producer never discussed the family and financial consequences inherent in needing long-term care. In other words, the presentation was about selling a product, not working with the individual to establish a plan. The lawyer most likely can brush aside the waiver of liability by arguing its intent was not to absolve the producer of liability but rather as a sales gimmick to embarrass the person into purchasing the product.
"My client purchased LTCi based on my recommendations. How can I be held liable?"
Simply selling LTCi is not enough. For example, I have seen far too many policies with a $50.00 a day benefit. What is that amount going to cover? The risk of diverting income and invading principal otherwise allocated for retirement is an almost certainty, should the person need long-term care. Worst, if the individual needs skilled nursing home care, he may actually qualify for Medicaid. Part of the patient paid amount would be the daily benefit. Imagine the anger children have when they find (a) the benefit didn't prevent invasion of principal (read: their inheritance) and (b) the premium their parent paid is going to help Medicaid by reducing its cost. Arguing, "some coverage is better than none" at best is amateurish and at worst exposes the financial planners’ lack of understanding about how long-term care impacts a family and its retirement planning.
Another example: A financial planner recommends a three-year benefit based on his worry that the cost of a lifetime benefit may kill the sale. The client goes on claim and exhausts the policy. He now invades principal, most of which is qualified funds to pay for the cost of care. Federal taxes on lump-sum distributions run as high as 37% (plus state income tax). The family argues that the producer should have considered the tax consequences of cashing in qualified funds. Had he done so it would have become obvious to the insured that a lifetime benefit was the appropriate recommendation. The producer is accused of breaching his responsibility to exercise due diligence in protecting the financial interests of his client.
"My client has $2,000,000, more than enough to pay for the cost of care. . . ."
It never ceases to amaze me when I hear a seasoned financial planner tell me he or she does not recommend LTCi to their wealthy clients. When I ask if they recommend a Medicare supplement policy to the same people, they answer: "Of course!" Think about that for a moment: the client is paying $2,000 a year to cover perhaps $10,000 worth of exposure. Compare that with the expenses associated with needing long-term care. The issue that will be raised by the children is not that the parent had enough to pay for care but rather why did the parent have to use his or her funds at all. "I work with an attorney who believes that for modest estates, a 3 year benefit LTCi policy combined with Medicaid makes financial sense. Where’s the liability?" At first glance this strategy makes sense. The attorney believes in the product, but suggests, because of the limited estate (usually under $300,000), only a three-year benefit. A closer look reveals that the attorney believes in Medicaid planning with the intent of using LTCi as "bridge financing" to the program. That philosophy can have disastrous effects for the financial planner. Here's how it works: Medicaid, a federal and state program based on financial need, will pay for custodial care in a skilled nursing home. The state has the right to look-back three years from the date an application for benefits is submitted. The thinking goes therefore that as long as three years expires from the date of gifting, thereafter Medicaid will pay. For example: Susan transfers $600,000 on February 1, 2004. She will qualify for benefits on February 1, 2007. The attorney therefore recommends a three-year benefit. He tells the client to gift everything the day he gets sick. The policy covers the next three years of care. When it runs out Medicaid will pay.
The problem is that this advice is based on a fundamental misunderstanding of long-term care and the tax code:
1. Most clients have qualified funds. By definition, the three-year look-back begins only on the date assets are gifted. Result: Instant tax; There’s little doubt the attorney will have to answer to the family when the transfer is made. The error is that the children will be paying privately as to keep their parent home.
THE SOLUTION IS IN THE PLAN Simply raising the issue of needing long-term care as mentioned is not the solution. The answer lies in recognizing that long-term care planning is a profession that requires the same commitment as the financial and estate planning profession. This includes a thorough understanding of elder care issues, elder law and care resources. It requires in-depth knowledge of what finances long-term care with particular attention paid to the Medicare and Medicaid, resources clients often believe will provide funding. Without the facts financial planners will continue to hesitate discussing the subject of long-term care for fear of encountering objections they cannot deal with assertively.
Understanding the business of long-term care allows:
1. The right questions to be asked which leads to;
LONG-TERM CARE INSURANCE The subject of long-term care insurance (LTCi) has been purposely left to the end of this piece. Too often it is raised as the solution to going bankrupt paying for a nursing home, not having choice or having to rely on friends or children. It rarely is discussed in the context of protecting a plan but rather as a stand-alone product. Long-term care insurance is a complex product. It should not be left to the client to decide what he or she wants. How on earth does the consumer know what daily benefit to buy and for how long? How many understand the difference between reimbursement, cash and indemnity payments? Do they buy a joint policy or a shared benefit policy? The complexity of the product creates the perfect opportunity for financial planners to craft the right benefits to protect the long-term care plan. However, the product like any insurance product is dangerous in the wrong hands. As has been illustrated, financial planners still risk being sued for recommending the wrong type of benefit or wrong period of time. Before making the commitment to suggest LTCi, financial professionals are well-advised to make the commitment to understand the profession of long-term care planning. Once the professional feels comfortable discussing the subject it is more likely they will integrate it into a retirement plan. As with all plans, insurance is a critical component in making sure it executes properly.
------------------ Harley Gordon is a founding member of the National Academy of Elder Law Attorneys a trade group representing over 4,000 attorneys focused on elder law issues. He has created along with other industry experts, the "Certified in Long-Term Care" (CLTC) designation which currently has over 7,000 graduates. The program is committed to increasing the sale of long-term care insurance based on same sound financial and ethical precepts that guide the professions of financial and estate planning.
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