Republicans are concerned about the "death tax", the one the makes the Paris Hiltons of the world who receive inheritances pay a cut of that in taxes just like any other lottery winner would. Currently, that tax applies to 47% of the amount over $1,500,000 that a person gives to people other than charities at death (45% on the first $500,000). The Senate is close to a deal that will keep that tax in place while reducing the rate and increasing how many million dolars can be transferred tax free.
Democrats are concerned about another kind of death tax. It affects only low income elderly people who die in nursing homes. It is called the "estate recovery" system and it is part of the Medicaid program. Unlike the "estate tax" there are documented cases when this tax does take away a family farm homestead.
Estate recovery affects many more people than the estate tax. The number of estates subject to the estate tax each year is in the tens of thousands, and has declined dramatically since the exempt estate amount has gone from $600,000 to $1,500,000. Tens of millions of poeple receive Medicaid and a significant share of them face estate recovery proceedings.
How it works?
Here's how it works in a nutshell. When an elderly person needs to go to a nursing home, but doesn't have enough pension income to pay for it (typically about $36,000 a year), they can seek help from Medicaid. Medicaid requires you to "spend down" your assets before they'll help you. Medicaid won't, however, require you to sell your house to pay for care or to sell a car you use to go to medical appointments. If you have a "community spouse" that spouse can usually keep another $80,000 or so to live on. (There are other exceptions, but these are the big ones).
If you give gifts to your children instead of spending down in the three years before you apply for help, the government pretends you still have that money.
But, Medicaid coverage is really just a guaranteed, interest free loan. While you get nursing home care, the government keeps track of what it spends on you, and at your death, it often puts a lien on the house to try to recover its expenses. Those expenses are often in the range of $30,000 to $150,000, and the houses of people who need Medicaid's help to get nursing home care tend to be modest. Often the state gets virtually everything.
Is it worth it?
The estate recovery system doesn't do much to help the financial health of the program, because most people on Medicaid have few assets, and even the "wealthy ones" barely have enough to cover their care. The "most successful" estate recovery system, in Oregon, recovers 2.2% of its expenses from the program, according to today's Wall Street Journal. More than a third of states (including populous states like New York and Florida) recoup less than 0.5% of their expenses through the program. In all the program generates less than $1 billion a year, less than 5% of the amount collected by the federal estate tax. In increase in the estate tax rate from 47% to 50% would generate more revenue than the entire estate recovery system.
Also, the estate recovery system involves far higher administrative costs than the estate tax system, because instead of handling a few very large estate, it handles a great many small cases.
Rethinking Long Term Care
We already have de facto universal health care for senior citizens in the United States. Medicare provides basic health insurance for 99.2% of the population aged 65 and older at a cost of about $12,000 per person, per year.
Medicaid ends up covering much of what Medicare won't cover. Medicare and Medicaid already provide $110 billion a year for long term care (like nursing homes) each year. Out of pocket payments and private long term care insurance provide $54 billion a year. Thus, two-thirds of the costs of long term care are already paid for by the government, and less than 1% of that expenditure (Medicare and Medicaid combined) is recovered through the estate recovery system.
Administering the Medicaid system is also expensive, because there is a complex means test that must be analyzed to determine eligibility. Almost every nursing home in this nation has a full time employee devoted to filling out Medicaid applications, and every state in the United States has a bureau devoted to processing those forms. The time spent processing that paperwork doesn't make anyone healthier.
Rather than imposing a punitive death tax on the families of the sick and the poor, we should begin by ending the estate recovery system. If assets are exempt, they should stay exempt. This is the death tax the average Americans care about and we should take action to end it.
We should also seriously consider whether it wouldn't make more sense to make long term care part of the package of benefits provided by Medicare, even if it increases the cost of the total system. Yes, $54 billion a year isn't chump change. But, if the system we made universal, the percentage of total system costs wasted on bureaucratic red tape would shrink dramatically, every American could be secure in knowing that if they need long term care that it won't cost their children their entire forture.
There's a natural place to look for some of that money. Retaining the death tax on heirs who have already received millions of dollars tax free.
