The cost of nursing care, either at a nursing home facility or at home, can be exorbitant. We are talking thousands of dollars per month and those costs are not always covered by health insurance. If you find yourself in a position where there are eight of nursing care or have a parent or loved one who does, then today's blog post from the Law Office of Bryan Fagan is for you. We are going to cover how you can prepare for these costs and what information may be helpful to you.
Many people who are in their golden years (or even younger) have financial difficulties affording the treatment. After all, we are talking about tens of thousands of dollars when a nursing home stay is all said and done. Even if you have that amount of money in a retirement account you can only access that money without penalty at age 59.5. There may be gaps in your finances to where you need additional help to afford nursing home care.
An irrevocable trust is one tool that can be utilized to help coordinate Medicaid and nursing home care. An irrevocable trust cannot have its terms changed without first obtaining permission from the beneficiaries of the trust. Revocable trusts, on the other hand, can have their terms changed at any time by the trustor. Irrevocable trusts allow for increased asset protection in the event a lawsuit is filed.
What are the two types of irrevocable trusts?
A living trust is the first type of irrevocable trust we will discuss. The second type of irrevocable trust is a testamentary trust which is created when you or another person pass away. A testamentary trust would be funded from your estate as a deceased person based on whatever terminology is used in the will. When we talk about irrevocable trusts, we are discussing a topic that can result in many benefits being paid to you and your family. These irrevocable trusts are important because there are estate tax exemptions that become a part of them and irrevocable trusts make it difficult to abuse the assets within the trust.
How does Medicaid factor into this discussion?
As we have been alluding to for the better part of today's blog post, Medicaid is one of the single most important tools available for individuals to use to pay for care in a nursing home. When we talk about Medicaid eligibility, know in advance that this is the key part of the discussion. For you to be eligible for Medicaid a determination is made based on your income. The determination will be made to see whether you can afford to cover the costs associated with long-term care in a nursing home environment or your home environment.
The way that Medicaid does this is that the government will look at your assets, and we'll determine what your income is and what your assets are before awarding you eligibility. If you have fewer than $2500 in monthly income and have less than $2000 in total assets, then you will be determined to be eligible for Medicaid. Also, keep in mind that not all assets count to determine eligibility for Medicaid.
Examples of assets that can be counted as being part of a Medicaid analysis are bank accounts, certificates of deposit, stocks, bonds, life insurance policies, vehicles, and real estate. However, for retirement assets like 401K, your primary residence, rental property, and personal property are not countable assets. You can speak with an experienced estate planning attorney with the Law Office of Bryan Fagan to determine which of your assets are in play as far as consideration for Medicaid and which ones are outside their purview.
The general rule that you need to be aware of is that Medicaid eligibility depends on you having only a small amount of income per month and little to no assets. Medicaid, rather famously, has a five-year look back under which the government can perform some research into your financial records to see if you have recently sold any assets to qualify for Medicaid. Because this lookback period can take some time to complete delays may result. The more advanced planning that you can perform, the better off you will be. Keep in mind that the government never works as quickly as we would like it to and as a result if you are relying upon the Medicaid program to help you afford school then you may be disappointed in how long the process takes from beginning to end.
How can you go about creating an irrevocable trust?
Giving up your assets for no return value is a difficult step to take. Much of the time those assets are things like vehicles or real estate which we may have a spot for in our hearts. On the other hand, the other types of property that may go into the process of being sold to qualify for Medicaid are less close to our hearts but may nonetheless be difficult to part with. I'm talking about things like stocks, certificates of deposit, and even life insurance policies. At the very least, it can be time-consuming to try and sell these items. There may also be logistical issues associated with you not doing well physically or mentally.
What you need to understand about trust creation is that under the terms of an irrevocable trust, once you place your assets in that trust, they are no longer yours from a legal perspective. The trustee whom you appoint to that position come well technically owns the assets on behalf of the trust. But what happens is you name any number of beneficiaries within the trust who would receive your assets after you pass away.
A trust that is created for the explicit purpose of protecting your assets from being utilized for paying for long-term care costs is known as a Medicaid trust. These types of trusts allow you to become eligible to receive Medicaid to receive nursing home care. The key part of this discussion is that the assets contained in the trust would not be counted to determine eligibility for Medicaid. However, there are additional pieces of information that you should be aware of as you begin to consider the possibility of having a Medicaid trust created for you. Understanding these details can be the difference between creating trust the right way and doing so in a way that is less than advantageous.
How can you use a trust when you are performing steps related to estate planning?
An irrevocable trust can be an important part of the estate planning process for you and your family. As opposed to a living trust, an irrevocable trust will contain assets that are not counted when it comes to potentially being used for the costs associated with nursing home care. Of all the drawbacks to consider, one of the most substantial is that you will not be able to get back the principal investment into any asset that is within the irrevocable trust. However, income and dividends earned from the contents of the trust cannot be seized to pay for long-term care.
There may also be Medicaid transfer penalties associated with the assets in your trust which are not otherwise accountable the penalty associated with this is an intent to punish you for taking assets out of your name and into a location where they cannot be counted. However, bear in mind that these penalties only come to rear their ugly heads if you try to apply for Medicaid less than five years after you have attempted to sell the property in question.
After you pass away, the state of Texas can attempt to recoup any payments made on your behalf. This process, known as estate recovery, impacts payments made toward long-term care facility usage. However, your estate will not be expected to pay back any property or costs if you have children or a spouse at the time of your passing. For this reason, the irrevocable Medicaid trust is one of the best tools that you can use to plan for your financial life and your estate.
What should you be thinking about as you begin to plan a Medicaid trust?
As we have been covering throughout today's blog post, an irrevocable trust is one of the best tools that you can use to protect your assets for estate planning generally and specifically for easing yourself into eligibility for Medicaid. However, these are general statements and are not necessarily applicable across the board to every person. For that reason, you need to be able to think about what the specific circumstances are that you are facing. This is where a free-of-charge consultation with one of the experienced estate planning attorneys with the Law Office of Bryan Fagan can come in handy a great deal.
First, you need to consider what it means to pass control of your property to a trustee. There are almost always dynamics that exist between you as the grantor of the property as well as the beneficiaries under the trust. You should know exactly how this property will be used during your lifetime and should be comfortable with that arrangement. Having someone else set up the trust for you without first asking for your input would be a mistake. Therefore, you should not only ask questions but make sure that you understand exactly how to address work and how it will impact your property.
One of the things that surprises some people when it comes to creating an irrevocable trust is that neither you nor your spouse can be beneficiaries of the trust. What the consequence of this area is that the trustee can use the trust’s assets for a person who is a beneficiary under the trust during your lifetime. It could be that you voice opposition to a certain decision that the trustee makes but you are going to be unable to do anything about that. If giving up this much autonomy bothers you then it is up to you to be able to determine whether a step like this is something that you can live with. What you need to consider is that the trustee of the trust and the beneficiaries of the trust should be in lockstep with one another and how to best utilize the contents of the trust.
At least when it comes to real estate which is contained within a trust, there are ways to structure the trust so that you can occupy the property for as long as you live. Additionally, you may be able to change the people listed as beneficiaries of the trust in certain circumstances.
What are the tax implications of performing the steps necessary to create an irrevocable trust?
One of the most common questions that people have associated with creating a trust for Medicaid and nursing home purposes is whether the beneficiaries of the trust will have capital gains tax consequences because the property that makes up the trust is all considered to be gifts. The way to handle this question is that, if structured correctly, a trust will receive a stepped-up basis at your depth which will minimize the amount of capital gains tax owed overall.
How will the trust impact the sort of care you receive at a nursing home?
One aspect of this discussion to take note of is that an irrevocable Medicaid trust can help you to preserve wealth it also helps when you make use of Medicaid to help you plan for costs associated with long-term care. Nursing homes that are known as Medicaid nursing homes are not of the same quality as other types of long-term care. You may find that the quality of care at a Medicaid nursing home is not what you expected or would want to rely upon in old age.
The impact of retirement accounts and eligibility for long-term care
One of the most significant issues that people tend to encounter as they begin to look into long-term care is that an irrevocable trust may be comprised mainly of retirement accounts like 401 K or individual retirement accounts. You would not be able to transfer ownership of these accounts to a trust. Therefore, the only way to be able to fund these accounts would be to do so after having liquidated them. This may or may not be something that you are interested in or comfortable with doing.
How to account for the five-year waiting period when it comes to irrevocable Medicaid trusts
We have talked multiple times today about how Medicaid has a five-year look-back period when it comes to determining eligibility for long-term care or nursing care. If this will be an issue for you and if you have a healthy spouse then you may be able to work around this rule and instead put yourself in a position where there are strategies available to spend as much property as possible in the short term or transfer ownership of the assets in question before applying for Medicaid.
What to do when you are planning for long-term care
As you can see, there are many moving pieces when it comes to estate planning for long-term care and Medicaid eligibility. Being diligent and prepared matters a great deal during this time. If you do not know where to begin and have questions about how to start this process then you have come to the right place. The attorneys with the Law Office of Bryan Fagan have an extensive amount of experience in helping people just like you plan their estates and think critically about their futures.
When it comes to planning for nursing home care there is only so much you can do in a relatively short period. It is not as if you would be able to save $1,000,000 over a year or two so that you can afford to stay at a nursing home without any financial stress. Short of being able to do so, you need to think about other options that may be available to you. Creating trust may be the smartest way for you to plan for these types of events.
However, there are concerns about how you can do this considering the difficulty associated with trust creation and estate planning. For that reason, working with an experienced estate planning attorney with the Law Office of Bryan Fagan can offer you the sort of peace of mind that may otherwise be lacking during this process.
Questions about the material contained in today's blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed estate planning attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas estate planning as well as about how your family’s circumstances may be impacted by the filing of a probate case.