Planning for Long Term Care
Frequently Asked Questions About Asset Protection
It is important that you discuss the right plan for you with an experienced estate planning attorney. Even so, reviewing the answers to some frequently asked questions can help get you started on the road to the right plan. You can also access a free download of the answers to the questions below.
Who Pays for Long Term Care?
Assisted living or nursing home care is not covered by health insurance or by Medicare. The government program that does cover these costs is Medicaid, but you have to meet the strict Medicaid income and asset requirements in order to qualify. What that means for most families is that, without careful planning, the cost of long term care will be paid out of your assets until you deplete those assets sufficient to meet the eligibility requirements.
Can I Give Assets Away?
Many people wonder if they can simply give their assets away without an elaborate estate plan. The answer to this question is both yes and no. There are ways to transfer assets out of your countable estate, but Medicaid/Mass Health will scrutinize any transfers within five years of the date you apply for benefits. This means that with some limited exceptions your planning for Medicaid should begin at least five years before you need it.
There are certain transfers you can make within the five year look back period. For example, if you purchase a prepaid, irrevocable burial plan, invest capital in making improvements to your home, or prepay certain home expenses those amounts spent will not be considered.
For the most part, however, if you want to protect substantial assets, you need to make the transfers at least five years in advance. For most people this does not give them the financial flexibility they need in their own lives which can be accomplished by a comprehensive estate plan.
What is the Five Year Look Back?
The look back period is a requirement of Medicaid, designed to prevent people from impoverishing themselves immediately prior to applying for Medicaid. If countable assets are transferred within that period, Medicaid will require you to find and use private funds to pay for care until you have “spent down” those assets. This is true even for charitable contributions, unless you can demonstrate that the contributions were not done in order to deplete assets for the purpose of Medicaid eligibility.
Can I Protect My House By Deeding it to My Children?
So long as you meet the five year look back, you can make gifts outright to your family members, including transferring real property. There are some consequences, however, that you should consider.
First, you should be aware of the potential for gift tax liability for gifts to any one individual worth more than $15,000 in a single year.
Second, once you give your house away you lose all control over it, including whether you can continue to live there. For that reason, another strategy people sometimes use is to transfer the home to a child and reserve in the deed what is called a “life estate.” In simple terms, this means that while your son or daughter owns the home, you have reserved a right for your lifetime to live in the home. This accomplishes two things: (i) when you pass your child will automatically have title to the home without having to go through probate; and (ii) if everything goes according to plan, it might protect your home from a Medicaid lien if you require nursing home care.
What does that mean? Technically when you have a life estate you do still have some ownership interest in the property, which means when you apply for Medicaid/ Mass Health, Mass Health will put a lien on that property.If you pass while the home is still held this way, your interest disappears upon your death and so does the Mass Health lien.
The downside of using the life estate strategy is that it only works if the home is not sold until after your death. This can limit your options and the options of your family members while you are in care, and result in a significant loss if there is a reason the house must be sold during your lifetime.
What is an Asset Protection Trust?
There are many different kinds of trusts, and they serve many different purposes. One kind is known as an income only irrevocable trust, which is specifically designed to protect your assets from being counted for purposes of Medicaid/Mass Health eligibility.
Assets put into a trust will belong not to you, but to the trustee. The transfer must be irrevocable- meaning you cannot later take those assets out of trust. You can, however, receive income from the assets in the trust during your lifetime. For example, if you place real property into trust and that real property generates rental income, the trustee may distribute that income to you. Similarly, if there is cash in the trust that is invested, the trustee can distribute the dividends on the investments to you.
There are certain terms that are required to meet eligibility requirements. Other than those, however, you can give the trustee as much or as little direction as you want, as with any kind of trust. For example, if some of the assets are eventually to go to children, you can specify the age at which they can receive those assets. Also like any other kind of trust, anything held by the trust at your death will pass outside of the probate court process.
Can I Use Assets Placed Into Trust?
Depending on the type of assets, yes. Most commonly the main asset placed into a trust is your home, and you can continue to live in the home and/or receive income from the rental of that property if you do not live in it. You can similarly continue to use and enjoy other assets in the trust, such as vehicles or a boat or an art collection. If the assets are money or investments, you can’t “use” them directly, but you can receive income generated by those assets, such as interest or dividends.
What if I Have a Mortgage with a Due on Sale Clause?
Most mortgages or home equity loans contain a “due on sale” provision. This gives the lender the right to demand full payment of the loan if the property is sold or transferred. Federal law, however, bars the enforcement of these provisions for certain kinds of transfers, including a transfer into a trust that you make during your lifetime. So long as the trust is properly drafted, it should not trigger any acceleration by your mortgage company.
What if I Want to Move or Downsize?
Many people wonder whether placing their home into an irrevocable trust will limit their options if they need to move or downsize later on. This is one of the many advantages a trust has over the simpler strategy of using a life estate. If your house is in trust and you want to move, the trust can sell your house and use the proceeds to buy a different home for you to live in or invest in something income-producing that can help pay for a rental.
Can I Add Other Assets to the Trust Later?
Yes. Once you create the trust, you can add to it at any time. You should just know that the five year clock will start for each asset when it is added to the trust. For example, if you put your home into a trust on January 1, 2021, the five year requirement for that asset will be fulfilled on January 1, 2026. If you add another asset on January 1, 2022, the five year requirement for that asset will not be fulfilled until January 1, 2027. The second contribution will not restart the clock on the original asset placed into trust.
When is the Best Time to Plan for Long Term Care?
Because assets placed into this kind of trust cannot be taken back, it is important to balance your need for flexibility during your lifetime with the goal of asset protection. The ideal time to begin considering this kind of trust is when your children are grown and most large parental expenses (i.e., college, weddings) have been completed. For most people, this is an issue ideally addressed when you are between 55 and 70 years of age.
Whenever you create a trust, you want to be thoughtful about what to put in it, to ensure that you have sufficient means to maintain your quality of life for the years before long term care is needed. This is why many families put assets like real estate into trust and keep liquid assets, like cash, investments, or retirement accounts, outside of the trust.
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