It’s not uncommon for me to speak with a prospective client who is convinced that he doesn’t need to plan for Long-Term Care because “I have a trust.” In my practice, we develop revocable living trust-based estate plans for clients frequently, and we think they are generally excellent estate planning tools. Like all tools, however, they are not right for every situation, and not for long-term care planning. During such a consult, then, I can educate the prospective client about why he’s wrong:
What revocable living trusts do…
What they are: Trust-based estate plans are wonderful models for dealing with many of the issues facing modern families. Using revocable living trusts, a family can assure that farm ground remains intact, that a spendthrift child doesn’t lose his inheritance, and that assets remain “in the bloodline” instead of accidentally ending up in the hands of a daughter- or son-in-law. Trusts can minimize the sibling squabbles that can accompany a parent’s death, and blended families can avoid hard feelings or assets inadvertently jumping from one family to the other. In simpler trusts, the goal might be to preserve privacy and ease of administration at death. On the more complex side, estate tax issues can be addressed, and the list goes on from there.
…and what they don’t do
There are limitations, though, and, perhaps the most significant is that a revocable living trust doesn’t protect assets from the costs of Long-Term Care. In fact, while the grantor (the person setting up the trust) is alive, there is no asset protection at all. Worse yet, a home inside of a revocable living trust actually loses protection: If you own your home outside of a trust, it can be protected by being considered exempt if it’s necessary to apply for Medicaid to assist with long-term care, but if the house is in a trust (other than a special trust discussed below), it is NOT exempt.
Your Spouse Isn’t Protected Either
A typical revocable living trust leaves assets to a surviving spouse, not outright, but in trust. Properly considered and drafted, this further trust should provide some protection against the surviving spouse’s remarriage so that any new spouse doesn’t get assets intended for the kids, other family members, and/or charity. In some cases, the surviving spouse may not even be in control of the assets. While this might protect the assets from most creditors, all of the assets in the trust are still considered under Medicaid rules to be “available” for the surviving spouse’s care. In other words, there is no protection from the costs of long-term care.
Calling a Trust “A Trust” Doesn't Tell Us Much
What many people fail to understand is that a trust is, effectively, a rule book which can take many forms. There are many types of trusts with many different types of rules. The rules dictate how assets owned by the trusts are to be handled. You can also think of a trust as a box- some boxes are open, some boxes are locked, etc. There are many kinds of trusts for many different kinds of purposes, and they have many names/categories. It’s more complicated than simply referring to a document as “a trust.” That really doesn’t tell us much.
While it’s true that many kinds of trusts do provide asset protection, even most of those won’t protect assets from the costs of long-term care. One type of trust, called a “Medicaid Asset Protection Trust,” (MAPT) can provide the necessary protection, but it must be used with care.
Medicaid Asset Protection Trust considerations
A Medicaid Asset Protection Trust isn’t for everyone, but, used correctly, it can be very effective.
First, in order for the assets owned by such a trust to be protected, the grantor has to give up control. This is true of any asset protection trust, but it can be a bitter pill for some to swallow.
Timing is also key: Planning for Long-Term Care using a trust and/or other strategies is usually done with the goal of creating eligibility for Medicaid while protecting assets for a spouse at home or for the family to inherit. For this reason, we commonly call long term care planning “Medicaid Planning.” Medicaid rules consider any “transfer for less than fair market value” to be a gift, and any gift made less than five years prior to an application for Medicaid will result in a dollar-for-dollar penalty. When a person sets up a trust and transfers assets to the trust, the trust doesn’t pay for the assets- those transfers are for less than fair market value. So, to be effective, a MAPT ideally needs to be completed and assets transferred more than five years before it’s likely that nursing home care will be needed.
There are other, more detailed, considerations as well, of course. The point is that these are not “do-it-yourself” projects and require significant legal counseling.
Planning Should Involve Ongoing Discussions With Your Professionals
This counseling isn’t just for people “of a certain age.” The first time you consult with a professional regarding estate planning, the discussion should include long term care planning.
When I consult with people about estate planning, I always, always, always talk to them about long-term care as well. One of the first questions I ask is whether they have Long-Term Care Insurance. If a client is 50 or older and doesn’t have Long-Term Care Insurance (and hasn’t even looked), I send him back his insurance agent to begin investigating options. For younger clients I suggest they start having the conversations, so they know what their options are and what changes in the industry might be expected.
If he’s already been declined, I’ll refer him to another company. Unless the client is truly self-insured (uncommon), or until he obtains Long-Term Care Insurance, knows he can’t get it, or absolutely won’t be getting it for whatever reason, then we don’t proceed with planning.
Long-Term Care Insurance and planning are important and usually economical. I tell clients to think of Long-Term Care Insurance as insurance for everything they own. With the right coverage, they don’t have to worry about giving up control of assets or the expense and ongoing administration of a MAPT. The right coverage allows them to maintain control and independence from the government (Medicaid) rules.
If options are more limited we discuss lifetime gifts, including life estate deeds, and trusts as well as other options until we find the right plan for the client. In many cases, the plan we develop today won’t work if circumstances change, but we can’t predict the changes. Instead, we develop the best plan we can for the known circumstances and build in as much flexibility as we can but set a timeline and triggers for future discussions.
So, no matter if you have a trust or another form of an estate plan, talk to your professionals once a year to make sure it’s still the right plan for you. It’s quite unlikely you’ll need to make changes each year, but it’s better to “keep on top of things.” Also, reach out any time life changes- if you or spouse becomes ill (especially if the likelihood that one or both of you will need long-term care is increased), when your spouse passes away, if one of your children or grandchildren becomes disabled, and so on. When in doubt, reach out.
Long-Term Care Insurance is Easy and Affordable Asset Protection. In most states, special Long-Term Care Partnership policies are available which provide additional dollar-for-dollar asset protection. Find your state, the cost of care, availability of partnership and tax incentives and more: https://www.ltcnews.com/resources/states
In addition to asset protection, Long-Term Care Insurance makes your aging issues easier on your loved ones. Caregiving is hard on your family. Paid care drains savings and impacts your lifestyle. Affordable Long-Term Care Insurance safeguards your retirement funds (401k, IRA, SEP, 403b) while making it much easier for your family.
Act before you retire and take advantage of low premiums and possible preferred health rates. Couples can also enjoy shared benefits. Work with a Long-Term Care Specialist who understands underwriting, policy design, partnership, and claims.